What is the Contractual Liability Exclusion?
One of the most elementary concepts for design professionals to be aware of when it comes to professional liability insurance is the contractual liability exclusion. This exclusion is present in just about every professional liability insurance policy.
The exclusion works by excluding coverage for any obligations design professionals agree to in a contract that do not already exist under the common law. In other words, it excludes coverage for obligations that would not exist in absence of the contract. One could also think of it as an exclusion of “breach of contract” claims.
Sample Language:
Here’s an example of the exact language pulled from one professional liability policy:
IV. EXCLUSIONS
B. Contractual Liability
arising out of:
1. The Insured’s actual or alleged liability under any oral or written contract or agreement, including but not limited to express warranties or guarantees; or
2. any actual or alleged liability of others that the Insured assumes under any oral or written contract or agreement.
Common Law
The common law standard of care that design professionals must meet when performing their services is: the ordinary skill and care usually exercised by members of the profession under similar circumstances and in the same or similar locality.
Design professionals are required to meet this standard of care regardless of whether it is explicitly stated in a contract. It’s important to emphasize that this means design professionals do not have an obligation to be perfect.
Why This Matters
Often times, design professionals are presented with contracts that ask for a higher standard of care than the common law standard outlined above.
For example, I have seen plenty of contracts that ask the design professional to use their “best efforts” when performing the services. See the following clause:
Consultant understands the importance of the Project discussed herein and therefore agrees to use its best possible efforts when performing the services.
On its face, this clause might seem harmless and perfectly reasonable. However, agreeing to this clause would raise the standard of care. Design professionals are not required to use their “best possible efforts” under the common law standard of care, so agreeing to do so would be agreeing to an obligation that does not exist in absence of the contract.
Consequently, in the event of a lawsuit against a design professional who agreed to this clause, the contractual liability exclusion would apply. The design professional would therefore be forced to pay any damages out of pocket should it be found that the “best possible efforts” were not used, even if the design professional met the common law standard of care. The effects of having to pay a large judgment or verdict completely out of pocket can be devastating to any business, which is why it’s so crucial for design firms to never agree to any contract clauses that raise the standard of care.
Conclusion
Professional liability insurance is intended to cover design professionals in cases where they fail to meet the common law standard of care. However, design professionals are often faced with contract clauses that seek to raise that standard, which can be very problematic.
The contractual liability exclusion in professional liability policies excludes coverage for claims stemming from a failure to meet contractual obligations that do not already exist under the common law. Because of this, design professionals should never agree to any contract clauses that raise the standard of care.
About the Author
Mike Pettit is in his second year as an A/E Risk Manager. Prior to his current role, he worked in personal lines.
Mike received a bachelor’s degree in risk management & insurance from Florida State University in 2019, and a Juris Doctor from Ohio Northern University Pettit College of Law in 2023.
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.