United States: Five Practice Pointers: Risk Allocation In Enterprise Cloud Service Agreements

Outsourcing information technology functions to the cloud entails risk for both companies and cloud service providers, especially when sensitive data is stored in the cloud. Sensitive data carries business risk and may be subject to a host of legal and regulatory requirements. Cloud service agreements, which typically use the cloud service provider's forms, do not by default align enterprise risks with provider obligations.

Risk allocation may shift based on a variety of factors, including the cloud service model (Software as a Service, Platform as a Service, or Infrastructure as a Service), deployment model (public, private, hybrid, or community cloud), and the data being hosted. The degree to which a cloud transaction can be negotiated likewise varies, so companies should involve legal counsel early in the procurement process to help tailor their agreement to fit the organization's risk profile. At a minimum, such tailoring includes clearly documenting the cloud service provider's responsibilities (particularly those related to both data privacy/security and allocations of liability), and providing for meaningful remedies in the event of a breach of contract.

As part of our year-end review series, below we provide five practice pointers regarding provider responsibility in enterprise cloud service agreements. Cloud service providers should (1) furnish evidence of data security standards and promise compliance with applicable laws, (2) indemnify enterprise customers against major risks, (3) accept higher limitations of liability for major risks where the provider is at fault, (4) carry adequate insurance, and (5) acknowledge customer ownership of data and limit use of that data to contractually stipulated purposes.

  1. Representations and Warranties

Boilerplate cloud service agreements may not obligate cloud service providers to maintain robust data security procedures and practices. While a lower level of security may be acceptable for an entry-level service (such as Software as a Service deployed through a public cloud) when sensitive data is not involved, higher levels of security should be required when sensitive data is at issue. Stakeholders should carefully review the cloud service provider's data security standards to ensure alignment with the risk tied to the data. The information security team should measure the provider's standards against the company's internal standards, and business stakeholders and legal counsel should assess whether the provider's standards meet applicable business and legal requirements.

Many cloud service agreements contain provisions obligating the provider to implement "reasonable security measures," but this standard is vague and can be difficult to enforce. Similarly, many cloud service agreements reference third-party information security certifications such as ISO 27001 (a set of requirements for an information security management system). Third-party data security certifications merely serve as a starting point for a thorough review of the provider's data security practices. Companies should request copies of the cloud service provider's internal data security policies, which could be provided subject to a non-disclosure agreement.

Audit provisions grant companies the right to monitor the provider's security practices. Companies may find it difficult to obtain first-party audit rights (such as site visits and penetration testing) given the shared environment of the cloud implementation. For example, allowing penetration testing by one customer may constitute a breach with respect to other customers. Further, the cost of auditing, even when permitted, may be prohibitive. Regardless of whether first-party audit rights are available, companies should require their providers to verify operational integrity via third-party audits results, such as SOC 2 Type II reports (which evaluate a service provider's information systems based on principles such as security, confidentiality, and privacy).

Several key warranty provisions should be sought in addition to a general warranty of adherence to industry best practices. For one, cloud service providers should warrant that they will comply with all laws and regulations applicable to them. Consider expressly naming any laws of particular relevance in the agreement.

Cloud service providers also should warrant that their technology does not infringe the intellectual property (IP) rights of any third parties. A provider's cloud technology may involve a complex interplay between systems and network appliances, proprietary technology, licensed third-party software and open source software. As the architect of the service, the provider should bear the responsibility for establishing their IP rights and for protecting their enterprise customers against any potential infringement claims.

Finally, cloud service providers should warrant that they will provide notice of material confidentiality and security breaches to companies. Companies may have a duty to notify affected individuals of such breaches if required by state breach notification laws or other applicable privacy laws. Regardless of the cloud service provider's culpability for a breach, providers often detect breaches first. As such, they should inform companies of breaches upon actual knowledge or reasonable suspicion of a breach.

  1. Indemnification

At minimum, cloud service providers should provide indemnification against gross negligence or willful misconduct by the provider's employees and subcontractors. More generally, providers should provide indemnification against provider errors that give rise to high remedial costs.

