Insurance Obligations and Limitation of Liability in MSAs
Master Services Agreements (MSAs) serve as the cornerstone of operational clarity between Managed Service Providers (MSPs) and their clients. This comprehensive guide is intended for MSP owners. We’ll clarify the strategic role of insurance and the limitation of liability clauses within our industry leading templates offered through our contracts-as-a-service solution.
Together, these components create a robust shield that mitigates potential risks, clarifies financial responsibilities, and fosters healthier relationships between MSPs and their clients.
The MSP-Client Dynamic
In a healthy MSP-client relationship, the aim is to avoid direct legal disputes as much as possible. Disagreements can strain the relationship and often lead to substantial legal costs and reputational harm. The design of the MSA’s insurance and limitation of liability clauses we provide helps prevent such direct conflicts by delineating the financial obligations of both parties and creating a framework for dispute resolution that revolves around the insurance carriers, not the parties themselves.
Provider’s Insurance Obligations
MSPs are generally tasked with maintaining professional liability insurance, which covers potential legal costs and claims resulting from service errors, omissions, or negligence.
In our MSA templates, the MSP is required to maintain professional liability insurance, including errors and omissions, with aggregate limits of at least One Million Dollars (US $1,000,000). This safeguards the MSP’s business from unforeseen professional liabilities and exemplifies a commitment to excellence.
Client’s Insurance Obligations
Clients are typically required to maintain specific insurance coverage, adding another layer of financial protection.
In our MSA templates, we stipulate that clients should maintain an insurance coverage minimum of One Million Dollars (US $1,000,000). This coverage includes commercial general liability, workers’ compensation, and first-party cyber liability, offering broad protection from physical damage claims to potential cyber incidents.
The First Dollar Out
The first-dollar-out approach stipulates that the client’s insurance will pay for any damages before the MSP’s insurance becomes involved. This approach is clearly outlined in the MSAs we provide, which mandates that the client’s insurance is primary over the MSP’s insurance.
Assistance with Insurance Applications and the MSP’s Role
MSPs often extend help to clients with insurance applications or provide technical assistance during the underwriting process. It’s crucial, however, to define the extent of responsibility in these cases.
Our MSAs templates establish that while MSPs can assist with insurance-related tasks, clients retain sole responsibility for the accuracy of information provided. Therefore, MSPs are not held accountable for any adverse actions taken by insurance carriers in connection with underwriting or claims administration. This clause ensures MSPs can assist without assuming undue risks.
Insurance Companies: The Buffer
In the event of an issue where the client’s carrier believes the MSP was responsible, the client’s insurer may choose to sue. However, rather than a direct dispute between the MSP and the client, this becomes a matter between two insurance companies. The MSP’s insurance will step in to provide a defense against the claim.
Having insurance companies “fight” each other, so to speak, is more advantageous for both the MSP and the client. This dynamic keeps the dispute within the realm of insurance law and away from the direct MSP-client relationship. It leverages the expertise of the insurance companies in handling claims and can reduce the emotional and reputational toll that could come from a direct legal dispute.
Insurance and the Limitation of Liability Clause
The Limitation of Liability clause outlines the scope of financial responsibility in the event of service-related incidents. This clause interacts with the MSP’s professional liability insurance policy to determine the maximum claimable amount.
In our MSA template, the MSP’s liability is limited to the greater of the proceeds from the MSP’s professional liability insurance or the total payments made by the client in the previous six months. Therefore, the liability of the MSP is directly correlated with the coverage provided by its insurance.
In case of an insurance coverage dispute, the MSAs we provide stipulate that the MSP isn’t required to dispute the coverage determination or file a declaratory judgment action. This clause acts as a safeguard, allowing the MSP to avoid unnecessary litigation and concentrate on its core business operations.
MSAs are vital for clearly defining the rights, responsibilities, and protections for both MSPs and their clients. In our practice, we see the profound impact that a well-crafted MSA can have in creating stronger relationships between MSPs and their clients, leading to growth and success for all parties involved. The strategic structuring of insurance obligations and limitations of liability within these agreements are core components of this success.
By fostering clear communication, delineating responsibilities, and creating a mechanism for resolving potential disputes, these provisions help to establish trust and assurance, which are the bedrocks of a successful MSP-client partnership.
