AV developers need new contracts to spread risk across supply chain

AV crashes will present automakers with complicated new questions about liability. To prepare for them, they will need to rethink their warranties and indemnities with suppliers.

Why it matters: An AV accident could be caused by anything from a programming bug to a mechanical failure. Given this complexity, automakers will need contracts that protect them from assuming liability for integrated software and hardware from their suppliers.

Background: Most supplier contracts protect automakers with warranties against defects in materials or workmanship. However, those may not offer much protection in the case of AVs, where the product under contract is likely to be software, or a part so deeply integrated that it's hard to say where its role ends and another's begins.

• Vehicles with Advanced Driver Assistance Systems already face some of these issues. After an accident involving a car with ADAS, investigators try to establish which system controlled the interaction in question.
• Fully autonomous vehicles will contract out more software, products, and parts, most of which will then be far more deeply integrated than in older cars.

What’s needed:

• Warranties will have to be tailored to the output and performance of software, rather than merely hardware.
• Indemnification provisions will have to address situations in which automakers integrate a supplier’s product with other parts and unifying software. This will require broader indemnification for system failures and assessments of the impact of one software program or product on the whole system.
• Insurance can be obtained by both automakers and suppliers, who can also add one another as additional insureds.

The bottom line: By adapting to these legal challenges now, in both supplier contracts and insurance needs, companies can better allocate risks across the supply chain and protect consumers from being left empty-handed if their AV causes an accident.

Jeff Soble is a partner in Foley & Lardner’s business litigation and dispute resolution practice and the former co-chair of its automotive industry team.