UNLIMITED liability. Is it a good thing or not?
For the uninitiated, unlimited liability is where there is no maximum limit which can be claimed. The guilty party is liable to cover all costs to remedy any breach. It differs from limits or ‘caps’ on liability that sets a maximum insured amount that can be claimed. This affords an element of certainty to potential future claims and the amount to be recovered.
You'd be surprised how often the question of whether unlimited liability is useful or not comes up. Although every construction project should be considered individually on its merits, the reflections tend to remain the same. Developers, funders and employers tend to want it; it affords them the opportunity to recover the full amount of loss or damage to cover the extent of any breach beyond insurance coverage. Contractors, consultants and members of the supply chain do not want it; it puts their company at serious risk.
Before we get our hands dirty with the implications of demanding (and agreeing to) unlimited liability, we will look at insurance in the construction industry at a very high level.
Insurance: this is essentially an ‘abstract pot of money’ that any person involved in a construction project is expected to have access to, but this money does not exist in a tangible sense. Think about it, whenever you get car insurance you do not drive around with a bag of money in the passenger seat. Insurance coverage in this wider construction sense is merely just a promise that if something were to happen, you would be covered.
Liability: this is just another word for responsibility. Liability comes down to whether or not you are responsible for the breach that caused the injury, harm or damage that has occurred.
It is the combination between these two that we need to ensure is protected.
The worst kept secret that everyone seems to know is that insurance companies do not want to pay out. While this is obvious for claims that are not legitimate, often you will find the small print being relied upon more and more, and it is here with unlimited liability where most issues arise.
More often than not, the small print of insurance provisions within the construction industry will actually invalidate insurance cover for a number of things, including, unlimited liability.
This is a major issue, and one that those requesting unlimited liability need to consider. It is becoming common to see private sector entities (as well as many public bodies in Ireland) require unlimited liability. So back to the question that started this piece, unlimited liability, is it a good thing?
Let's look at the situation whereby a contractor is liable (responsible) for a breach of contract that causes significant damage or loss. The contractor then goes to its insurance provider in order to secure the cover. However, whenever it arrives at the door of the insurers, they pull out the magnifying glass, put it in the contractor's hand, point at the page and say, "read here". The highlighted text in this instance will be a provision that points out it has invalidated its insurance by agreeing to unlimited liability.
Where there is no limitation on liability, insurance policies are often invalidated. Claims are therefore limited by the financial means of the offending party. With this in mind agreeing to a liability limit provides certainty to the developer/funder/employer that there is 'x' amount which can be claimed.
A prudent contractor or consultant is unlikely to accept an unlimited liability contract, particularly where the works are complex or high risk, and will either push back on this or turn down the work. A developer/funder/employer could find that the pool of contractors or consultants which it can employ is diminished and the work could become more costly.
Whilst setting a limit means the claiming party can only claim a sum up to that amount, and therefore they inherit the risk of any sum over that value, it provides certainty and could be more economically advantageous in the long run. A liability cap at a suitable level is beneficial to everyone involved.
:: David McNeice is a senior associate, construction and infrastructure at DWF Belfast
