Construction Law

Limitation of Liability in new AIA Document

By Werner Sabo

One of the new 2007 AIA documents is B103 -- Owner-Architect Agreement for a Large or Complex Project. This document differs from the flagship owner-architect agreement, B101, in that the owner is expected to hire cost and scheduling consultants, and it also anticipates that the project will be done as phased or fast-track construction in most cases. However, one of the more interesting provisions in this document that does not show up in the other new 2007 owner-architect agreements is a limitation of liability provision. Here it is:

§ 8.1.3 The Architect shall indemnify and hold the Owner and the Owner?s officers and employees harmless from and against damages, losses and judgments arising from claims by third parties, including reasonable attorneys? fees and expenses recoverable under applicable law, but only to the extent they are caused by the negligent acts or omissions of the Architect, its employees and its consultants in the performance of professional services under this Agreement. The Architect?s duty to indemnify the Owner under this provision shall be limited to the available proceeds of insurance coverage.

Note that this paragraph starts out as an "indemnification" of the owner by the architect. This seems to be very pro-owner and is something that we would normally strike from any contract proposed by an owner. The indemnification, however, is limited to the negligent acts or omissions of those for whom the architect is responsible. This is not an expansion of the architect's liability as the architect would be responsible for such acts or omissions in the absence of such language.

The more interesting part of this paragraph is the last sentence wherein the architect's liability under this paragraph is limited to the available insurance proceeds. Owners should be aware that such a limit may be somewhat illusory, since most of the professional liability policies are of the "declining balance" variety, wherein the costs of defense, notably attorneys fees, reduce the available limits as a case progresses. Also, if another claim is made against the architect's policy in the same policy period, both matters would erode the available limits.

To offset this problem, B103 permits the owner to require the architect to carry additional insurance (at the owner's expense). See Section 11.8.1.8 of B103. If the owner invokes this option, the owner should require, and pay for, insurance that extends several years after completion of the project, otherwise the architect will revert to the prior policy limits at the conclusion of the project and latent defects not discovered until later will not be subject to the greater insurance limits expected by the owner.

A final interesting question is whether the architect may be liable to the owner for errors or omissions outside of this indemnification paragraph. If so, the limitation of liability will not protect the architect to the extent that it may appear on first reading this provision since the limitation covers only the architect's duty to indemnify the owner under "this provision." Presumably, the answer is that any claims by the owner for an error or omission by the architect, employees of the architect, or consultants to the architect are subject to this paragraph. If there is a claim by the owner that is not a "negligent act or omission," the limitation may not apply. We await a court's determination of this issue.

Full post as published by Construction Attorney Blog on November 11, 2007 (boomark / email).