Hold That Clause!! The Third District Court of Appeal Addresses Limits of Liability Clauses

A Limits of Liability clause is a contractual provision that attempts to set a cap on liability for breach of the terms of the agreement or for other forms of liability.

Until recently, in Florida Limits of Liability clauses designed to protect professionals have generally been enforceable provided (1) the clause clearly indicated the parties' intentions; (2) the limitation did not absolve any party of all liability and still provided a deterrent to negligence; and (3) parties to the contract had equal bargaining power. Diesel "Repower" Diesel Repower Inc. v. Islander Investments LTD., Inc., 271 F. 3d 1318,1324 (11th Cir., 2001). See also, Merrill Stevens Dry Dock Co. v. M/V Yeocomico II, 329 F. 3d 809 (11th Cir., 2003).

Accordingly, many types of professionals in Florida have included these clauses in their professional contracts to protect themselves by setting limitations on the upward scale of their potential liability. This has also served to protect professionals from lawsuits by setting recovery limits so low it would discourage the plaintiff's Bar from bringing claims. In turn, these limitations helped to provide a solid legal foundation for insurance carriers to underwrite coverage for lower premiums than might have been set if such caps were not in place.

Now a new case in the Third District Court of Appeals for Miami-Dade County may bring this protection to an end and could spell trouble for professional liability carriers that might get burned by this "after-the-fact" loss of exposure caps. In Gerhardt M. Witt, Individually v. La Gorce Country Club Inc. and La Gorce Country Club v. ITT Industries, (No 3D08-1812) Consolidated with (3D08-1825), the Third District Court of Appeal has issued an opinion that disturbs the legal landscape and which could change the face of professional E & O coverage into the foreseeable future.

In 1999, La Gorce Country Club (La Gorce) decided to investigate the feasibility of irrigating its golf course through the reverse osmosis water treatment system. To that end, La Gorce met with ITT Industries (ITT) and ultimately contracted with ITT to design and build an irrigation system. Gerhardt M. Witt (Witt), a professional geologist licensed in Florida who owned his own company, Gerhardt M. Witt and Associates (GMWA), ultimately entered into a contract with La Gorce for hydro-geologic consulting services on the project. The contract contained an exculpatory provision that limited the liability for any claim, including but not limited to negligence and professional errors to a specific amount. It is important to note that GMWA was specifically named in the limitation of liability clause while Witt was not named individually.

Ultimately, the system was delivered to La Gorce, and La Gorce used the system for approximately fourteen months before a complete failure of the system occurred, ostensibly causing damages to La Gorce. La Gorce sued GMWA and Witt individually, as well as ITT for, inter alia, professional malpractice against Witt and GMWA. The trial court found Witt and GMWA liable to La Gorce and found that the limitation of liability clause applied only to GMWA but not to Witt individually.

The trial court found that Witt was personally liable because he provided services but found that the limitation clause did not protect him because he was not a party to the agreement. The trial court also relied on Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999) and its holding that "it is questionable whether a professional ... could legally or ethically limit a client's remedies by contract in the same way that a manufacturer could do with a purchaser in a purely commercial setting."

In reaching its decision, the Third District Court of Appeal agreed with that concept and stated that even if Witt had been covered by the limitation of liability clause, the Moransais decision deems the clause unenforceable.

Moransais is not a strict limitation of liability clause case. Instead, that case is more focused on another old friend, the "economic loss rule." The economic loss rule generally restricts a plaintiff to the recovery of only true economic losses when the parties are in contractual privity and one party seeks to recover damages in tort for matters arising from the contract; or when there is a defect in a product that causes damage to the product but no personal injury or damage to other property. The Florida Supreme Court in Moransais held that:

[T]he economic loss rule does not bar a cause of action against a professional for his or her negligence even though the damages are purely economic in nature and the aggrieved party has entered into a contract with the professional's employer. We also hold that Florida recognizes a common law cause of action against professional based in their acts if negligence despite the lack of direct contract between the professional and the aggrieved party.

The La Gorce opinion concedes that Moransis does not discuss the insulation of a professional by a limits of liability clause; however, it indicates that the Supreme Court's analysis "highlights the extra-contractual" nature of a claim against a professional. It interprets Moransais as acknowledging that an extra-contractual remedy against a negligent professional is necessary because the contractual remedies may not be adequate. It also held that since Moransais acknowledges that a negligence claim is available and operates outside of a professional services contract, it would be inconsistent to limit the liability to the amount specified in that professional services contract.

What does this mean to the professional or the carrier insuring the professional? If the decision is appealed to the Florida Supreme Court and that court upholds the decision, it means that a professional cannot limit his or her liability to terms of the contract and that exposure in malpractice cases cannot be limited to a contract price or some other agreed upon number.

The practical impact on carriers is significant, especially in a slow market where parties are looking to blame professionals such as engineers, surveyors, etc. for failing real estate developments and the like. Professionals may be less likely to take on endeavors they deem to be risky, and insurers may be less likely to provide coverage. As is quite obvious, this case must be watched carefully by the defense Bar and carriers alike. If the matter moves to the next level, it may be prudent for the insurance industry to pursue filing an amicus brief to address issues related to the impact on the financial side of professional E & O coverage.

* Sangeeta is an associate who works in the firm's Tampa, Florida, office. She can be reached at (813) 472-7818 or spspengler@mdwcg.com.

Defense Digest, Vol. 15, No. 3, September 2009