Is an SLA an insurance policy?

It’s important that every company, especially service providers, regularly review and edit their contract terms and conditions. It sounds like an obvious thing to do, but you’d be surprised how little this is actually done.

I’ve been seeing more and more companies relying on the service level agreement to protect the company interests; therefore a contractual update in this area must reflect any industry and company changes, ensuring the on-going protection of the business.

What is an SLA (service level agreement)?

A service level agreement is one element within a full service contract, outlining specified terms of service. The SLA ensures that all parties involved are informed of their responsibilities and the penalties which may occur from breaking these agreements.

Responsibilities are typically outlined in measurable terms, such as:

  • The percentage of time a service will be available
  • The schedule of notification of hardware maintenance
  • Response times after logging a ticket
  • Fix times after logging a ticket
  • At a first glance an SLA seems like a fool-proof way of guaranteeing a level of service. However, when you explore the fine print, the agreement tells another story.

Breaking the agreement

An SLA also details what penalties are in place if the provider fails to meet their agreed requirements. These penalties not only vary per provider, but also per contract. Traditionally, the provider gives a percentage of the overall monthly contract cost back to the user… how much depends on the level of down time that occurs.


After an outage, in order to determine how much compensation is required the correct monitoring tools must be in place. If there are no tools, then there is no compensation. Does the penalty cover all servers, or just one? There is no point in having an SLA on a server that is hardly used, likewise, is there monitoring on all servers?

How frequent is server availability measured? If the monitoring software checks the servers every 15 minutes, this may not be accurate as in between these checks the server could be down.

Does the SLA cover all financial damage?

It is unlikely that an SLA will ever cover the financial damage you could incur from a major outage. Most insurance companies will not cover hosting companies for loss of earning or consequential loss for their customers. So the best you can do is make sure the penalty looks reasonable in line with the value of the contract you hold with the organisation. Make sure there is some pressure for the provider to get the service up and running again as soon as possible. Some company’s penalty fees are insignificant, for example Microsoft 365 limit their liability to just $5.

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