MARCH - APRIL THE COMPUTER L A W A N D SECURITY REPORT

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MAINTENANCE CONTRACTS- THE INSURANCE "CLAIMS"

In the last issue of Computer Law and Security Report, the lid was lifted on Wigglesworth (Insurance Brokers) Ltd. claim that most maintenance contracts were in reality contracts of insurance. The Department of Trade and Industry (D.T.I), whi lst aware of the 'commercial' nature of these claims, are nevertheless taking the matter seriously, and have commenced on examination of the issue.

DoT.I. POWERS

The D.T.I. from time to time conducts an investigation when informed that a company is carrying on an insurance business without the appropriate authorisation under the Insurance Companies Act 1982. Its powers under this Act enable it to require the company concerned to obtain the appropriate authorisation, or in the last resort, to close the business down. To obtain authorisation, a company has to run a distinct insurance operation, aside from other activities, and has to show that it has both the financial resources and the management skills. In reality whilst the D.T.I. has to respond to cases referred to it, it rarely prosecutes, preferring to bring about changes by a policy of consultation. Its main concern is the 'public policy' issue, and concentrates on disreputable or financially unstable organisations, who take 'up-front' payments and then disappear to go bankrupt; hence the need for licensing. This is also a concern for users and reputable supplers of maintenance alike, as both may suffer financially from these activities.

THE D.T.I. VIEW

The view held by the D.T.I., on the distinctions between maintenance and insurance, concedes that each contract has to be individually construed on its own terms, but offers some interesting, albeit guarded, distinctions. The Department has stated that:

1. A contract under which, in return for an annual or single payment, equipment is maintained, break- down attended and faulty parts replaced, at no further charge, is likely to be a contract of insurance.

2. If similar cover is provided as part of the contract of sale of the equipment concerned, and is paid for at the time of sale, it is unlikely to be a contract of insurance.

3. Where warranties are given with equipment, covering breakdowns and faulty parts, this is unlikely to be a contract of insurance.

4. If, in return for a sum representing the economic cost of regular maintenance visits, the contract provides for equipment maintenance, but requires separate payment for replacement parts, the contract

would not be one of insurance.

These distinctions raise a number of interesting questions for lawyers. A clear distinction is made between maintenance offered by the equipment supplier at the time of sale, and the third party main tenance situation. The fourth point looks at the cost basis upon which maintenance is provided, but takes no account of overheads and initial costs such as the purchase of spare parts.

CONCLUSION

If this is the prevailing view, then industry representatives are certain to be vocal in differentiating the main- tenance business and insurance along the lines indicated in the last issue of The Report. A D.T.I. official recently attended a meeting of the C.S.A.'s Legal Affairs Group to hear the views of the industry. The meeting discussed the various types of maintenance agreement for both software and hardware, and pointed out to the D.T.I. representative the main elements of such contracts. There were those present who suggested that the D.T.I. analyse the real causes of abuse, namely 'pirate' operators, instead of perpetuating uncertainty and giving credence to the Wigglesworth view. Nevertheless, the D.T.I. is to undertake an investigation of the issue, in consultation with the Computing Services Association, and has invited interested parties to forward specimen maintenance contracts for the Department's consideration. But as David Davies concluded in the last issue of The Report, the real problem is about 'selecting the right maintenance company: one that has the right level of service and expertise, that has acceptable contract conditions and that will still be in business at the end of the agreement'. The C.S.A. has its own third party maintenance group, and requires certain standards of its members. This type of status is a measure of reliability for customers and this form of industry self- regulation offers a preferable and more practical means of dealing with the situation than to apply legislation to circumstances for which it was not intended.

David Greaves

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