After Beacon: Use of Indemnity Provision in Conjunction With Limitation of Liability Clause

Design professionals in California have often used limitation of liability clauses as an effective risk transfer technique.  Given that a third-party plaintiff’s recovery is not capped by the limitation clause in a contract between the design professional and the developer, we have made it a practice to recommend to our clients that, in addition to the limitation, they attempt to negotiate an indemnity provision in which the owner indemnifies the design professional for any judgment in excess of the limitation of liability.

Even where developers are willing to agree to a limitation of liability provision, they often resist also including indemnification for any judgment in excess of the limitation of liability.   However, the July 3 Supreme Court of California ruling in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP highlights the purpose of an indemnity provision.

For the limitation to be truly effective, the indemnification agreement is necessary.  In the residential context, the developer is strictly liable for design errors.  Therefore an indemnification agreement only confirms that the developer will be responsible for the design exposure above the limitation of liability.

Design professionals should use the Beacon case as an opportunity to explore the risk transfer inherent in a limitation of liability with their clients and hopefully convince them of the appropriateness of using an indemnity provision in conjunction with a limitation of liability.