The Top 5 Legal Risks Facing MSPs - monjur

Did you know that one overlooked detail in your MSP contracts can lead to six-figure lawsuits or regulatory penalties?

What you need to understand before talking about the legal risks for managed service providers (MSPs). The legal foundations of their businesses often receive far less attention than their technical solutions.

Business Impact: MSPs face unique legal challenges that can have severe consequences for their businesses. Most MSPs aren’t even fully aware of the risks until it’s too late.

This blog sheds light on the top five MSP legal risks and how recognizing these threats early can help protect your business, clients, and reputation.

1. Cybercriminals: Ransomware and Business Email Compromise (BEC)

The rise of cybercrime poses a significant legal threat to MSPs. When cybercriminals exploit vulnerabilities, they can cripple your clients’ operations, steal sensitive data, and demand ransom payments.

And why do they target MSPs rather than targeting individual businesses?

They see MSPs as valuable gateways to multiple targets. As we witnessed with recent high-profile attacks, compromising one MSP can provide access to hundreds of downstream clients.

And that can open a floodgate of legal risks for MSPs.

Why This is a Legal Risk:

Clients may sue MSPs for failing to prevent attacks, especially if a cybersecurity breach results in data theft or operational downtime.
Regulatory authorities may impose fines for breaches of compliance standards like GDPR or HIPAA, depending on the nature of the attack.

Awareness Tip:

MSPs need to clearly define their cybersecurity responsibilities in contracts to mitigate liability. A strong focus on preventative measures like multi-factor authentication (MFA) and continuous monitoring is essential.

2. Vendor Risk: Acts or Omissions of Third-Party Providers

MSPs often rely on third-party vendors for critical services or software. When these vendors fail, whether due to outages, breaches, or negligence, the ripple effects can lead to disputes with your clients.

I’ve seen how a single vendor’s failure can trigger a chain reaction of legal issues for MSPs that traditional MSA templates simply don’t address.

This is why we developed our Schedule of Third-Party Services. It is our response to seeing too many MSPs getting caught in the crossfire of vendor-related disputes.

Why This is a Legal Risk:

If a vendor’s service disruption harms your client, the client may hold you accountable, claiming the MSP failed to ensure reliable services.
Vendors may have contracts that limit their liability, leaving the MSP to shoulder the burden.

Awareness Tip:

Include robust vendor management and indemnification clauses in your agreements with clients to protect yourself from downstream risks.

3. Regulatory Compliance Risk

With regulations like GDPR, HIPAA, and state-specific data privacy laws constantly evolving, MSPs are increasingly expected to ensure their clients’ compliance.

Failure to address these responsibilities proactively can lead to significant legal and financial consequences.

However, most legacy law firms lack the technical know-how to properly address the intricacies of MSP legal compliance.

Why This is a Legal Risk:

Non-compliance, even if unintentional, can result in fines, lawsuits, and reputational damage.
Misaligned expectations between MSPs and their clients about who is responsible for compliance can lead to disputes.

Awareness Tip:

Ensure that your contracts include robust data processing terms designed specifically to address specific regulatory requirements, such as GDPR’s Data Processing Agreements (DPAs) or HIPAA’s Business Associate Agreements (BAAs).
Incorporating data processing terms as part of your contracting stack clearly defines the roles, responsibilities, and limitations of both you and your clients when handling sensitive data.
Use dynamic contracts that can adapt to regulatory changes, ensuring compliance without the need for constant manual updates.

4. Employee Risk: Misconduct or Negligence

Many MSPs operate with the assumption that their employees inherently understand security best practices. However, in several recent court cases, this assumption has proven dangerous.

In reality, employees are both your greatest asset and a potential legal liability. Mishandled client data, human error, or deliberate misconduct can expose your business to lawsuits or fines.

Why This is a Legal Risk:

Negligence, such as failing to apply software patches, can leave clients vulnerable to attacks.
Malicious insider threats, such as data theft or sabotage, can create significant liability.

Awareness Tip:

Implement strong policies for employee oversight, regular training on compliance and cybersecurity, and clear documentation of responsibilities.

5. Risk Balancing Terms: Indemnity, Limitations of Liability, and Insurance

MSPs often overlook critical contractual provisions that allocate risk between themselves and their clients. These provisions are essential for protecting your business from unmanageable liabilities.

I’ve seen insurance carriers deny claims or even sue MSPs for failing to disclose basic security measures like multi-factor authentication.

Why This is a Legal Risk:

Indemnity: Without proper indemnity clauses, MSPs may be exposed to liabilities for third-party claims, including those stemming from client errors or vendor failures.
Limitations of Liability: If your contracts don’t cap your liability, you could face excessive financial exposure, especially in high-stakes situations like data breaches.
Insurance: Failure to maintain appropriate insurance coverage leaves MSPs vulnerable to costs associated with unforeseen claims or incidents.

Awareness Tip:

Indemnity: Include mutual indemnification clauses in your contracts to ensure both parties bear responsibility for their actions.
Limitations of Liability: Set clear and reasonable liability caps in your agreements, such as tying the limit to fees paid over the past 12 months.
Insurance: Maintain adequate coverage, including general liability, professional liability, and cyber liability insurance, to protect against a wide range of risks. Ensure clients are contractually obligated to do the same.

The Path Forward

Understanding these risks is the first step toward protecting your MSP from costly legal exposure. The reality is, the MSP industry is transitioning from the “cybersecurity era” into the “AI era.”

This shift brings new complexities to MSP Risk Management that traditional legal approaches simply weren’t designed to handle.

At Monjur, we specialize in helping MSPs mitigate these risks through comprehensive, legally sound contracts and proactive risk management strategies.

Are you ready to take the next step in safeguarding your MSP? Let’s talk about how Monjur can help you sleep better at night.