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Limiting Your Liability in Records Management

November 1, 1999

5 Min Read
Limiting Your Liability in Records Management

Limiting Your Liability in Records Management

By Cary McGovern

The most important issue in operating a commercial records business is limiting yourliability. 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 usedin courts of law, used to prove regulatory adherence and to document internal controls inbusiness 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 todescribe this attribute is "unalterable."

So Why Is This Important to Me?

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

The Contract

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

PRISM International (formerly the Association of Commercial Records Centers) hasdrafted 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 isinexpensive--only $500 annually for new members. This $500 investment will save you morethan that in legal fees for the development of your contract form. This contract is triedand true and has been tested successfully many times; however, PRISM still recommends thatany contract should be reviewed by your attorneys and not just used as provided. There maybe additional wording required to give you protection. Additionally, PRISM requires you tosign a form to hold them harmless for using their standard contract form. Joining PRISMtoday could be the best short-term investment that you can make in your records-managementbusiness.

Contractual Issues

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

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

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

Bonding and Drug Testing Employees. You should include employeebonding 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 employeesshould sign a confidentiality statement and be trained annually on the company's policyregarding the confidential nature of your customers' records. Typically, commercialrecords centers have a standard policy statement and a form to sign annually. You shouldassure your customers that confidentiality is one of your most important priorities.

Access to Records. Your contract should clearly state that it is thecustomer's responsibility to inform you of changes to their authorized personnel list. Youshould maintain a list of customer employees that have authority for retrieval ordestruction of files. This list should be updated annually or as your customer's employeeschange. Under no circumstances should records be transferred to employees who are notauthorized.

Reference Level. You should not retrieve files from boxes unless youhave inventoried (indexed) those files. Since you are the custodian of the records, youare responsible for boxes said to contain certain records. Without an inventory, you maybe 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 ofheartache in dealing with your customers.

Recommendation. I have been in the records-management business fornearly 25 years and have seen some very dumb things. One of the most common in thenon-traditional records-management environment such as self-storage or moving-and-storageis the lack of a formal contract. Just recently I visited a records center with nearly200,000 cubic feet of records and well over 100 accounts that had no contracts with itscustomers. This is a dangerous practice. In addition to the potential liability that youhave, you have absolutely no protection against a customer leaving your facility to go toa 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 andPierce-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 legitimatefee when reasonably priced. You have invested thousands of dollars in racks, equipment andpersonnel. 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. Thepermanent-retrieval fee gives you leverage and insures that you won't lose money on largetransfers of records to a competitor.

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

Regularcolumnist 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-roommanagement and litigation support services for the legal industry. For more informationabout records management, contact Mr. McGovern at File Managers Inc., P.O. Box 1178, AbitaSprings, LA 70420; phone (504) 871-0092; fax (504) 893-1751; e-mail: [email protected]; www.fileman.com.

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