Contract Question | Limitation of Liability

[bookowski]

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.

 

[zdas04]

Check with your agent before signing the contract. My guy would have kittens over it. The price of the insurance is based on a statistical analysis of their risk relative to your gross income. That contract would change their exposure dramatically without any additional compensation.

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"

 

[bookowski]

I did, and of course they don't like it. The client has agreed to pay any cost associated with insurance fees related to coverage of this project.

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.

 

[MacGyverS2000]

Are they agreeing to pay the difference for the lifetime of your liability window? I'm working form memory, but don't you have to carry liability insurance on projects for at least 20 years after project completion? What if you decide to retire before then... will they carry the difference that entire time, or just as long as the project is going? Doesn't seem like you can drop back to a $1mil policy after the project is over and still say you have $2mil on the project in question.

But maybe I'm approaching this from the wrong viewpoint...

Dan - Owner

http://www.Hi-TecDesigns.com

 

[greenone]

Back when I was on the client side of things, we required consultants to sign our corporate contract, which had no limit on liability. Yes, we paid more for professional services, but we then had recourse if there was a problem. Some companies actually read our contract, and declined to work with us. Others just signed it, and one actually had to pay for a mistake they made, way over the value of the contract.

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.

 

[bookowski]

Greenone - Client will not be a future source of revenue. The architect associated with the project may or may not be, I have never worked with them before. If I pass on this I will most likely not work with them again as they are the ones that brought this project to me. If the total liability was limited to the policy limit (i.e. not unlimited) do you still recommend passing?

 

[greenone]

Have you asked the architect whether or not they are also subject to the liability to the $2MM for their client (I'm assuming you would be a sub to the arch)?
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.

 

[Ron]

A few points...
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.

 

[beej67]

My insurance carrier asks that I put a LOL clause in my contracts, but doesn't specify what the limit should be, so I'd be totally fine with your scenario. This is where you hope you have a friendly and responsive insurance broker.



Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -

http://www.campbellcivil.com

 

[Forensic74]

In my experience, the limitation of liability clause is shaky at best in court, so this may entirely be a moot discussion. I've seen LOL's get thrown out, so OP you may want to consult with an attorney to see what is actually worth fretting over.

 

[brandonbw]

We are going through this exact same situation right now. Except it came up as the project is about to break ground. The client's bank wants to see how much more everyones insurance will be with extras, and my be paying the difference. At the last meeting we had the Architect said he will not up anything on his end no matter what. After speaking with our insurance we are maxed out on E&O so I have no clue how we can go higher for that one. This is the 2nd of 3 projects we are currently working on with this particular developer and they showed me about 25+ jobs in the future pipeline. Now we are their preferred Civils, so we have a bit more to lose/gain by playing hardball than the OP.

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

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http://bwstructuralengineer.com

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http://bwcivilengineer.com

 

[Guest262653]

By a LOL case, do you mean a "Laugh Out Loud" case whenever things go wrong?

 

[JedClampett]

I'm not a lawyer, nor did I stay at a Holiday inn Express, but our company lawyers explained to us that when we have a contract with a city (we do a lot of municipal work), they require us to have a certain liability limit, usually $2,000,000 or more. With that, there's a requirement (she called it a "pass through") that our subconsultants have the same limit. Otherwise, we're assuming some of the possible 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.