Limitations of Liability

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Limitations of Liability

Sections within this essay:

Background

Liability refers to the responsibility, under law or equity, for which a party is bound or obliged to make restitution, compensation, or satisfaction to another for loss or harm. A limitation in liability is a limit placed on the terms or nature of responsibility for loss or harm. It may be expressed in terms of maximum percentage of fault, dollar amount, type of harm or loss, or causative factor, beyond which a party openly denies any responsibility.

Limitations in liability may take several forms, the most common of which are written clauses contained in warranties, disclaimers, waivers, insurance policies, and contract terms. They also may take the form of "exculpatory clauses" which clear or tend to clear parties from any fault or liability for loss or harm to others whatsoever. Governmental entities may limit their exposure to liability for claims by citizens and members of the public (See, sovereign immunity ).

Limitations in liability also differ in what they limit. There may be a cap or ceiling on monetary damages; an exclusion of certain forms of damages (e.g., punitive, incidental); or an exclusion for certain kinds of harm (e.g. those caused by acts of God or forces of nature). In product purchases, liability may be limited to the purchaser only, and not to third persons or subsequent owners/users.

In a way, limitations of liability are, for the most part, actual (or tantamount to) terms of contract, and generally enforced under principles of contract law. They generally require actual or implied notice and the consent of all parties to the transaction,—proof of which is generally deemed to be conclusive as to acceptance of the limitations.

States have different laws regarding the extent to which persons or business entities may limit their liability to others. Since each state may have several laws dealing with limitations of liability (according to the application), contacting the subject state's department of insurance is advised for guidance and clarification. (See Organizations listed below.)

Warranties and Disclaimers

Warranties guarantee minimum standards or performance in products or services. They may be express (as in a manufacturer's certificate of warranty that is attached to a consumer product), or implied (as in the common law implied warranty of merchantability). Manufacturers' warranties are controlled by federal and state laws, including the Uniform Commercial Code (UCC) Warranties are essentially statements of declared limits to liability, e.g., "Five years or 50,000 miles" for some new vehicles.

A disclaimer is a limitation of liability otherwise attaching to an actual or implied warranty. It works as a substitute for what is otherwise warranted, other than that which is expressly warranted by the drafter of the disclaimer. Disclaimers of all warranties is common in items or goods sold on an "as is" basis.

Monetary Ceilings and Caps

One of the most common forms of limiting liability is through the application of monetary caps or ceilings to the amount recoverable in any claim for loss or harm. So widespread and successful is this practice that it is often incorporated into statutory provisions to ensure uniformity and requisite notice to third persons.

Many states have passed legislation capping the available remedies in tort cases (tort reform). Such legislation is particularly intended to address those cases in which emotion may cause "runaway juries" to award millions or billions of dollars in cases that play on their sympathy or anger.

Two broad areas of tort litigation undergoing constant reform are products liability and medical malpractice. In the area of medical malpractice, a majority of states have enacted tort reform legislation, many of which limit non-economic damages (e.g., to $250,000) as a result of lobbying from insurance companies.

Congress and state legislators have enacted many provisions over the years that serve to limit the available remedies in certain cases or controversies (e.g., the Limitation of Liability Act, 46 USC 181 et seq., regarding cargo shipments)or the Federal Tort Claims Act. Other examples in which Congress has eliminated liability for ordinary negligence, but not for intentional or willful misconduct, include the Bill Emerson Good Samaritan Food Donation Act, the Volunteer Protection Act, the Aviation Medical Assistance Act of 1998, and the Paul D. Coverdell Teacher Protection Act of 2001. These statutes grant private parties immunity from suit in many cases, or otherwise limit their exposure to liability, by declaring them federal employees for purposes of the benefit or good they are providing to the public at large. Likewise, in 2005, during a global threat of a particularly virulent form of the flu virus, the 109th Congress worked on legislation to limit the liability of pharmaceutical manufacturers of flu vaccines. This was intended to accelerate the production of new strains of flu vaccines needed to address a potential pandemic, without developers being unduly delayed by fear of liability for untoward complications or negligence in the testing, manufacturing, labeling, distribution, dispensing, prescribing, or administering of the vaccine.

Insurance "Policy Limits"

By far, the lion's share of monetary damages awarded in jury trials or voluntary settlements comes from insurance money. At one time, insurance companies merely increased their premiums across the board to recoup their losses. However, insurance premiums have reached all-time highs, and consumers are no longer willing to accept this solution. An alternative has been to sharply raise the limitations of coverage offered by insurers. In health insurance, for example, this may take the form of more stringent limitations on pre-existing conditions, or a lower maximum dollar amount payable per injury/illness or per incident. Although insureds may file suit for reimbursement or payment of larger amounts, the stated policy limit will generally be held valid.

For business entities carrying liability insurance, their contracts or business transactions may often expressly state that liability is limited to "policy limits." This means that, should a damages award against the company result in a liability greater than the amount of coverage provided by any insurance against such loss or liability, persons dealing with the business cannot compel the business to liquidate assets or offer other resources to cover the difference.

In lawsuits, the policy limit is often used as a negotiating tool for early settlement of a case. Even though plaintiffs may believe they could be awarded a greater dollar amount by a jury, they may settle the case for the policy limits of any insurance carried by defendants. This removes the uncertainty and protracted litigation often involved in trying to collect money or liquidating assets from the defendant's personal estate after all available insurance has been paid out.

