Everyone knows that building construction and renovation work can be difficult and dangerous and that lawsuits are not unusual. While most lawsuits involve the contractor on the project, there can certainly be lawsuits against the design professionals working on the project for an error or an omission in the design or in the provision of their services. There may be a claim that the work was not adequately or properly observed and that this resulted in problems with the work that the co-op or condominium was not aware of. Having insurance to cover such risks is essential, but that is not the end of the story. There are many instances where there may not be any insurance coverage for a variety of reasons—someone "forgot" to buy it; it was cancelled and nothing was done about it; the carrier received late notice of the claim and is declining coverage or the policy does not cover the hazard or type of work involved in the lawsuit. There also may be instances where there is insurance in place, but there is no defense of the claim offered by the carrier. Thus, while having insurance is important, there will still be certain claims that may need to be "defended" by the design firm or individual owner of that firm.
As an attorney who reviews a lot of building construction and renovation contracts, I get to see a lot of interesting provisions. Certainly there are no two contracts that are alike. Lately I have seen a "trend" that is worth taking notice of. It is the " attempted" use of "limitation of liability clauses" in contracts with design professionals. Basically, these clauses seek to limit the liability of the design professional to either the amount of their fee for the project or to the limit of their insurance policy. My response is "Nice try," but "No."
Imagine hiring an architect or engineer to design a project. The fee might be something like $50,000 or even $150,000. Why would the client want to limit the architect's damages to $50,000 or $150,000, when something far more costly may go wrong on the project? It would be short-sighted thinking. I have also seen contracts trying to limit the design professional's potential damages to the amount of the design professional's malpractice insurance policy. If you consider that the attorney fees and expenses of litigation may come out of that policy, there may not be a whole lot left at the end of the day to use to settle a lawsuit or pay a judgment. That is a huge gamble to take and why should an owner risk that?
Let's say that the co-op or condominium takes that risk and signs a contract with a limitation of liability clause. He may say to himself, "Well, there is a $1 million dollar policy. That should cover whatever happens." What if the carrier denies coverage? What if the amount claimed in the lawsuit is for more than $1 million dollars? What if the judgment is for $2 million dollars? Should the client "forget" about the rest of the damages awarded and just be content with the policy limits and what remains after litigation expenses? What is more, when the design professional gets sued for $2 million dollars and has only a $1 million dollar policy, he is likely to get a letter from his insurance carrier reserving their rights with regard to any judgment over and above the amount of the policy. The only one who "wins" in such a situation is the insurance carrier for the design professional.
Recently a co-op client came to me for a consultation. They were asking for a quick review of an architect contract before signing. They had already exchanged comments with the firm before they ever called me and just wanted to be sure it was okay to sign. The first thing I noticed when I read it was a limitation of liability clause "embedded" in a paragraph on a completely different subject. Several people on the board had read the contract and had not even noticed it, because the title of the paragraph dealt with something else and they were not expecting such a clause. Limiting liability to a modest fee is like saying, "If your building falls down, hey, we tried our best."
Boards should always have contracts reviewed by legal counsel familiar with these types of issues so that they can make the most informed decisions possible. Deleting a limitation of liability clause does not harm the design professional. They still will have insurance which will likely cover the defense of any lawsuit, which may arise and the owner or developer will keep all his options open.
C. Jaye Berger, Esq., of the Law Offices C. Jaye Berger, is a Manhattan attorney specializing in real estate, co-op, condo, construction law and litigation.