Breaches of confidentiality and security can be expensive. Although some breaches may be attributable to the provider's failure to comply with contractual requirements or applicable laws, other breaches might not rise to this level. Draft the indemnity provisions based on the level of responsibility attributable to the cloud service provider. Companies can seek a higher cap for costs and expenses of a breach attributable to provider fault, and a lower cap for other breaches.

Consider the difference between first-party and third-party costs when the provider is at fault for the breach. When a breach occurs, companies incur significant first-party costs for providing notice to affected individuals, as well as from credit monitoring services, call center staffing, forensic investigation, legal counsel, and reputation management. Accordingly, the agreement should contemplate coverage of first-party costs (especially for notice and credit monitoring) and third-party claims when the provider is at fault. Reserve the right both to control the distribution of all required notice and to choose a reasonable provider of credit monitoring services.

Cloud service providers also should indemnify companies against IP infringement claims and remedial costs arising from violations of law. While a provider's boilerplate language may only provide protection against claims of copyright infringement, IP indemnity provisions should cover all potential IP claims. Patent infringement suits are particularly expensive, and increasingly frequent in the cloud context. Likewise, companies should not bear the costs of remedying any violations of the law caused by the provider. Both parties should accept financial responsibility for compliance with all applicable laws and regulations.

  1. Limitation of Liability

The baseline limitation of liability cap typically reflects some multiplier of fees or a fixed dollar amount. Cloud service provider liability for fraud, gross negligence, and willful misconduct usually is not capped. Consider a carve-out approach to address breaches of confidentiality and security, IP infringement, and violations of law. Be careful to ensure that no other provisions in the agreement limit the amount recoverable under the carve-out. The agreement can specify a higher cap if the breach is attributable to the conduct of the provider and a lower cap for other breaches, but this approach demands a clearly defined set of provider obligations concerning data security and confidentiality.

Recently, some cloud service providers have hesitated to reimburse the costs for notice and credit monitoring services to a company's customers following a data breach attributable to the acts or omissions of the service provider. The providers considered these costs to be included in direct damages. Ensuring that the responsibility for these costs is clearly defined in the agreement can help avoid complications in the event of a security breach.

Where cloud service providers bear responsibility for IP infringement, they should in turn bear the costs for resolving infringement claims. Depending on the limitation of liability cap for IP infringement claims, the customer may want to retain control of any lawsuits.

  1. Insurance

If a cloud service provider does not maintain sufficient liquidity, appropriate insurance coverage improves the likelihood that the customer will be reimbursed for costs associated with a qualifying event.

Commercial general liability policies typically do not cover costs associated with technology-related errors. Accordingly, cloud service providers should carry a commercial blanket bond to cover any grossly negligent acts or willful misconduct by the provider's employees, and coverage for technical errors and omissions also should be sought. In terms of coverage amounts, risk management teams can identify threshold dollar figure requirements for each type of coverage.

Where appropriate, the company may request to be named as an additional insured on the cloud service provider's policies, allowing the company to pursue reimbursement directly from the provider's insurance carrier. Additionally, companies may seek a waiver of subrogation to prevent subsequent lawsuits initiated by insurers to recover costs from the party deemed to be at fault. In some cases, the willingness of a provider to meet such insurance requirements may be conditioned upon the company carrying similar coverage.

In addition, companies should consider obtaining cyber risk insurance to protect against losses associated with data security breaches, theft of personal information, data loss or destruction, and denial-of-service attacks. Cyber insurance policies offer a range of coverage, so companies should carefully weigh coverage needs against anticipated risk.

  1. Data Ownership and Use

Ownership and data usage rights should be clearly defined in the cloud service agreement. Cloud service agreements frequently include provisions granting the provider a license to use the customer's data for analytics and service improvement purposes. The agreement should distinguish between using company data or metadata in an application that allows the company to evaluate cloud service performance and using such data in other applications or for other purposes.

Cloud service providers also frequently indicate that they will aggregate and/or de-identify customer data. Companies should determine the specific method(s) of de-identification or anonymization utilized by the provider. Note that data sharing by providers with third parties (such as analytics companies and advertisers) may risk violating a company's confidentiality obligations, so carefully evaluate the implications of granting any permissions to the provider in this respect. Consider allowing the provider to use company data only for purposes absolutely necessary to the provision of the service, while prohibiting all other uses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.