Before we answer the question, to start with, a Limitation of Liability (LOL) contract clause can go something like this.
The Design Professional’s total aggregate liability for any and all damage from any and all causes including but not limited to its breach of contract, error, omission, professional negligence, strict liability, or indemnity obligations will be limited to a sum not to exceed the lesser of the Design Professional’s fee or _____________________ (fill in the blank, such as a negotiated amount between Design Professional and its client, the available proceeds of the Design Professional’s liability insurance coverage, etc.)
THE RATIONALE FOR INCLUDING AN LOL CLAUSE IN A CONTRACT
The clause allocates the inherent risks between a prime professional and their client as a mechanism to fairly and equitably adjust the exposure of an A/E in situations where the damages from a claim can be excessive. Damages may be disproportionately high given the nature of the practice of architecture and engineering, so capping potential damages makes business sense. A construction project may cost multimillions of dollars, and project owner may realize considerable profit, yet the design professional’s fee is limited and a relatively small percentage of all the money involved. In other words, it balances the risks and rewards of a prime professional relative to their client.
NO, AND HERE IS WHY
It is safe to say that a prime professional should not limit the liability of their consultants. The main reason is that in many projects a prime professional’s contract with their client may not have the benefit of an LOL clause. The prime professional’s exposure is disproportionately high relative to their fee for services, so it makes no sense to limit their consultants’ exposure. Otherwise, make no mistake about it, the prime would be “holding the bag” of the exposure of a claim’s damages on the project.
Consider the following — if a prime professional limits the liability of its consultants, and if the consultant's errors or omissions cause damage exceeding a consultant’s LOL limit, the prime professional may be responsible for the difference. Under the concept of “vicarious liability,” when all is said and done, a prime professional is responsible to their client for the entire project, including the consultants’ services. If a consultant makes an error or omission that causes harm to the project, the client may pursue a claim against the prime professional, even if the consultant was responsible.
Also consider an insurance implication for the prime’s professional liability coverage, if the prime limited the liability of their consultant. As stated above, the prime professional’s professional liability insurance provides coverage for vicarious liability. And that would apply for the prime professional’s coverage for the consultants' negligence (of course the consultant would have on their own but may not match the prime professional’s coverage). Having said that, the prime’s professional liability coverage may exclude coverage for liability assumed by contract (the contract between prime professional and consultant), if the prime limited the liability of their consultant that wouldn't have been present otherwise. As a result, limiting a consultant's liability could potentially reduce or negate the effectiveness of the prime professional's own insurance liability coverage.
INSTEAD OF LIMITING CONSULTANTS’ LIABILITY
A prime professional should carefully select their consultants that have a successful working relationship from past projects. Apart from “consultant selection,” utilize strong risk management tools such as quality control/assurance measures and peer reviews. It is understood that consultants should have their own professional liability insurance coverage that should match the design professional’s terms and limits.
About the Author of this Risk Management Building Block Article
As a risk manager for the last 20 years for the design profession, Eric O. Pempus, FAIA, Esq., NCARB has experience in professional liability insurance and claims, architecture, engineering, land use, law, and a unique background in the construction industry. Prior to risk management, he has 25 years of experience in the practice of architecture/engineering, and as an adjunct professor teaching professional practice courses at the undergraduate and graduate levels for 37 years at Kent State University’s College of Architecture & Environmental Design.
As a Fellow of the American Institute of Architects and AIA National Ethics Council 2021 Chair, he has demonstrated his impact on architectural profession. He has presented numerous loss prevention and continuing educational programs to design professionals since 2000 on topics of ethics, contracts, and professional practice in various venues across the United States and Canada. He is a former member and chair of his city’s Board of Zoning & Building Appeals for 24 years, and is a licensed architect, attorney, and property & casualty insurance professional.
His educational background includes a JD from Southwestern University School of Law, Los Angeles; Master of Science in Architecture from University of Cincinnati; and BA in psychology/architecture from Miami University, Oxford, Ohio.
The above comments are based upon DesignPro Insurance Group’s experience with Risk Management Loss Prevention activities and should not be construed to represent a determination of legal issues but are offered for general guidance with respect to your own risk management and loss prevention. The above comments do not replace your need for you to rely on your counsel for advice and a legal review, since every project and circumstance differs from every other set of facts.
Disclaimer: The viewpoints expressed in this article are those of the author(s) and are not necessarily approved by, reflective of or edited by other individuals, groups, or institutions and this article is an expression by the author to generate discussion and interest in this topic.