Over the last two weeks, we discussed contract provisions designed to address the implementation of preventive security measures, as well as responding to security incidents. Our third and final blog post in this series focuses on contractual provisions that address the allocation of liability for breaches that result in security incidents.

Because of the potential for large-scale damages from a security incident, customers and service providers are generally very focused on the allocation of liability in indemnification and liability provisions. Below we list some key issues to consider when drafting these contract provisions.

  • Rather than relying on general negligence or contract breach standards, consider adding security incidents resulting from a contractual breach as separate grounds for indemnification coverage.
  • Determine whether indemnification is limited to third-party claims or includes other direct and/or indirect damages and liabilities caused by a security incident.
  • Coordinate indemnification defense with incident response provisions and consider the effect on the customer’s client relationships where the vendor assumes such defense.
  • Assess whether all potential damages from a security incident are covered by the damages provisions, including any damages that may be considered indirect or consequential.
  • To determine the allocation of liability, consider the contract value, industry norms, type of data at issue, potential business exposure, cost of preventative measures, and cause of the security incident.
  • Consider calling out specific damages related to a security breach that are not subject to any cap or exclusion to provide clarity and protection—such damages can include the costs of reconstructing data, notifying clients, and providing them with identity protection services.

With cyber attacks growing in number and sophistication on a daily basis and the increased amount and value of data that is at risk to such attacks, cybersecurity concerns are top of mind for senior management.

This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.