Limiting Your Liability in Records Management
Copyright 2014 by Virgo Publishing.
By: Cary McGovern
Posted on: 11/01/1999



 

Limiting Your Liability in Records Management

By Cary McGovern

The most important issue in operating a commercial records business is limiting your liability. This article discusses what you need to know and how to protect yourself.

What Do I Need to Know?

Records are the memory of an organization. They are very valuable because they are used in courts of law, used to prove regulatory adherence and to document internal controls in business systems. Records are defined as "the results of business transactions." The record documents what happened during the transaction. In order to be used as proof, it must have integrity; that is, it must not be tampered with. The technical term used to describe this attribute is "unalterable."

So Why Is This Important to Me?

Any commercial records center operates as a custodian of records. A custodian is generally considered a caretaker. That responsibility must be clearly defined in your contract. So the first issue that you must consider is requiring a contract with every records-storage customer. Your self-storage contract is not appropriate for records management or storage.

The Contract

The contract wording should protect you against any liability. Although you may choose to have your attorney draft a contract from scratch, that decision may be an expensive one. The records-management business has been in existence for more than 40 years. The experiences of the industry have provided a proven basis for contract design. The good news is there is a standard, industry-wide contract form.

PRISM International (formerly the Association of Commercial Records Centers) has drafted a standard contract form for use by its members. This contract (or a form of it) is in use by hundreds of commercial records centers worldwide. Membership in PRISM is inexpensive--only $500 annually for new members. This $500 investment will save you more than that in legal fees for the development of your contract form. This contract is tried and true and has been tested successfully many times; however, PRISM still recommends that any contract should be reviewed by your attorneys and not just used as provided. There may be additional wording required to give you protection. Additionally, PRISM requires you to sign a form to hold them harmless for using their standard contract form. Joining PRISM today could be the best short-term investment that you can make in your records-management business.

Contractual Issues

Limitation of Liability. The most important issue is the limitation-of-liability statement. The industry standard is $2 per carton or storage unit. This is a very important factor. Records may be worth millions of dollars to a customer to defend himself against litigation or regulatory audit. Since many records cannot be reconstructed, it is impossible to give them a dollar value. Needless to say, your goal is to fix value at a reasonable dollar amount. Since this is the industry standard, customers have no option.

Excess-Valuation Insurance. You may choose to offer your customer excess-valuation insurance. The customer contracts directly with an insurance carrier to provide some valuation above the $2 per carton that you guarantee. Many commercial records centers offer this excess-valuation insurance through a broker and share in the insurance revenue.

Price-Escalation Clause. Your contract should clearly state how prices are increased and what criteria those increases are based upon. If you include this in your contract, you will avoid futile arguments with customers concerning pricing.

Bonding and Drug Testing Employees. You should include employee bonding and drug testing as part of your employment requirement. Bonding is inexpensive, shows your commitment and will demonstrate your desire to protect their records.

Employee Confidentiality Policy Statement and Training. All employees should sign a confidentiality statement and be trained annually on the company's policy regarding the confidential nature of your customers' records. Typically, commercial records centers have a standard policy statement and a form to sign annually. You should assure your customers that confidentiality is one of your most important priorities.

Access to Records. Your contract should clearly state that it is the customer's responsibility to inform you of changes to their authorized personnel list. You should maintain a list of customer employees that have authority for retrieval or destruction of files. This list should be updated annually or as your customer's employees change. Under no circumstances should records be transferred to employees who are not authorized.

Reference Level. You should not retrieve files from boxes unless you have inventoried (indexed) those files. Since you are the custodian of the records, you are responsible for boxes said to contain certain records. Without an inventory, you may be blamed for files that are missing even though they came to you without those files. Limiting your liability here is an important issue. It will save you a great deal of heartache in dealing with your customers.

Recommendation. I have been in the records-management business for nearly 25 years and have seen some very dumb things. One of the most common in the non-traditional records-management environment such as self-storage or moving-and-storage is the lack of a formal contract. Just recently I visited a records center with nearly 200,000 cubic feet of records and well over 100 accounts that had no contracts with its customers. This is a dangerous practice. In addition to the potential liability that you have, you have absolutely no protection against a customer leaving your facility to go to a competitor.

Your contract should spell out the terms that allow a customer to pull his records out. This is common in the contracts used by the major-market players such as Iron Mountain and Pierce-Lehey. This permanent-removal fee is typically referred to in the industry as the "hostage fee." Although this fee has gotten bad press lately, it is a legitimate fee when reasonably priced. You have invested thousands of dollars in racks, equipment and personnel. You should charge a permanent-retrieval fee for at least the first few years. Without a contract, you will be hard pressed to maintain your accounts. The permanent-retrieval fee gives you leverage and insures that you won't lose money on large transfers of records to a competitor.

Always have a contract. Always fix terms and price to the contract. Never vary from this policy.

Regular columnist Cary F. McGovern is a certified records manager and owner of File Managers Inc., a records-management consulting firm that also provides outsourcing services, file-room management and litigation support services for the legal industry. For more information about records management, contact Mr. McGovern at File Managers Inc., P.O. Box 1178, Abita Springs, LA 70420; phone (504) 871-0092; fax (504) 893-1751; e-mail: fileman@acadiacom.net; www.fileman.com.