Legal disputes can be expensive and stressful. While there are several ways for an agency to reduce the risk of ending up in a dispute – good work and good contracts, for example – there is no magic shield that can prevent them all. So, agencies should also do what they can to be well-positioned if they do end up in a dispute.
The same things an agency does to reduce the risk of ending up in a dispute in the first place also better position them to deal with an actual dispute. But there is one additional thing that agencies can do to reduce the expense and stress of a legal dispute – potentially drastically: have the right insurance policies.
Which Insurance Policies Safeguard Agencies Against Legal Disputes?
The risks that digital agencies are generally exposed to fall into three general categories:
- Direct liability to clients
- Indemnity obligations to clients
- Employment-related risks
Each of these risks can be insured, and we discuss them all below:
Direct Liability to Clients
When a client claims to be damaged because an agency’s work wasn’t done well, correctly, or on time, this is a claim that should be covered by an insurance policy called either “errors and omissions” (E&O) or “professional liability.”
For agencies doing any development work (even if just front-end), there may be a specific policy (or rider to a policy) that covers “technology errors and omissions.” Direct liability to clients can also arise from an agency’s data security breach because of the exposure or loss of client data or files (though this is more likely to be an “indemnity” obligation, discussed immediately below). For this liability exposure, a “cyber” (or “data breach”) policy is needed.
Indemnity Obligations to Clients
This is typically where most of an agency’s potential liability exists. An indemnity provision requires the agency (the indemnitor) to deal with a claim by a third party against the agency’s client (the indemnitee) that relates in some way to the agency’s work.
There are several ways these types of claims typically come about:
- A claim that your agency’s work infringes on a third party’s intellectual property rights.
- A claim that your agency’s work did not comply with legal requirements, such as the Americans with Disabilities Act or data privacy law.
- A claim that your agency’s work caused a site or application security breach that exposed the client’s customers’ personal data.
There are three different types of insurance policies that might cover these indemnity obligations:
- A stand-alone Intellectual Property (IP) policy
- A “commercial general liability” (CGL) policy (with “advertising injury” coverage)
- The above-mentioned E&O (or professional liability) policy
A proper IP and/or a CGL policy with advertising injury should cover the claim described in part 1 of the above list. It used to be that patent infringement was excluded but policies that cover that liability are recently becoming more available. The claims described in parts 2 and 3 of the above list should be covered by an E&O policy.
Finally, agencies (like all employers) are subject to potential employment claims. Workers compensation coverage is required by law and covers employee injuries that occur within the scope of an employee’s job.
Employment practices liability insurance (EPLI), which is a less common type of policy purchased by agencies in our experience, is a policy that covers claims by employees primarily concerning discrimination, harassment, and retaliation. While agencies vet their hires, employees who might discriminate against or harass other employees can slip through.
Similarly, there are unscrupulous and litigious people who may raise claims that have no merit. In either scenario, having an EPLI policy can prevent a company-threatening liability exposure.
The Right Agency Insurance Aids in Contract Negotiations
In addition to the peace of mind, having the right insurance can make it much easier to negotiate contracts with your clients and prospective clients. That’s because you can feel comfortable that some of the risks your clients may ask you to take are insured.
To get the right policies, though, you’ll need a broker who understands your business and who is responsive to questions. Otherwise, you may end up paying a lot of money for policies that don’t really do what you need or want them to do. Don’t just go for the first referral you get, and don’t necessarily just stick with who you have. Spend some time researching and chatting with a number of different options, and get quotes from at least a couple brokers.
Have more questions about what insurance your agency needs? Get in touch with Matchstick.