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Should you be concerned about consequential damage claims?

4.1.1Recently, I’ve received a number of telephone calls from design firms concerned about consequential damage claims and contract language that refers to these damages. I thought it might be a good time to take a look at how this affects design professionals. Here are some of the questions I’ve received:

1. “What are consequential damages?” Consequential damages are defined as: “damages that do not flow directly or immediately from some act or occurrence, but from the consequences or results of the act or occurrence.” Consequential damages arise out of special circumstances that are typically unpredictable and are typically more expensive than direct damages. The definition of consequential damages changes from jurisdiction to jurisdiction so it’s important to understand that the exposure may differ from project to project.

2. What is an example of a claim for consequential damages? Schinnerer’s claim study, “Anatomy of a Large Engineering Claim,” explores a claim against a mid-size structural engineering firm for the structural design of an assisted living facility. In this claim, in addition to direct damages, the client’s claims included consequential damages for the loss of use of the facility for 4.5 months and a $1.7M tax loss. (The client had funded the project from an $8 million profit earned from the sale of another building. Due to tax law, he had only a limited amount of time with which to reinvest that project or he would have to pay taxes on it.) The claim settled for the engineer’s policy limits and a waiver of the engineer’s outstanding fees.

3. Are consequential damages covered by insurance? Although consequential damages may not be covered by all insurance carriers, these damages are covered under the Schinnerer professional liability program as long as they result from negligence in providing professional services. Download our newest policy form to see for yourself.

4. Can I limit my liability for consequential damages? Yes! You can try to negotiate a waiver (typically, this is a mutual waiver) of consequential damages with your client. Both the EJCDC and AIA sets of documents include a mutual waiver of consequential damages. Here is the mutual waiver in EJCDC E-500, Standard Form Agreement Between Owner and Engineer for Professional Services:

Mutual Waiver: To the fullest extent permitted by law, Owner and Engineer waive against each other, and each others employees, officers, directors, members, agents, insurers, partners, and consultants, any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, resulting from, or in any way related to the Project.

5. My sub-consultant wants to include a mutual waiver of consequential damages in the sub-consulting agreement. Is this a good idea? Only if you have a corresponding waiver in the prime agreement with the owner. A prime consultant who agrees to limit the liability of a sub-consultant has contractually assumed an obligation to be responsible for any damages caused by that sub-consultant beyond the stated limit, significantly increasing potential liability that would exist in the absence of such a limitation.

The Schinnerer claims study, “Contractual Provisions that Expand Liability,” includes a claim involving an architect retained to design a courthouse. The claims against the architect resulted from the architect’s vicarious liability for the negligence of the structural engineer. The architect settled with the county, contractors, and construction manager and looked to the engineer for reimbursement of $793,000, which included $130,000 in claims by the architect for extra services. The engineer’s contract with the architect included a mutual waiver of consequential damages, while the architect’s contract with county did not. The engineer took the position that the CM’s claims and some of the architect’s claims were consequential in nature, forcing the architect to recover only $702,000 from the engineer.

In summary: you may be held legally liable for consequential damages that were caused by your negligence unless you have a contract that limits your liability for such damages. Review contracts carefully and consult with local legal counsel.

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