Media Center

By Tim Shumrick

Disaster strikes. A design flaw becomes apparent during construction administration. Tempers flare between a design professional on the project and the project owner. Exasperated over the prospect of rework, a pushed-back schedule, and general disruption to project progress, the project owner files a claim against the design professional with a demand for significant economic damages.

Enter the Limitation of Liability (LOL) clause.

In this scenario, the design professional was successful in negotiating a Limitation of Liability clause into its contract with the project owner.

That LOL clause limited the design professional’s total potential liability to its $75,000 fee for the project. While the damages resulting from the design flaw far exceeded the $75,000, the design professional had the protection of its LOL clause and the owner reluctantly agreed to a resolution in which the design professional’s contribution was limited to the amount of its fee. The design professional took responsibility for its error but was protected from a more significant exposure.

How the LOL clause works:

The Limitation of Liability clause is, as the name implies, a contractual means for a design professional to limit their liability to a specific amount when damages to a project result from their professional negligence.

Typically, this amount takes one of three forms:

1. The designer’s Professional Liability insurance limits or available insurance proceeds
2. The designer’s fee for the project
3. A fixed amount agreed to between the designer and the project owner/contract holder based on relevant risk factors.

Some limitations of the LOL:

It’s important to keep in mind that an LOL clause is not surefire protection. Some caveats to keep in mind about the LOL include:

1. It only applies to the parties listed on the contract.
2. The limitation does not apply to third parties that are not part of the contract (ex: an innocent passerby is injured because of a design flaw).
3. The LOL may be challenged in legal proceedings and may be unenforceable depending on applicable law.
4. It can be difficult, even impossible, to get an LOL clause for certain types of projects and contracts (ex: government/public entity projects).

The pros

1. The LOL Clause is a good step in risk management for the design professional.
2. Insurance carrier underwriters acknowledge the benefit of the LOL. In some cases, they are willing to provide premium discounts for regular use of the LOL in your contracts.

As with most aspects of a contract, the LOL is a negotiation point.

It is a very effective tool to quantify potential exposure, equitably allocate risk among project participants, protect your revenue, insulate your insurance program costs, and to ensure your operations for years to come.

Educating your clients early about why the LOL makes sense for all involved is an excellent first step.

This article also appeared in Oswald’s A&E e-newsletter “Lights, Design, Action.”

For more information about the Limitation of Liability clause, risk management education, and strategies to discuss with your clients, contact your representative from the A&E team.