Errors and Omissions Insurance Case Study: Dealing with Subcontractors

By Laura McCormick

The following is a claim scenario involving teleservices companies, based on combining facts from actual claims made against the ATSI Professional Liability plan. Following the scenario are some helpful suggestions on how your company can avoid such claims.

A teleservices company held responsible for a subcontractor’s error: A teleservices company was retained by a client to set up a sales program for the client’s product, with the understanding that a toll-free number was to be obtained for the client by the company as part of the program. The company, in turn, retained a subcontractor to secure the toll-free number. The client, in reliance on the toll-free number furnished to it by the company, mailed out 20,000 advertisements about its new sales program. On the date the toll-free line was to be effective, however, it still had not been turned on. It was soon discovered that the subcontractor had failed to activate the line, and it was inactive for several days after the start of the sales campaign. The client made a claim against the teleservices company for the cost of the mailings, as well as for lost profits on its sales campaign.

The matter was reported to the teleservices company’s insurance carrier. The insurer’s attorney determined that the subcontractor had no insurance of its own, and did not have sufficient assets to pay for the damages alleged by the client. As a result of the subcontractor’s error (for which the teleservices company, however, was ultimately responsible) a settlement was negotiated based on evidence presented about the alleged damages. It was argued that the projected profits were speculative and excessive, since the figure was based on a large percentage of sales resulting from the mailed advertisements, although past sales histories showed a much lower percentage of positive responses.

How to avoid or mitigate a similar claim: Although it is not unusual to retain a subcontractor to perform certain services on a project of this nature, the teleservices company should have realized it was responsible for the conduct of its subcontractors. The subcontractor should have been asked to sign a contract confirming the service it was to provide. The claim also could have been avoided if the teleservices company’s telephone service provider had been asked to confirm, in writing, the date the line was to have been activated. A checklist of items to be performed by the subcontractor, submitted to the teleservices company ahead of time, could have prompted the subcontractor to confirm the activation date on the toll-free number.

To mitigate the impact of the claim on the teleservices company, the subcontractor should have been asked to provide an insurance certificate or other evidence of its ability to respond to any claims that could arise. Thus, if the subcontractor was at fault, the teleservices company could have obtained contributions or indemnification for any damages. To avoid certain problems in securing such relief, the subcontractor’s agreement could have contained indemnification and “hold harmless” provisions favoring the teleservices company.

For more E & O Case Studies, see Laura’s subsequent article.

[From Connection MagazineNovember 2002]

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