ROLLING THE DICE WITHOUT PUTTING IT ALL ON THE LINE
Proposal Qualifications to Protect Contractors
Against Catastrophic Liability Exposures

• Introduction
• The Severe Risk of Warranty Liability
• The Severe Risk of Broad Form Indemnity
• The Severe Risk of Environmental Liability
• The Severe Risk of Professional Liability
  • Design Liability
  • Professional Liability in General
• The Severe Risk of Consequential Damages
• The Severe Risk of Unlimited Liability
• Conclusion

Abstract

Contractors face enormous liability exposure when bidding to perform construction work and related services in our highly industrialized and litigious society. Today, it seems we don't even blink an eye when we hear of damage awards in the $10 to $25 million dollar range. Our society seems to have become desensitized to the catastrophic impact of damage awards which would severely impact, if not entirely wipe out, most contracting firms. Indeed, the revenue (and resulting profits) contractors expect to earn in today's market bear no relationship to the risk of catastrophic loss to which they are exposed. In reality, a small mistake on a small job can result in a devastating loss.

When representing the contractor, the construction contract lawyer should counsel his or her client about exposures that may be beyond the client's control and ability to manage. Hopefully, the contractor can afford insurance to cover severe liabilities. Jurors today tend to assume sophisticated contracting firms buy vast sums of insurance to cover such large liability exposures. But this is not always the case. Even for large contractors, coverage may be unavailable, or the policy limits may be insufficient to cover the loss. In addition, policy exclusions may negate coverage, leaving the contractor in an uninsured position.

In private work contracting, there is considerable opportunity to manage severe loss exposures through the bid and contract negotiation process. This is the first stage of the contracting process where severe risk may be qualified, ignored, or overlooked. The proactive contractor identifies severe risks to his customer at or prior to bid, and seeks to manage these risks during the bid and negotiation process. The prudent contractor will carefully weigh, and even walk away, from a job involving severe loss exposures that cannot be adequately managed through insurance, contractual protections, or both.

The risk of severe or catastrophic loss can arise in several areas: warranty obligations, broad form indemnity obligations, environmental hazards, professional errors and omissions, and consequential damages. Probably the single most significant way in which the contractor can protect himself against catastrophic loss is to negotiate a general limitation of liability. Samples of contract language are provided below for consideration in proposing alternatives to help manage these severe risks, from the contractor's point of view.

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