Contract Question | Limitation of Liability
Contract Question | Limitation of Liability
(OP)
My standard contract has a limitation of liability clause that sets the limit at my compensation (usually peanuts). Most clients sign it, probably without ever reading it. Occasionally we have bumped it up to a lump sum or multiple of the compensation.
I have a potential new job where they are asking me to raise my insurance limit (from $1mill to $2mill) and also change my liability clause to set the limit at my policy limit. As I've not had this request before it set of some bells. However, the client seems reasonable (I have not worked with them before) and has stated that the request is from their contract review attorney. They offered to pay for the difference in coverage.
I have checked with associates at several large firms in the area and all of their standard contracts limit them to the compensation or some lump sum. However, they've all told me that the clause is only part of the standard contract template - usually it gets negotiated between client and attorney etc. and they're not sure what if usually boils down to.
My concerns are:
- Is this typical and I am worrying about nothing
- If I do this I want to make sure that defense costs and other fees are deducted from the limit. So the liability limit would be whatever is actually available, not the whole policy amount. Is there specific language that addresses this?
- Should these requests set off any radar?
This is a decent job but nothing to retire on so I'm not willing to take on any excessive risk if this is atypical.
I have a potential new job where they are asking me to raise my insurance limit (from $1mill to $2mill) and also change my liability clause to set the limit at my policy limit. As I've not had this request before it set of some bells. However, the client seems reasonable (I have not worked with them before) and has stated that the request is from their contract review attorney. They offered to pay for the difference in coverage.
I have checked with associates at several large firms in the area and all of their standard contracts limit them to the compensation or some lump sum. However, they've all told me that the clause is only part of the standard contract template - usually it gets negotiated between client and attorney etc. and they're not sure what if usually boils down to.
My concerns are:
- Is this typical and I am worrying about nothing
- If I do this I want to make sure that defense costs and other fees are deducted from the limit. So the liability limit would be whatever is actually available, not the whole policy amount. Is there specific language that addresses this?
- Should these requests set off any radar?
This is a decent job but nothing to retire on so I'm not willing to take on any excessive risk if this is atypical.





RE: Contract Question | Limitation of Liability
David Simpson, PE
MuleShoe Engineering
"Belief" is the acceptance of an hypotheses in the absence of data.
"Prejudice" is having an opinion not supported by the preponderance of the data.
"Knowledge" is only found through the accumulation and analysis of data.
The plural of anecdote is not "data"
RE: Contract Question | Limitation of Liability
The client's attorney made the following point, which I can agree with to some degree. He says that what good is my insurance to him if the contract limits the liability such that the policy is essentially exempt, i.e. what good is $1 mill policy if the contract limits total liability to $50k. I see his point, however most contracts that I have reviewed do have some lump sum or multiple of the compensation - not the full policy.
RE: Contract Question | Limitation of Liability
But maybe I'm approaching this from the wrong viewpoint...
Dan - Owner
http://www.Hi-TecDesigns.com
RE: Contract Question | Limitation of Liability
Large clients usually have large law depts, and they are tough on contracts. Is this client a potential source of future revenue? Lots of it? If not, you may want to pass on this.
RE: Contract Question | Limitation of Liability
RE: Contract Question | Limitation of Liability
I hate to pass up a project that would be interesting out of fear, but only you can decide if the potential downside is worth the risk of the insurance cost. If you can get the coverage, and the project will pay for it, what are the possible "bad" outcomes? Project goes badly, client makes claim, insurance pays, insurance drops you, and you have to find new coverage.
I think in my company, we would probably pass. In a larger company, with an inhouse legal advisor, I think it would be a negotiating point and they would try to take the job.
RE: Contract Question | Limitation of Liability
1. A project does not have to go badly for you to get a claim. You won't know whether it has "gone south" or not until a claim is made.
2. Professional liability policies are written on a "claims made" basis. This means that a claim must be made within the term of the policy. If a claim is made outside the term of the policy, the carrier might deny coverage. You must have "tail coverage" to cover the term after your policy expires.
3. Limitations of liability are not enforceable in all states. Check yours.
4. Yes, all provisions are negotiable. You might consider limiting the liability to insurance coverage in force at the time of the project and that claims made after a certain time will be invalid.
5. Increasing your limits can often double the cost of your insurance. Consider that you are small firm, with annual premiums of, say, $10k for 1M liability coverage. Increasing to 2M might cost you an additional 10k....your project fee is now Engineering Fee+Extra Cost of Insurance + profit. Don't consider spreading the cost over several clients...they don't care...they're happy with what you have now.
Good luck.
RE: Contract Question | Limitation of Liability
Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East - http://www.campbellcivil.com
RE: Contract Question | Limitation of Liability
RE: Contract Question | Limitation of Liability
Its not typical in the last 5 years of doing this, but I don't see it being out of the question. Makes you wonder what someone is seeing as issues, to start bumping up insurance though.
B+W Engineering and Design
Los Angeles Civil Engineer and Structural Engineer
http://bwengr.com | http://bwstructuralengineer.com | http://bwcivilengineer.com
RE: Contract Question | Limitation of Liability
RE: Contract Question | Limitation of Liability
We don't like it, but that's the way it is. Some of our subs are smaller companies, and we don't necessarily want to eliminate them as project partners, but we're taking on some of their liability if they can't match the city's limits.
The name of our legal department is "Risk Management." They're tasked with reducing our risk. If you can't meet the contract limit, that increases our risk.