Allocating Risk When Hiring Professionals

We frequently review contracts between associations and licensed professionals, like Architects and Engineers. One common provision that many of these professionals are inserting to their contracts is to limit any liability they have for performing their services. We have several comments that we believe our clients should be aware of. 1) “Companies” are not licensed professionals, and the professional working for the company cannot be released from liability for their errors UNLESS the company is formed as a professional limited liability company (PLLC) AND the company has $1 million of professional liability insurance. 2) So if the company is not set up properly, even if the company is released from liability, the PERSON with the professional license is still liable for his/her mistakes. 3) If the company has professional liability insurance, but you agree to limit liability to fees paid, you have lost the protection the insurance might provide. If you agree by contract to limit the liability to $25,000, insurance will never pay more than $25,000. Stating there is $1 million of coverage would be irrelevant, because you would not get any of that extra protection. 4) The courts have not yet addressed whether such limitations on liability are valid contract provisions. They may be prohibited as a matter of public policy. The intent of the law (regarding the liability of professionals) was to allow the professionals a way to limit their personal liability by creating a form of company that could “practice” architecture, engineering, law, accounting, or other professional services. A requirement of that limitation on personal liability was that insurance be provided to protect the customers. If the company is allowed to wipe out that insurance protection by contract, then it defeats the intent of the legislation. 5) We recommend that contracts NOT limit professional liability. A reasonable compromise would be to limit liability only if it is not covered by insurance, so that the full benefit of the required insurance is available to the customer. The risk of an error which would result in a claim against the professional, or a claim on his/her insurance is low. But there is no reason to accept without negotiation a provision that would wipe out any ability to get recovery should the professional do something wrong. We strongly recommend that you have any agreement with professionals reviewed by an attorney, so that you understand the risks that your association is taking on in these relationships.
Categories: Board Conduct, Contracts