MOCK NEGOTIATIONS: LIMITATION OF LIABILITY

Transcription

1 MOCK NEGOTIATIONS: LIMITATION OF LIABILITY DPRCG Loss Prevention Role Play Exercise a fun and effective tool to help you convey important negotiation tips and loss prevention info to your staff CASE SUMMARY Client: Crystal Lake Water Authority Project: Crystal Lake Dam Spillway Rehab Total fee: $99,950 Engineer s opinion of probable construction cost: $1,270,000 Services to be rendered: Condition, design concept, DNR permit application, contract documents, (contract administration) INSTRUCTIONS The following script is a role-playing exercise that demonstrates how to negotiate a limitation of liability clause in a client agreement. This exercise is designed to be an in-house, self-administered course that can be delivered by a firm principal or risk manager to the firm s design professionals. The role play exercise requires three participants. Generally, a principal or risk manager plays the part of the moderator. The moderator introduces the topic, sets up the role-playing scenario and leads a group discussion of lessons learned after the completion of the role play. We have provided samples of lessons learned at the end of the script, which the moderator can use to stimulate discussion. Two participants are needed to play the roles of the design firm representative and the client representative. Typically, these roles are played by two of the design professionals attending the session. ROLES Moderator Tommy Trout: Client s Representative George Geo: Design Firm s Representative Delivery time: 5-10 minutes Lessons Learned discussion: 5-10 minutes When to deliver: staff meetings, etc. It is possible to assign these roles at the beginning of the presentation. However, it is preferable that these two participants be selected prior to the actual presentation. That way, the two role players can be provided their scripts in advance, and they will have the opportunity to practice their dialog. This leads to a smoother, more comprehensible presentation. We believe that you will find this role-playing exercise both informational and enjoyable for all participants. Your feedback regarding how well this presentation was received by your group is always appreciated. Should this exercise generate any questions for which you do not have ready answers, contact your insurance agent, who will be able to provide additional information. The script follows. Have fun and good luck!. Page 1 of 6, Mock Negotiations: Limitation of Liability

2 MODERATOR Greetings. Today we will be examining one of the most effective tools design firms have in their loss prevention and risk management toolkit: The Limitation of Liability contract provision. Essentially, The question becomes, then, how does a design firm convince a client that a limitation of liability provision in the contract agreement is fair and equitable and not just the design firm s attempt to shirk its responsibility? That is the subject of our exercise today. With the help of some of your esteemed colleagues, we will conduct a role-playing exercise that will demonstrate how to negotiate a limitation of liability provision. Afterwards, we will discuss some of the lessons learned in the exercise and provide ideas on how you might be able to successfully negotiate an LOL clause. this is a contractual agreement between the design firm and its client that sets a dollar cap on the amount of money for which a design firm will be liable in the event of a professional liability claim. This dollar amount is typically tied to the fees that the design firm is making on the project, or the amount of professional liability insurance that the design firm has available at the time of the claim. If everyone s ready, let me introduce our cast of characters. Meet George Geo, the Contract Officer for our fictitious geotechnical firm, You Rock My World, Inc. Now meet Tommy Trout, the client The purpose of the Limitation of Liability provision is representative from Crystal Lake Water Authority. Our project is the rehabilitation of the Crystal Lake Dam Spillway. Total fees for our geotechnical firm are $99,950. The project s probable construction cost is 1.27 million dollars. The scope of services includes a condition assessment, design concept, DNR permit application, and contract documents. Note that the proposal at the request of the owner does not include contract administration services since the client/owner is trying to save money. to balance the risk to reward ratio for the design firm and the client. In most cases, the reward to the design firm is the amount of fees it will earn on the project. For the client, the reward is the finished product and any fees or income that can be generated over the life of the project. Since the potential reward to the client is often a substantial multiple of the potential reward of the design firm, it seems only fair that the liability of the designer should be capped at a reasonable level. Otherwise, the design firm is putting its very existence, as well as the livelihood of all of its employees, at risk for a small, onetime fee. Our client, CLWA, presented our geotechnical firm with a fairly standard contract. The geotechnical firm reviewed it, found it reasonable but responded with one addition a limitation of liability clause that restricts the professional liability exposure to a set dollar amount not to exceed the total fees earned on the project. Let s take a look at the exact wording of the proposed clause: 2006, X.L. America, Inc. Page 2 of 6, Mock Negotiations: Limitation of Liability

