YOU AGREED A CAP ON LIABILITY BUT YOU DIDN’T PUT IT IN!
Make sure to include agreement in any contract
It is a common occurrence in our experience that a cap on liability might be intended and agreed between the parties, but then fail to be inserted into the contract.
This occurs through the parties believing that the clause which relates to professional indemnity insurance also operates to cap the professional’s liability.
This is not the case.
A typical professional indemnity insurance obligation requires that professional indemnity insurance be maintained at a certain level for a certain period of time. It often also contains the important caveat that the required insurance only has to be maintained if it is available on commercially reasonable terms.
An example of such a clause is therefore familiar:
The Consultant will maintain professional indemnity insurance for 12 years from practical completion of the Development with a limit of indemnity of £5,000,000 each and every claim or series of claims arising from the same originating or underlying cause, provided such insurance is available in the insurance market and at commercially reasonable rates.
This obligation requires the maintenance of insurance in the specified terms, but says nothing concerning the liability of the Consultant to the other party to the contract. In the absence of further terms, the liability is in fact unlimited, even though the required insurance backing for the liability is £5m.
Any liability over and above £5m would therefore be uninsured.
The misunderstanding is perhaps furthered by elements in the insurance obligation which sometimes appear. So for example:
Without prejudice to their liabilities or obligations under this Deed, the Consultant will maintain professional indemnity insurance for 12 years from practical completion of the Development with a limit of indemnity of £5,000,000 each and every claim or series of claims arising from the same originating or underlying cause, provided such insurance is available in the insurance market and at commercially reasonable rates.
Such wordings may create the impression that it would otherwise be the case that the clause DID limit the Consultant’s liability. In fact the additional wording is intended to address a concern which is largely unfounded (and especially given requirements of the UK courts that limitation clauses be clear and demonstrably the intent of the parties, not to mention a certain antipathy to very general exclusions of liability).
In order to actualise a cap on liability a separate clause would be needed to clearly express this intent. For example:
Subject always to the Consultant’s liability in relation to claims for death, personal injury or fraud, the Consultant’s total aggregate liability for claims under or in connection with this Deed whether in contract, tort including negligence, breach of statutory duty or howsoever arising shall not exceed the sum of £X.
A similar and related misunderstanding is where a professional advises that they are “offering” a certain level of professional indemnity insurance. If this related solely to the level of insurance the Consultant is required to maintain it would be correct, but often the Consultant purchases a higher limit than the amount they are “offering”, and the perception is that the Consultant’s liability is limited to the amount “offered”.
So for example where the Consultant purchases £5m professional indemnity insurance, but offers £2m for the particular project. The insurance obligation is duly drafted in terms of £2m. The actual position is then that whilst the obligation to maintain PI is only £2m, and the Consultant actually purchases £5m (but would be free to lower this limit in the future provided that they didn’t go below £2m), the Consultant’s liability remains unlimited.
As such the parties intended that the Consultant’s liability be limited to £2m, but haven’t put this into the contract. The correct approach in such a situation is for the insurance obligation to be drafted in terms of £2m, and a cap of liability of £2m to be inserted into the contract.
These misunderstandings can obviously have financial consequences if the Consultant was trying to manage its risk through caps on liability.
It can have devastating consequences however if the Consultant was trying to protect personal and corporate assets, and an intended cap on liability was not in fact put in place. The viability of the firm and/or personal wealth would then be exposed through unlimited liability for a claim.