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February 27, 2009

Recession may increase IT legal disputes: report

Don’t promise too much, says insurer Hiscox

By Steve Evans

Specialist insurer Hiscox has warned that the ongoing economic crisis 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.

Breach of contract claims are likely to rise, it says, as companies look for ways to back out of IT contracts in an attempt to reduce expenditure and possibly regain some of the original investment.

The company also urged IT consultants to lower, and better manage, client expectations during a project. Hiscox warned consultants not to over promise during a contract, which could leave them open to breach of contract allegations.

Over a four year period, from 2003 – 2007, a third (36%) of all the professional indemnity claims dealt with by Hiscox in the IT sector, were for 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.

Of the largest 100 IT claims handled and paid at the company, the main causes of claims were: claiming defective product or services, essentially where a company claims the product did not do what the provider said it would (68%); inadequate project management (60%) and inadequate initial scoping of the project (56%).

Sam Franks, specialist IT risks underwriter at Hiscox, said: “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.”

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