© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the November 2005 edition of BENEFITS CANADA magazine.
The Law: Passing the buck
Sponsors are increasingly signing detailed service provider contracts. But limitation of liability clauses could leave them holding the bag.
By Paul Litner

GONE ARE THE DAYS WHEN THE APPOINTMENT OF A service provider in the pension and benefits industry was concluded with a handshake or a simple letter of appointment. With evolving laws and governance standards demanding greater scrutiny over the terms of such appointments, it is now very common for a plan sponsor/administrator to undertake a detailed Request For Proposal(RFP)process before choosing a new service provider.

Likewise, it is not uncommon for an administrator to undertake an RFP process to review their existing service providers to ensure the plan is getting the best services possible at a reasonable price. Service providers are also now requiring detailed written contracts with their clients—both when entering into new relationships and to “formalize” longstanding ones.

The advantage of the written service agreement is that it should provide both parties with a clear understanding of their respective roles and responsibilities. For example, most services agreements include record retention provisions; typically such terms provide that service providers are required to retain all records for a minimum period of time and must notify the administrator before destroying or disposing of any records. Clarification of record retention responsibilities ensures that records are maintained in an appropriate format for an appropriate period of time, allowing clients to access historical records when needed.

Of particular concern to administrators are limitation of liability provisions which many service providers are now insisting upon in service agreements. In a nutshell, service providers are requiring:
• exculpatory clauses shielding the service provider from liability in relation to all of the services they provide under the contract(even if they have been negligent)unless they have acted fraudulently;
• a dollar “cap” on liability the service provider will be exposed to; this cap applies even if the service provider has acted fraudulently. This cap is typically calculated in relation to the fees paid by the client under the service agreement(e.g. two times the annual fees paid by the client to the service provider); and:
• an indemnification from the client in the event that a third party(such as a group of plan members)succeeds in a claim against the service provider.

These limitation of liability provisions seem to have arisen in response to a number of large class action lawsuits against service providers in the U.S.

It is understandable that service providers want to limit their exposure to potential litigation and future losses, particularly when insurance premiums have increased dramatically over the past few years. However, from an administrator’s perspective, these limitation of liability provisions are troublesome as the plan ends up bearing the risk of potential future litigation and related losses for work the administrator is not performing.

What is an administrator to do? To begin with, administrators need to start considering the scope of the limitation of liability provisions being offered by various service providers as a decision-making factor in the RFP process. Administrators can also attempt to have limitation of liability provisions removed from their individual service agreements—although service providers seem unwilling to remove such exculpatory clauses. They do, however, seem willing to negotiate an increased liability cap on a case-by-case basis.

In the end, there is case law to suggest that limitation of liability provisions in commercial contracts may not be enforceable in some circumstances. Thus, time will tell whether the courts will prevent service providers from relying upon these provisions in the pension and benefits services context. Perhaps the best way to protect against future litigation and related losses is to ensure that you have selected experienced, qualified service providers and to actively and continually monitor the services being delivered.

Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP in Toronto. plitner@osler.com