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October 31, 2003

Alone, Unarmed (maybe), and Uninsured

Here's a story about a software vendor that found out -- in probably the worst possible way -- that its general-liability insurance policy did not have the specific coverage that was probably the most crucial for the vendor's software business. Not a good day for the vendor's risk-management people.

Background

The software vendor was a company called Professional Data Services (PDS). Its software was used to help manage medical clinics.

The customer apparently was an opthamology practice or maybe an optometry shop, Heart of America Eye Care, P.A. I'll just call it "the eye clinic."

The software license agreement dated back to 1995. It was a pretty vanilla agreement, judging from the court's sketchy description of it. The agreement gave the eye clinic a license to use several of the vendor's software programs, and required the vendor to investigate and correct problems with the software.

The Vendor-Customer Dispute

At some point the eye clinic had problems with the software. In April 2002 -- some seven years after it first acquired the software -- the eye clinic sued the vendor, PDS. The eye clinic claimed:

  • that PDS failed to provide the required training, customer service, investigation, and correction of software problems;
  • that PDS improperly maintained the software;
  • that the software was not fit for the purposes for which it was intended [Editorial comment: Most software license agreements expressly disclaim any warranty of fitness for a particular purpose; perhaps this agreement didn't do so];
  • that the software did not satisfy the medical accounting needs of the eye clinic [Editorial comment: Many software license agreements expressly disavow any commitment to satisfy the customer's particular needs]; and
  • that PDS misrepresented the quality of service and support it would provide to the eye clinic. [Editorial comment: Many software license agreements contain an "integration" clause that says, among other things, that neither party is relying on any representation of the other except as expressly set forth in the agreement. It sounds like this agreement didn't say that.]

The Missing Insurance Coverage

The vendor, PDS, apparently figured that its insurance carrier would pay the attorneys' fees for defending against the eye clinic lawsuit. It no doubt was also counting on the insurance to cover any damage award that the eye clinic might receive (up to the policy limits, of course).

The insurance carrier thought otherwise. It filed its own, separate lawsuit against the vendor (and the customer too), seeking a judicial declaration that there was no coverage and no duty to defend.

Right you are, the court said. The applicable coverage in the insurance policy was for "property damage." That phrase was defined in the policy as (i) physical injury to tangible property or (ii) loss of use of tangible property that is not physically injured. Loss of use of a software package and corruption of intangible data doesn't count, at least not when the computer itself isn't damaged or rendered useless. The court cited other recent judicial holdings to the same effect.

So, the software vendor is now facing, uninsured:

  • the expense of defending against the customer's lawsuit; and
  • if it loses, the expense of paying any resulting damage award.

The customer didn't necessarily come out ahead here either, because without insurance coverage, the vendor may not have the assets to pay a damage award.

(Cincinnati Insurance Co. v. Professional Data Services, Inc., No. 01-2610-CM, U.S. District Court, District of Kansas, July 18, 2003)

Possible Lessons

If you're a software vendor:

  • Check your insurance policies to make sure you have coverage for information and network technology errors and omissions -- a general-liability policy may not cut it.
  • Take a look at the warranty disclaimers in your standard license agreements.
  • Remember that disputes can arise even with long-time customers.

October 31, 2003 in Embarrassments / Bad Career Moves, Finances, Litigation, Sales | Permalink

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