Q. I have a single-family house that I use as a rental. I’m about to do some major renovation work and was given a contract by the contractor. It’s got a clause in it that I’ve never seen before, which reads, “For any claims related to this contract or the work that are not covered by contractor’s insurance, contractor’s total liability is limited to and may not exceed three times the amount owner pays to contractor under this contract.” Is this legal?
A. That’s a new one on me too. Perhaps the reason neither of us has seen a contract clause like this before is that it’s almost certainly unenforceable.
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The clause attempts to limit the contractor’s liability for almost anything that could go wrong on the job or after it’s completed, including problems that are solely due to the contractor’s shoddy work or carelessness. As it reads, if any such claim exceeds the contractor’s insurance coverage, the contractor will be limited to three times the contract price — that’s it.
For example, suppose you hire a contractor to remodel the kitchen; he removes a load-bearing wall, and the house falls down. If you have a claim against the contractor that settles for $700,000, but the contractor’s insurance policy has a limit of $500,000, normally the contractor would have to make up the balance out of pocket. But this clause changes that rule by limiting his obligation to no more than three times the amount you paid under the contract. If you paid the contractor $50,000, he’d be obligated to pay you only $150,000, leaving you $50,000 short.
As if the above scenario isn’t bad enough, there’s an even more worrisome one. Though it’s unlikely, it’s possible that you might experience a loss, injury or damage that isn’t covered by the contractor’s insurance policy.
For instance, deliberate actions or extremely reckless behavior is typically not covered by commercial general liability insurance. If you were to suffer harm because the contractor intentionally sabotaged the job or acted recklessly, your claim would supposedly be limited to three times the money you spent on the contract, and no more. In this situation, without any insurance proceeds, you could end up even more limited in your ability to cover your losses.
Fortunately for you, the unsavory nature of these results would strike most judges as unacceptable too. I don’t think most courts would enforce such a clause, because it attempts to limit in advance the liability of someone who negligently, carelessly or deliberately causes another person harm. In a consumer transaction especially, such efforts are routinely struck down as against public policy, particularly in states that carefully protect consumer rights.