From the Desk of Joe Jones
Contract language that may exceed coverage
Below is a sample from an indemnity clause:
For the purposes of determining the A/E’s share of such costs for Work which has not yet been performed, the cost of work performed by the Contractor’s Change Order shall generally be presumed to be 15% greater than if the Work had been included in the Contractor’s Contract. The A/E shall have the burden of disproving this presumption.
This is essentially a liquidated damages clause because it sets a penalty regardless of whether the design professional is actually negligent, and the damages are set at a fixed percentage regardless of what the actual damages are. This clause also creates a contractually assumed obligation beyond the design professional’s obligations under Common Law. Both the contractually-assumed obligation and the liquidated damages beyond what the design professional would be responsible for due to negligence are exclusions under the professional liability policy.
If a design professional is negligent and the actual damages are 5% higher than what they would have been at the time of bid, the professional liability policy will pay the 5% (actual damages due to negligence), but the design professional is contractually obligated to pay the additional 10% due to the contractual obligation to pay liquidated damages of 15%.
Remember to review your contracts carefully. Issues such as the one above may not always be obvious.
Re: From the Desk of Joe Jones
Liquidated damages are excluded under the policy so there would be no professional liability coverage for agreeing to pay for this type of damage. The professional liability policy provides coverage for negligence, and since a liquidated damages clause is a contractually agreed-to arrangement and not based on negligence, it is excluded.