IT Consultants Facing Increased Legal Action

Hiscox, a specialist insurer, has today warned that the economic downturn is likely to expose IT consultants to potentially costly legal claims for delivering a product or service that clients allege does not meet their expectations…

Listing a defective product or service from an IT supplier as being the top reason for a breach of contract claim, the insurer urges IT consultants not to over promise and focus on better scoping of IT projects from the outset, and tighter management of client expectations. Cases of breach of contract, where a company claims its IT supplier has failed to deliver a product or service in line with an originally agreed contract, made up more than a third (36%) of all the professional indemnity claims dealt with by Hiscox in the IT sector over a four year period (1). Of the largest 100 IT claims handled and paid at Hiscox, the main causes of claims were (2);·

68% claiming defective product or services – ‘it didn’t do what they said it would do’ 60% claiming inadequate project management

56% claiming inadequate initial scoping of the project According to Hiscox, breach of contract claims could increase during an economic downturn where companies, who may be short of money, look to make cutbacks and reduce investment. IT projects often come under cost cutting scrutiny and some companies decide that they can recoup some of their original investment, or get out of an existing contract, by claiming their IT contractor or company has not provided them with the IT system or service they were promised.

Sam Franks, specialist IT risks underwriter at Hiscox, commented: “The current economic downturn highlights the importance of IT suppliers, big or small, properly scoping a project from the outset to avoid costly legal action. It is critical that they set down in the clearest terms what they intend to deliver with realistic costs and timelines, and then by careful management of the contract and client expectations, ensure any potential room for misunderstandings or disagreements is minimised.

“Many IT companies also do not realise that their existing Professional Indemnity insurance may not provide adequate cover. It is absolutely critical that IT contractors and companies, from the one man band operators right up to the multi-million pound IT businesses, check that their professional indemnity cover provides for breach of contract. They should also notify their insurer immediately if they suspect there might be a problem, which often first shows itself through an unpaid client bill.”