Liquidated Damages
from the desk of Nahom Gebre
We often see clauses that attempt to make design professionals responsible for liquidated damages caused by schedule delays. Liquidated damages provisions determine in advance the measure of damages if a party breaches the agreement, whether or not it exceeds or falls short of the actual damages. The challenge for design professionals is that they are legally responsible for damages that are due to their negligence in the performance of professional services; liquidated damages provisions, however, contractually predetermine the damages without having to show that they are caused by negligence. This is a contractual assumption of risk. The professional liability policy will pay for damages to the extent that they are caused by negligence in the performance of professional services; the policy will not pay for a contractual obligation to pay liquidated damages that are not shown to be caused by negligence in the performance of professional services. The CNA professional liability policy specifically excludes coverage for liquidated damages.
From a risk management standpoint it is best if the contract is amended to acknowledge the importance of the schedule but ultimately to state clearly that you will be responsible for those damages that are caused by your negligence in the performance of services. For further information, you can review our management advisory on liquidated damages at www.schinnerer.com/risk-mgmt/Documents/ManagementAdvisories/Liquidated-damages.pdf. (Access is limited to brokers and policyholders.)