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Who sues game developers?

By on February 19, 2013

Euan McKenzie is an insurance broker, with over 10 years experience of advising games developers on general insurance issues, including contractual liabilities and IP.

In this article I wanted to look at the main risks of litigation that Games Developers face. Intellectual property was covered in previous posts (here and here) and if we ignore “generic” claims, such as falling down stairs and contracting food poisoning at the annual BBQ), what does that leave?

Hiscox Insurance, an established insurer within the Games Sector, state that over 90% of the claims they deal with against technology companies, relate to allegations of breach of contract. This includes areas such as a failure to meet contract specifications, timescales or a failure to manage “scope creep” after the original contract is agreed.

One reason that claims under contract are prevalent is that they are not subject to normal legal hurdles, such as:

  • The defendant having had to do something “wrong” in the eyes of the law, such as a negligent act, error or breach of duty
  • Claimants being required to minimise their loss and claims being limited to putting them back in the same position had the loss not occurred
  • Contracts impose a wide range of responsibilities that can include:
  • Compliance with specifications, quality and performance standards
  • Provision of warranties or guarantees
  • Provision of indemnities, i.e. agreement to pay costs on behalf of someone else
  • Requirements to relieve another party of certain financial responsibilities
  • Any payments for services being subject to achieving agreed targets on agreed dates (milestones)

As such, it doesn’t take much to breach a contract term and whether the alleged breach is accidental, unavoidable, false, or someone else’s fault, it will take time and money to resolve. In some cases, an allegation of a breach of contract might even be a convenient veil for an exit strategy where a customer has a mid term change of heart.

Settlement of a dispute may include payment of damages and claimant’s costs, as well as defence costs – and even a successful defence has a cost. In addition, revenue may cease as an unhappy customer is unlikely to be making any payments whilst the dispute is ongoing.

So what can be done up front to mitigate the risks?

As we touched upon in the IP posts, developers should engage their legal advisers to conduct any contract negotiations.

A contract imposes responsibility, but can also function as a “first line of defence” and pre-contract negotiations are critical when trying to manage a fair allocation of responsibilities.

So using an experienced solicitor and building a relationship with them, so that they understand your business, is invaluable.

But, there may be little room to negotiate on the key terms of contracts and where there is, responsibility for the work undertaken cannot be avoided, so what additional protection can a games developer get?

Professional Indemnity (PI) insurance provides a second line of defence, or safety-net and one of the main benefits of a good policy is that it covers claims arising from allegations of a breach of contract.

In some circumstances insurers will even pay withheld fees, to minimise financial difficulties until the claim is finalised.

So, what is the catch? In the next article, I’ll highlight the key aspects of cover that this type of policy provides.

About Euan McKenzie

Euan McKenzie is an insurance broker, with over 10 years experience of advising games developers on general insurance issues, including contractual liabilities and IP.