Remote control

Technology, media and telecoms companies should prepare for more breach of contract disputes, as Frances Hedges discovers

Cash is king. That’s the message as the economic downturn becomes more severe. While it’s good advice for many, it’s bad news for others. As companies tighten their belts, they’re more likely to scrutinise the service they receive from suppliers and, where possible, make claims for breach of contract – with IT consultants facing the biggest risk.

Andrew Sellers, Hiscox UK & International Claims Manager, estimates that cases of breach of contract make up 60 per cent of all the professional indemnity claims in the IT sector that Hiscox deals with. The most likely allegations to be made against consultants include a defective product or service (68 per cent), inadequate project management (60 per cent) or inadequate initial scoping of the product (56 per cent).

“IT companies are more at risk than others because when capital becomes scarce, expensive infrastructure projects become dispensable,” Andrew explains. “Many developments are in the ‘nice to have’ box and are not always mission-critical for the business, so if a project is pulled, companies can always revert to their old systems.” This means that when companies struggle to raise capital, they try to reduce or eliminate the budget they allocate to IT projects.

“Once the decision has been made to terminate the project, companies will look for any excuse to allege termination for breach,” warns Andrew. Whereas they may previously have been lenient about projects being late or over budget, they’re less likely to forgive when times are tough and they are trying to conserve cash.

Andrew’s top tip for limiting liability is to have a sensible contract signed by both parties and to follow the procedures within it. A thorough initial scoping of any new project is crucial to ensure that the IT company is not promising anything that it cannot deliver on schedule and within budget.

“The key message is financial control,” says Andrew. “Have all costs agreed up front and monitor the budget closely with your customer.”

With the volume of claims likely to increase even further as the recession deepens, Andrew also advises IT consultancies to ensure that their existing Professional Indemnity insurance covers them fully. Some policies provide cover for negligence but not for breach of contract, meaning that IT companies might find themselves unable to reclaim costs for up to 60 per cent of claims brought against them.

Hiscox’s latest Media and Technology policies have recently been adapted to take account of the new risks emerging in these markets. The latest versions of the policies offer wider cover for unintentional breach of contract disputes as well as cover on a duty-to-defend basis, providing guaranteed support to IT, marketing and telecoms companies faced with legal action. Cover for the client’s own advertising and website is also provided as part of a packaged policy.

Few businesses can afford to find themselves facing costly legal action in today’s difficult economic climate, so adopting a comprehensive insurance policy is a simple – and essential – way to avoid becoming yet another credit crunch business casualty.