Design Contract Concepts you should NEVER agree to.

Insurance companies are selling Architects and Engineers (A/E or Design professionals) a bill of goods that could leave you and your project exposed to risk and uninsured when you need to make a claim.  A/Es are being told that if they limit their liability in their contracts, they can get a big discount in their insurance premiums.  Of course they can.  This practice only serves to limit the insurance companies’ liability.

The clause in the contract the A/E presents is usually titled something to the effect of “Limit of Liability.” It may even be lumped under another heading. The clause usually contains language requiring the client of the architecture or engineering firm to agree to limit the liability to the value of architects’ or engineers’ services. For instance: “client agrees to limit design professional’s liability to the value paid for their services.” It could also show up as another, seemingly random, but unusually low figure – say $50,000: “client agrees to limit the liability of the licensed professional to $50,000.” Or as a combination of the two: “client agrees to limit the liability to the value of licensed professional’s services or $50,000 – whichever is lower.”  If the client agrees to this language in the design contract, the client and the design professional have essentially let the insurance company off the hook for paying any claims beyond the limit specified: the cost of the services or another named figure, regardless of the value of the project.

A design professional is educated, trained, licensed and insured for a reason.  The stakes are very high in the work we do. Much higher than the fees we charge our clients. An error in an engineered system, for instance – emergency pressure relief valves on a still, or the structure of building – has the ability to seriously endanger people’s lives.

If a building’s design is flawed due to an architect or engineer’s services – what is referred to as Errors and/or Omissions losses – the result, in terms of both dollars and lives, may be devastating or catastrophic.

Is a project has a catastrophic loss occur as a result of an architect or engineer’s error or omission, but there is a limit of liability clause in place. What will happen? 

Everyone. Ends. Up. In. Court. Everyone, including the owner of the project, the contractor, the sub-contractors and the design professional will be sued.  The architect or engineer’s insurance company will cover the loss only up to the level of the liability limitation. After that point, the coverage is exhausted. But, wait! The limited coverage doesn’t come close to covering the loss. So, who pays the difference?

Most likely, you will have to go to court to find that answer. The aggrieved party’s attorneys will continue to seek full compensation from the architect or engineer. Only now, the design professional has no further insurance coverage and is likely insolvent as a result.  Further, the injured party will seek compensation from every person and firm involved in the project, including the owner.  The owner of the project is most at risk as they are party to all the contracts, either directly or indirectly, and have ultimate responsibility as owner of the property.

Dalkita will never present a client with such a limit of liability clause. We actively seek to identify these terms and strike them from contractors, sub-contractors, suppliers – anyone, who works on our projects.  We don’t want to be exposed and uninsured either. 

Further, Dalkita’s policy is not to work with any A/E firm that refuses to remove such a one-sided clause against the client.  Most A/E firms recognize the issue and remove it with little resistance. Particularly, when they are contracted to Dalkita as prime consultant.  Dalkita’s policy prohibits us from recommending any client, directly or indirectly, be a party to any contract with such a clause limiting A/E liability. 

Any business should reserve the right to avoid vicarious liability from others, contracted directly to the owner and using these limitation of liability clauses. Dalkita requires the parties to such contracts to indemnify our firm against such vicarious liability.  

We strongly recommend that anyone signing an A/E contract (or another legal document) consult with an attorney, qualified in the relevant area of law.

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