3 LIMITATION OF LIABILITY Client agrees, to the fullest extent permitted by law, to limit the liability of the Design Professional, its directors, officers and employees, and its sub consultants, their directors, officers and employees to the Client for any and all claims, losses, costs, damages of any Well, it s pretty obvious. You re trying to shirk your responsibility if something goes wrong with the project. We ve got almost a million and a half wrapped up in this project and you only intend to cover about 100,000 dollars worth of your mistakes. nature whatsoever or claims expenses from Well, look at it from my perspective, Tommy. We re charging a very reasonable fee for our services. We ve done quite a few projects like yours. You know that; you checked our references. What did those folks tell you? any cause or causes, so that the total aggregate liability of those named to Client shall not exceed $, or the Design Professional s total fee for services rendered on this project, whichever is greater. Such claims and causes include, but are not limited to negligence, professional errors or omissions, strict liability, breach of contract or warranty. They all sang your praises. On time, on budget and Our client has reviewed the revised contract with his attorney and has requested a meeting with the the regulatory hurdles were easily jumped. We want you on this project, but my attorney says geotechnical firm. The discussion focuses on the limitation of liability clause. Do you know how much we ll make on this deal? TOMMY TROUT: Well George, I presented your limitation of liability We ll be lucky to make a $10,000 profit. Yet you want us to be liable for the whole project? clause to my attorney and he said no go, no way, no how Only if it s your fault. GEORGE GEO: (speaking directly to the audience in a sarcastic tone): Now there s a surprise! Even if it s not our fault, we can burn up that ten grand in about a day or two of legal fees. And let s What? face it: if there s a problem on a project, everyone gets sued. I speak from experience here. Nothing, nothing. What did your attorney find Well I still can t accept the clause. objectionable in the clause? 2006, X.L. America, Inc. Page 3 of 6, Mock Negotiations: Limitation of Liability

4 Tommy, look at this from a risk-versus-reward perspective. Our potential reward is about $10,000 and maybe a nice referral from you. Your reward is a beautiful recreational lake to enjoy for the rest of your lifetime, your children s lifetime and probably your children s, children s lifetime. No offense, but these building lots aren t that special without the lake. LIMITATION OF LIABILITY Notwithstanding any other provision the total liability, in the aggregate, of DESIGN PROFESSIONAL to CLIENT for any and all claims related to the Project or this Agreement from any cause or causes shall not exceed the total insurance proceeds paid on behalf of or to DESIGN PROFESSIONAL by DESIGN PROFESSIONAL s insurers in settlement or satisfaction of CLIENT s Claims under Well, yeah, but.but my attorney says no way, no how. the terms and conditions of DESIGN PROFESSIONAL s insurance policies applicable thereto (excluding fees, costs and expenses of investigation, claims adjustment, defense and appeal). Well we ve got to get a little creative, then Tommy, because I don t think my executive committee will accept this project without a limitation on our liabilities. We ve got 175 employees that count on having a place to go to work tomorrow. We just can t put their well being on the line for $10,000. As we discussed, we carry a policy that will pay up to two million dollars per claim, with a four million dollar aggregate. That means you ll have up to two million in coverage if anything goes wrong with What do you have in mind? your project. In return, we d like to add construction administration to our scope of services so that we are in a better position to help avoid claims during the construction phase of the project. We ll How about this, Tommy. I ll extend our liability to want about ten thousand more in fees for the expanded scope of services. the amount of available professional liability insurance coverage. MODERATOR: Here is the revised contract language George is proposing: Well, two million is better than a hundred thousand But what do you mean up to two million. We d get the full two million if there were that much in damages, right? 2006, X.L. America, Inc. Page 4 of 6, Mock Negotiations: Limitation of Liability

