A Professional Indemnity Case Study: When State of the Art Software Isn’t

Mark Vos

Mark Vos

A guest submission from Mark Vos, a senior GTS® adjuster in the Netherlands

Crawford Global Technical Services® (GTS®) is Crawford’s definitive global offering for major and complex incident claims handling. Following is a case study based on GTS’ work for a software firm; its problematic project was creating custom product for a client.

GTS was retained to adjust a Professional Indemnity (PI) claim of a mid-size software manufacturer. The software company was contracted for a custom project—to deliver special application software to an international telecommunications operator. The project was based on a requirement to provide “state-of-the-art” technology to the application, which would have provided the buyer with expanded capabilities in its operations.

Delays lead to the project deadlines in the agreement between the two parties being missed, with the result being that the telecommunications operator was going to hold the software company liable for approximately $1 million dollars in alleged damages. This potential liability threat was large enough to trigger a compulsory notification under the PI insurance policy cover.

GTS was appointed to investigate and consider the alleged liability, as well as the circumstances that led to the project not being completed as contracted. The GTS loss adjuster involved was very familiar with these kinds of claims, and as he began his investigation noticed the delays resulting from a continuing stream of new potential features and functions, which are common when the contract allows for a broad interpretation of the project parameters. Generally a highly specific contract and strict project management should manage this contract scope creep, but when those controls are not in place new features are continually requested, resulting in delays as the software is readjusted to compensate for the ongoing change requests.

GTS’ review revealed that the two contesting parties had been discussing the proposed 26th revision to the technical specifications of the initial agreement, and this large number of revisions prompted a detailed analysis of the original project and subsequent scope changes. Project analysis—and associated documentation of the variety of requests for changes which the software company received from the telecommunications provider—demonstrated that the buyer was unable to decide on a precise set of features for the application. Potentially there was a wide range of new functionality for the software that could put the telecommunications provider ahead of its competitors and at the leading edge of the market, and the result was that the telecommunications provider was regularly expanding and changing what it wanted from the application.

GTS’ view was that the software company was acting in good faith by responding to its client’s changing requests, and it would be difficult to legitimately argue that its response could be viewed as a negligent act under the policy. Additionally, the buyer was benefiting from a flaw in the contract stating that extra time (which had to be paid for) and delays resulting from change orders were only acceptable once the technical specification was agreed, but the change orders meant that the technical specification had to be modified as well. This meant that the planned number of hours to realize the technical specifications was far too little and generated major frustration in the software company’s project team. The contract also included a clause requiring “state-of-the-art” software, an ambiguous description that created enormous project creep. Given the buyer’s actions and the deeply flawed contract language it could be argued that the inability to meet the completion deadline did not rise to a materially negligent act.

The analysis by the GTS adjuster disclosed a number of mitigating factors affecting the project’s viability, including the poorly constructed contractual requirements and specific actions taken by the telecommunications company that could materially weaken its claims argument. Based on the evidence and arguments put forward by GTS, the claimant (telecommunications operator) ultimately was convinced to reconsider the viability of its claim. After additional discussions and negotiations between the parties, it was determined that the telecommunications provider would pay approximately 80% of its outstanding debt to the software firm and withdraw its claim for damages. The resolution of the situation also lead to more specific and rigorous development of proper contracts by both companies, and the software firm created a set of rigid project steps to guide its operational processes. The management of the software company and its PI insurers were appreciative of Crawford GTS’ strategic approach and solution it engineered.

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