"Famous Last Words"

Insurance Requirements for Developers (July 2004)

Dear Jim,

Recent development deals have greatly expanded the kinds of insurance we are being asked to obtain. Some of this coverage is very expensive, if it is available at all to a developer. What gives?

Dear Tex:

As game development has become more expensive, as IP, products liability, and content litigation continues to grow based on all sorts of innovative legal theories, and as publishers look for ways to manage their own risk, development contracts issued by game publishers look more and more to developers and developer's insurance for protection.

It was not very long ago that development contracts had no insurance requirements. Then we began to see language requiring that developers carry a standard business liability policy (limits subject to negotiation agreements would often demand coverage of up to $3 million but could be negotiated down). Standard business liability rapidly expanded to require products liability coverage. Now we routinely see contracts that demand developers insure for errors and omissions (very expensive), and against claims that the publisher may make arising out any breach by the developer that may result in publisher loss and/or trigger the developer's indemnification obligation to the publisher.

Let's examine each of these.

1. Standard Business (Commercial) Liability. Every business needs a standard commercial liability policy. It may very well be required in your office lease. This is the insurance that protects you from claims arising from a slip and fall in your reception area, from fire, water damage or other casualty, and from theft of office equipment. You may also be able to get business interruption insurance as part of this package. Limits in the millions are available. A basic policy with at least $1million in coverage may be adequate for many small businesses. As always, it is good idea to find and consult with an experienced and knowledgeable insurance broker on all these issues.
   
   
2. Workers' Comp. Required by state law. If you are an employer, you must have workers' compensation insurance. It provides benefits to your employees who may be injured on the job. Policy limits are generally dictated by the size of your payroll and the number of employees on your staff. Premiums may be regulated by your state.
   
   
3. Products Liability. This insurance protects against claims that your product is dangerous - that your game led to physical injury. The classic example is that someone swallows a Game Boy cartridge and chokes, or cuts him or herself on a sharp disk. While publishers may demand this of developers, it is important to focus on what product liability risk is really associated with the developer. Since the developer has provided the game software, unless someone were to be injured by the binary code integrated into the game media, all other elements of the product come from or through the publisher. And even in the case of the binary, it is subject to review and approval by the publisher, any third party content licensor(s), and even the hardware manufacturer before it goes to market. To the extent products liability insurance is advisable, it should be carried by the publisher, and the developer named as an additional insured. The publisher's products liability coverage should protect the developer, not the other way around.
   
   
4. Errors and Omissions. Errors and Omissions, known as "E&O" coverage, protects against infringement of intellectual property rights in content. Examples of claims that may fall under an errors and omissions policy include infringement of any person's or company's right of publicity or privacy (including use of someone's likeness or images in a game without consent), unauthorized use of third party code in a game, use of source material, images, trademarks, popular icons, likenesses of well known buildings without consent of the owner(s), failure to secure necessary clearances or licenses for voices or music, or any other claim involving unauthorized use of intangible I.P. property rights.
   
   Anyone who has gone looking for E&O insurance knows it is extremely expensive and requires a developer commitment to proactive clearance of game elements in order to maintain the coverage. It is not enough to purchase this insurance and leave things to chance. Developers historically have not had E&O. If your publisher demands it, you might advise that it was not budgeted and will increase the cost of the development deal. If the publisher agrees to wrap the cost of the premium into the deal, add the cost to the start payment (that's when the premium will be due), don't forget you may have a multi-year commitment to maintain the coverage, and provide in your deal that the coverage can be dropped at any time if the publisher does not pay the corresponding annual premium milestone on time.
   
   A better solution for a developer might be to be added as an additional insured to the publisher's own E&O policy. As far as I can see, most publishers have this coverage.
   
   
5. Publisher Indemnification Coverage. This is a sort of unusual wrinkle that has been showing up in development contracts recently. An example from a recent deal:
   
   "Developer will obtain, at its own expense, Comprehensive Commercial General Liability Insurance, including . contractual liability coverage providing adequate protection for Publisher against any such claims or suits in amounts no less than three million dollars ($3,000,000) per occurrence, combined single limits."
   
   It appears that publisher is trying to assure a deep pocket in the event developer fails to meet its contractual obligations to publisher. This is a sort of surety bond. Once again, if such coverage has not been budgeted, let the publisher know you do not have this coverage, that it may not be available, that if available it may be very expensive, and that if the publisher wants it, you will speak with your insurance agent and add the cost to the production budget. In the case of both this coverage and Errors & Omissions, since they do not go to the production of the game, I believe amounts paid through by the publisher for coverage should not be treated as additional advances, but rather as additional flat payments not subject to recoupment.
   

Before any developer signs any dev agreement with any publisher, it is very important to sit down with your insurance agent or broker and go through the insurance requirements of your deal. Make sure you have the required coverage. Make sure if you do not have it that it is available, and know the cost.

I am aware of a recent deal with a developer located outside the United States who because of local insurance custom was not able to secure the coverage required in the first draft of the dev agreement at any cost under any circumstances. By careful negotiation, they were able to come up with language with which they could comply.