A professional service firm, like any business, is responsible for harm to its client caused by the firm’s breach of its contract. But breach of contract is not what professional liability insurance covers. All professionals must meet an applicable standard of care for the services provided, and must rectify any harm caused if they are negligent in their performance. It is this professional obligation that is within the scope of professional liability insurance coverage.
Many clients, however, want to conflate the two responsibilities. At times this is accomplished through a liquidated damages provision—a stated amount due from a party based on a specific contractual occurrence or nonoccurrence. Clients may also set up elaborate payment withholding or contractually obligated payment schemes based on their decision that professional services were deficient. Sometimes these are applied beyond a “threshold of harm” amount.
For instance, a recent contract we reviewed stated that the design firm would be responsible for 25% of the cost of items or features omitted from bidding documents, 50% of the cost of errors in the bidding documents discovered “prior to installation,” 100% of the cost of any delay caused, and 100% of the cost of reconstruction, replacement, and delays if there has been “a partial or complete installation” of something because of an error in the bidding documents. It seems like a very clean and quick way to determine a remedy; the client will determine fault and either withhold payment or demand the contractual amount from the design firm.
However, any contractually assumed payment scheme falls outside of the coverage of professional liability insurance. Professional liability coverage only pays for actual damages (losses, costs, expenses) to the extent they are the result of the firm’s failure to meet the standard of care for the services provided. This finding of negligent performance cannot be made unilaterally by a client. And the withholding of a fee is not the same as a demand for money or services based on an allegation of negligent performance, which defines the claim trigger for professional liability insurance coverage.
When a client wants a simple contractual solution to its dissatisfaction with any aspect of professional services, be wary. Unless the contractual remedy tracks with your normal legal liability as a professional, do not expect professional liability insurance to respond. Both your firm and your client should recognize that the risk is uninsured. And that might mean that you should charge significantly more for your services to fund your uninsurable exposure.
