Contractor's sneaky strategy for limiting liability

Rent it Right

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? –Debra L.

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.

The clause attempts to limit the liability of the contractor 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, and that’s all.

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.