5 Well not necessarily. Any legal fees would come out of the limits. Plus, if we had another couple of claims, that could reduce the aggregate limit as well. The few assets we have in the corporation are tied up into our design tools and equipment. We re not liquid. We have to rely on our insurance for financial protection. Even if you won a judgment greater than our insurance limits, you can t get much blood from a bankrupt turnip. Now wait a minute Are you trying to pull a fast one here? OK. So let me get this straight. You want us to limit Not at all Tommy. Another firm might not have told you this. I did it in the interest of full disclosure. The way my Professional Liability policy works is that your liability to your available insurance limits. And you want to provide construction administration services for another ten grand. I don t know if my attorney will like it. there is $2M available for each claim to cover the damages and expenses, however the most the policy will pay for all my claims made in any single policy year is $4M. In the 27 years I ve been doing this, we ve never even come close to that aggregate limit in claimed damages, let alone actual losses. Well, Tommy, without a limit on our liabilities, I don t think our firm can agree on the project. It s just too much risk for too little reward. You know the quality of our work. And with contract administration services, we ll be in a better position to nip any potential problems in the bud, before they get Well, I don t know if my attorney will like this limitation of liability much either. He doesn t think I expensive. You get a great deal of the reward on this project, so it s only fair you accept some level of risk. It s only fair, right Tommy? should limit your liabilities, period. That s your lawyer s job. He has to worry a little Well, I guess so But my attorney still ain t gonna like it. about errors and omissions, too. But you know Tommy, our liability is already limited. Tommy, this is your business, not your attorney s What do you mean? business. If you want us on the project, we re going to have to come to some agreement on limiting our liability, and I think this compromise is very I mean, in truth, our liability is limited to what the company can pay. You ve seen our balance sheet. fair. Outside of two other big claims against us in one year, you should have all the protection you need. You could probably find another firm that 2006, X.L. America, Inc. Page 5 of 6, Mock Negotiations: Limitation of Liability

6 would do this project without the limitation. I think you d have the same conversation we re having with a limitation equal to his firm s fee and negotiated that amount upward to his available insurance limits. right now with the more reputable ones. The others; well if they re not going to look out for their own risks, do you think they re going to look out for yours? Second, we have shown that the negotiation of limits involves give and take. George agreed to increase the limit, but he also negotiated an Well, George, I do want your firm for this project. increased scope of services that includes construction observation and 10 thousand dollars in additional fees. I ll talk to my attorney and try to see what I can do. I sure hope he doesn t yell at me Third, as Tommy showed, no client is simply going to give you a limitation of liability. You have You can do it, Tommy, you can do it. And if he d like to talk to my insurance agent about the coverage, just let me know. to ask for it and then be steadfast in your convictions. You can negotiate the limit, but be prepared to walk away from a project where the reward simply does not justify the risk. MODERATOR: So Tommy faced his attorney, explained the new limitation of liability provision and after a few rounds of Tommy s attorney trying to call George s bluff, and George steadfastly refusing to Fourth, we learned that LOL clauses are reasonable to ask for. No client is going to give you an unlimited budget, scope of services or fee so why should you provide your services with unlimited liability? accept the project without the LOL clause a final agreement was reached. George got his limitation of liability provision and Tommy got his preferred Any other lessons you have learned from today s exercise? geotech firm. Thank you for your participation. And how Let s give a big hand to our two academy-award worthy actors. about one more round of applause for our fabulous actors. Now, let s look at a few of the lessons learned here. First, we have shown that the actual limit of your firm s liability is negotiable. George starting Developed by DPRCG members working in collaboration with the Design Professional group of the XL Insurance companies. Please send your feedback to DPRCG@xlgroup.com. "XL Insurance" is the global brand used by XL Group plc s (NYSE: XL) insurance companies. Coverages underwritten by Greenwich Insurance Company, Indian Harbor Insurance Company, XL Specialty Insurance Company, and XL Insurance Company Limited Canadian Branch. Coverages not available in all jurisdictions 6157_06/ , X.L. America, Inc. Page 6 of 6, Mock Negotiations: Limitation of Liability