Can you imagine insuring a $10,000,000 asset for a maximum of only $20,000 in value? That is $9,980,000 in uninsured exposure!
Consultants, especially architects, engineers, and material testing agencies try to get you to do that all the time!
Why? Because they (their insurance carriers) are constantly involved in legal battles over who is at fault for some error or omission.
The next time you receive a proposal, contract, service agreement, etc, PLEASE read carefully the terms and conditions.
Learn how to avoid a common trap when it comes to “risk sharing” with cosnultants like architects, engineers, and interior designers.
Here are some real examples:
EXAMPLE #1 – Owner & Geotechnical Engineer
“Risk Allocation and Limitation of Liability
The parties acknowledge that a variety of risks potentially affect [COMPANY] by virtue of entering into an agreement to perform the Services. The parties further acknowledge and agree that there is no disparity in bargaining power between the parties.
IN ORDER FOR CLIENT TO OBTAIN THE BENEFIT OF A LOWER FEE THAN WOULD OTHERWISE BE AVAILABLE, CLIENT AGREES TO LIMIT [COMPANY’S] LIABILITY TO CLIENT, AND TO ALL OTHER PARTIES, FOR CLAIMS ARISING OUT OF [COMPANY’S] PERFORMANCE AND THE SERVICES.
THE TOTAL AGGREGATE LIABILITY OF [COMPANY] SHALL NOT EXCEED THE TOTAL FEE FOR THE SERVICES RENDERED ON THE PROJECT, OR $20,000, WHICHEVER IS LOWER, FOR ANY LIABILITIES, INCLUDING BUT NOT LIMITED TO NEGLIGENT PROFESSIONAL ACTS OR ERRORS OR OMISSIONS, AND CLIENT AGREES TO INDEMNIFY [COMPANY] FOR ALL LIABILITIES IN EXCESS OF THE MONETARY LIMITS ESTABLISHED.”
The fee in this example was less than $7,000 while the actual asset including land was valued at around $15,000,000.
If you are engaging a geotechnical engineer to test the soil and recommend a foundation design for a multi-story office building, a “mistake” is worth a lot more than a $7,000 fee.
EXAMPLE #2 – Owner & Architect
“Article 8 Claims and Disputes
In recognition of the relative risks, rewards, and benefits of the Project to both the Owner and Architect, the risks have been allocated such that the Owner agrees that, in no event and to the fullest extent permitted by law, Architect’s total liability to the Owner for any and all injuries, claims, losses, expenses, damages, or claim expenses arising out of this Agreement from any cause or causes, whether arising out of contract, tort, negligence, warranty, strict liability or any other legal or equitable theory, shall not exceed $50,000.00 or the amount actually paid by Owner to Architect for Architect’s services, whichever is greater.
In no event, however, shall the Architect’s total liability for any suits or causes of action, including claims for negligence, exceed the Architect’s available amount of professional liability insurance.”
So imagine you paid an architect over $600,000 for design services on a $15,000,000 development.
Yes that is a lot of money, and we can discuss whether those fees are worth it another time.
Your risk of exposure is much greater than $600k if there is water damage because the architect produced inadequate construction drawings.
What does shutting down an operating asset to conduct repairs do to your investment returns?
No revenue = No bueno.
EXAMPLE #3 – Owner & Architect
“Risks:
In recognition of the risks, rewards and benefits of the project to be the Client and the Architect, the risks have been allocated so that the Client agrees to the fullest extent permitted by law, that the Architect’s total liability to the client for any injuries, claims, losses, expenses, damages or claim expenses arising out of this agreement, from any cause or causes, shall not exceed the total amount of fee paid to Architect.
Such causes include, but are not limited to, the Architect’s errors, omissions, strict liability, negligence, breach of contract or breach of warranty.”
So let’s talk about the elephant in the room.
Why would you want to limit the risk of your consultant because of THEIR own ERROR, OMISSION, or NEGLIGENCE?
What is the point of their insurance if they are not willing to make their coverage available?
Would it be better for a design professional to say, “you know what Mrs. Client…I’m really good at my job, but if I make a mistake my insurance carrier has got my back AND yours.”
Instead this reads, “I’m probably going to screw up (because I have in the past) and you Mr. Client are going to waive me of any responsibility.”
Sounds harsh, but guess what, I’ve seen lots of “pros” who charge a premium make careless mistakes.
EXAMPLE #4 – Owner & Engineer
“Risk Allocation and Indemnity
The Client and the Engineer recognize the relative risks and benefits of the Project to both parties.
The risks have been allocated such that the Client agrees, to the fullest extent permitted by law, to limit the liability of the Engineer to the Client for any and all claims, losses, costs, damages of any nature whatsoever, and claims and expenses from any cause or causes, arising out of, resulting from or in any way related to the Engineer’s negligent acts, errors or omissions, so that the total aggregate liability of the Engineer shall not exceed the amount of the total compensation paid to the Engineer pursuant to this Agreement.
It is intended that the limitation applies to any and all liability or cause of action described herein regardless of legal theory alleged, unless otherwise prohibited by law.”
Just trying to hammer the point home.
No offense Mr. Engineer, if you screw up a design on my $100MM high rise, because YOU were negligent, it does not seem like a good investment strategy for me to limit your liability to a few $1,000 in fees.
So what did we learn:
ALWAYS review the limits of liability and strike through the type of language shown in the examples above.
Your consultant and/or design professional should be willing to make their per-occurence-liability policy limits available to you as the client.
If they are not, say thanks but no thanks.
Move on and find a professional who is confident in their ability, but grounded in reality to know they are not perfect and could make a mistake.