What Designers Can Expect from a Professional Liability Claim

A professional liability claim can be a distraction from running day-to-day operations at your design firm, while also affecting your company’s brand, reputation and finances. Understanding that the potential exposure for a claim starts at the contract drafting and negotiating stage and continues throughout the project may help protect your design firm from a professional liability claim.

Here’s an overview of what’s involved in a typical claim, from the types of damages you could face to the lessons learned from litigation.

The two types of professional liability damages

Generally, courts recognize two broad categories of damages in a professional liability claim: direct damages and consequential damages.

• Direct damages result naturally, or directly, from an error or omission that the design professional made, rather than from a breach of the agreement. For instance, consider the repair costs to correct a design defect, such as removing and replacing shingles that were not properly installed. These costs represent the “loss of the benefit of the bargain” or, in other words, the value that the other party would have received from the contract if work had been properly completed.

• Consequential damages are generally regarded as collateral losses, meaning losses that are less direct, like expenses or lost revenue. Consequential damages waivers are common provisions in contracts. However, given the various interpretations of what constitutes consequential damages, there is no guarantee that a court will interpret such a waiver to include lost profits, lost financing opportunities or project completion fees. In order to avoid possible ambiguity in case of a dispute, it’s a good idea to define as clearly as possible what would be excluded from the damages recovery calculation in the event of a claim.

What can lead to higher claims against design firms?

During the contract negotiation stage, it can be helpful to understand what factors might lead to a higher claim. If your contract doesn’t specifically waive consequential damages, these damages could be sought as part of the loss recovery calculation and potentially increase the claim amount significantly.

Defense costs may also significantly increase the cost of a claim, if for example, there is a need to engage experts, such as a work delay expert, accounting professional expert or a standard of care expert. Generally, critical path analysis will be required. Litigation can be a very time-intensive process that is subject to various interpretations. And it can be costly.

Talk to your design professional liability insurance agent

Early and proactive involvement in addressing issues if they develop, and involving insurance professionals early on, can help reduce your exposure for consequential damages. Travelers provides resources for design professionals to understand and help mitigate their exposure to professional liability risk.

Even when a project owner is not seeking consequential damages, early and proactive involvement can assist with identifying value-added or betterment opportunities on the project and addressing the owner’s expectations before a costly repair is implemented.

Sometimes a client may request that a liquidated damages provision be added to the contract. This often occurs when the contract is a contractor form. A liquidated damages provision specifies a dollar amount, in advance, that the design professional would have to pay for a specific breach of contract, such as late performance.

Lessons learned from litigation against design firms

Well-drafted contracts that assign responsibility to the entity in the best position to manage a particular risk are a valuable risk management practice. Proper risk assignment helps protect design professionals by minimizing the chances that a claim arises from risks over which they may have no control.

Learn more about our Design Professional Liability products and services and how Travelers can help protect your business, or talk to your independent agent or broker.