Professional Services Firm Contracts: Fair Bargaining or Adhesion?

1. Professional Services Firm Contracts: Fair Bargaining or Adhesion?

2. Singin’ The PL Blues MODERATOR: • John Edward Love, MPA, CPCU, President, TechAssure Association, Inc. PANELISTS: • Marcia Blanco-Gorog, RPLU,Vice President, Underwriting, Navigators Group, Inc. • Nick Economidis, MBA, ARM, Underwriter, Beazley, USA • Aaron Latto, Esq., Vice President, Business InsuranceClaims, Travelers Insurance • Richard A. Simpson, Esq., Partner, Wiley Rein LLP • Michael Stolarski,Esq., Partner, Howrey LLP

3. Agenda • Risks associated with professional services contracting. • Contracting language best practices. • Underwriting and claims service issues for Professional Services firms. • Review of contract terms and case study examples.

4. Objective • The audience for this presentation should be able to: 1) identify the causes of breakdowns in professional service relationships that lead to challenges to the contract and its terms 2) identify important contract terms- how they can be fairly constructed, yet still protect the contractor, and be integrated with the contractor’s liability insurance program.

5. Best Practices in Generalfor Professional Services Firms • Clearly defined deliverables & ability to measure success. • Break the job/deliverables into milestones so the customer can incrementally sign off on acceptance. • Partner with the customer – Make sure everyone understands the customers’ expectations, desired outcome. • Have the customer host an orientation session for staff. • Clearly define the team’s roles, especially for addressing complaints– don’t ignore any problem. • Move quickly and communicate with the client when there is staff turnover. • Document all communications with client.

6. Practical Considerations Going Into a Negotiation • Who stands to gain financially and how many competitors are there for the services needed? • Do state/federal laws impose responsibility and/or specify damages? • Be responsible for only your own errors or omissions, unless customer asks you to assume an extraordinary risk. • Every negotiating point has a price, but not all points are insurable!

7. Underwriting Process What does the insured company sell? Who makes it? (contract manufacturer?) Who do they sell to? What is the length & size of the average & largest contract? Adequate pricing for risk Dispute resolution ability and terms Contracts Terms & Conditions Agree to Terms!

8. Claims Issues Review of policy and allegations Are any complaints retaliatory? Which counts are covered, which are excluded, and how are they connected ? Assess likelihood of defense effort Analysis of facts and circum-stances Review Insured Contract Terms

9. Emerging Risk Trends • Intellectual property disputes. Do you need to change how they are addressed in the contract language? • Need to protect the customer’s systems and data from attack or theft by 3rd parties. • Need to protect the customer from acts by your employees. • A “real time” world in which customers expect everything to run flawlessly, 24x7 (and want to pay less for it).

10. Key Contract Terms • Description of the professional services to be provided. • Fees & fee schedule – are they adequately tied to the description of services? Is a customer acceptance procedure delineated? • Duration of the contract and time for each deliverable. • Indemnification – one-sided or dual? • Limitation of Liability – what is limit and is it effective? • Consequential damages – is there a waiver? • Liquidated damages – is there an agreed amount? • Warranty language and Guarantees. • Intellectual Property clauses.

11. What Goes Wrong in the “Real World” • Customer specifications, expectations are not thoroughly anticipated, examined, and documented. • Customer changes performance parameters and forces “scope creep” in the work being performed. • Personnel changes, at the service provider or the client, cause “warm & fuzzies” to dissolve, expectations to change. • Customer is dissatisfied, refuses to pay; contractor sues for non-payment; customer counter-sues alleging failure to perform (among other things). Some counter-claims may trigger policy exclusions that limit or eliminate coverage.

12. Case Study 1 • Company A is a behind-the-scenes hotel reservation services operator, with dozens of hotel chain customers, taking millions of reservations per year. • Company B provides the technology for Company A and hosts the systems, which incorporated software from Company G, the sole-owner of a proprietary algorithm. • The credit card processors are behemoths with iron-clad, unilateral, contracts. • Companies H & I pay B for trend reports on traveler activity and also provide up-sell services through B, through A, back to travelers.

13. Company B Company A Companies C-F Database w/ customer info Credit card processors Accessed Via Internet Hotel reservation services provider Multiple hotel clients Millions of guests’ info. ISPs Company G Software Developer H I Guests/Travelers Privacy Laws Companies H & I, which sell information for/on travelers Case Study 1 Hotel reservation system operator

14. Case Study 2 • Company A is a medical device company with patents on a heart rhythm monitoring device. • Research was performed by Company B. • Assembly of the finished units by Co. C, with components from Cos. D-H. • Distributed through resellers, of which Company L “owns the market” and likes to train its doctors.

15. C A Wearable monitoring device for arrhythmia patients R&D Company Owns the IP Assembly Battery D B CRO Housing E Product Delivery Distributor I Distributor J Wires & Harness F Distributor Distributor K L Circuit Chip G Doctor M Patient N Software H Case Study 2

16. Questions&Answers

17. Many thanks to … • John Love • Marcia Blanco-Gorog • Nicholas Economidis • Aaron Latto • Richard Simpson • Michael Stolarski