Contractual Terms

Standard limitation-of-liability clauses are commonplace in all types of contracts. Because courts of law rarely consider the fairness of contract terms, parties to a contract must carefully review its terms and negotiate any limitation of liability.

An example of a limiting clause in a contract might be language similar to "The liability of contractor to customer, whether in tort or in contract and for any reason and upon any cause of action or claim relating to the performance of work under this agreement, shall be limited to the amount paid by customer to contractor pursuant to this agreement."

Limitations-of-liability clauses are one-sided terms (favorable to the drafter of the contract), and should always be reviewed with scrutiny. Unless they are clearly unconscionable or against public policy, courts will seldom set them aside, despite their obvious unfairness to an unwary party to the contract.

Public Policy Exceptions

Whereas the general rule is that the government (legislative or judicial) cannot interfere with a party's right to engage in contracts, such non-interference does not contemplate an unlimited right to exculpate oneself from liability. Courts will seldom uphold a clause in a contract, disclaimer, or waiver that tends to exculpate a party from liability as a result of intentional, wanton, or reckless conduct. Most states limit exculpatory clauses to acts of ordinary negligence. Moreover, most states do not permit parties to limit liability for loss or harm under circumstances normally requiring strict liability (e.g., the handling of dangerous materials like explosives, radioactive materials, etc.)

When courts interfere with the private contractual rights of parties by not enforcing a limitation of liability clause, it is often under the auspices of protecting persons from violations of public policy which effectively void such clauses. Courts will generally strike unconscionable terms that are oppressive because of grossly unequal bargaining power between the parties; are improper because of the imposition of strict liability; or are unenforceable because they are contrary to state-imposed standards of care (as for certain professional licenses or permits). The justification most often cited for the court's interference in private contractual relations is that such a limitation-of-liability clause is "void as against public policy." Public policy is that which tends to safeguard and support the good or betterment of all, as opposed to the individual rights of contracting parties.

Limited Liability Companies (LLCs)

Most states require that business entities which limit their liability must declare so openly, which is intended to provide notice to those doing business with them. Certain business entities limit their liability right up front, before they even engage in any contracts or business transactions. Limited Liability Companies, or LLCs, combine many facets of corporate structure with the smaller and simpler partnership structure. Third persons are immediately placed on notice of a LLC's liability limitations by the very name of the company, which, in most states, must included the "LLC" designation as part of its company name.

In a LLC, individual owners are not personally liable for company debts and obligations, including monetary damages awarded against the company in a law suit. This means that if company assets are sold off to meet liabilities, the owners do not need to use their personal assets to make good on business losses.

Limitations on Governmental Liability

The concept of sovereign immunity prevents citizens from suing their governments. (As a government by and for "the people," conducted and administered by democratic representation, citizens would theoretically be suing themselves.) Notwithstanding, branches of both federal and state governments permit the imposition of liability for certain losses and damages. By statutory consent, governments will generally compensate for losses caused by non-discretionary acts of their employees or agencies (so as not to inhibit the exercise of discretionary decision-making in perilous or exigent circumstances, for fear of liability exposure). Often, claimants are prohibited from filing suit in a court of law, but must file in a special Court of Claims, the jurisdiction of which is exclusive to suits involving the government as defendant. Other restrictions and limitations may apply, including limitations on fault, form of remedy, amount of damages, or standing to sue.

Additional Resources

Cohen, Henry. "CRS Report: Pandemic Flu Liability Limitation Legislation." Washington, DC: Library of Congress, Congressional Research Service, 2005.

Grossman, Mark. "Emerging Issues: Limitations of Liability." 15 July 2003. Published by The Institute of Internal Auditors (The IIA).

Kurer, Martin; Stefano Codini; Klaus Gunther; Jorge Santiago Neves; and Lawrence Teh. Warranties and Disclaimers: Limitations of Liability in Consumer-Related Transactions. Aspen Publishers, 2005.

Organizations

Alabama Department of Insurance

201 Monroe Street, Suite 1700, PO Box 303351
Montgomery, AL 36104
Phone: (334) 269-3550
Fax: (334) 241-4192
URL: www.aldoi.org

Alaska Department of Community and Economic Development

3601 C Street, Suite 1324
Anchorage, AK 99503
Phone: (907) 269-7900
Fax: (907) 269-7910
URL: www.dced.state.ak.us/insurance

Alaska Department of Community and Economic Development

P.O. Box 110805
Juneau99811
Phone: (907) 465-2515
Fax: (907) 465-3422
URL: www.commerce.state.ak.us

Arizona Department of Insurance

2910 North 44th Street, Suite 210
Phoenix, AZ 85018
Phone: (602) 912-8444
Fax: (602) 954-7008
URL: www.state.az.us/id

Arkansas Department of Insurance

1200 West 3rd Street
Little Rock, AR 72201
Phone: (501) 371-2640
Fax: (501) 371-2749
URL: www.state.ar.us/insurance

California Department of Insurance

300 Capitol Mall, Suite 1500
Sacramento, CA 95814
Phone: (916) 492-3500
Fax: (415) 538-4010
URL: www.insurance.ca.gov

Colorado Division of Insurance

1560 Broadway, Suite 850
Denver, CO 80202
Phone: (303) 894-7499, ext. 4311
Fax: (303) 894-7455
URL: www.dora.state.co.us/Insurance

Connecticut Department of Insurance

P.O. Box 816
Hartford, CT 06142
Phone: (860) 297-3984
URL: www.state.ct.us/cid

Delaware Department of Insurance

841 Silver Lake Blvd., Rodney Building
Dover, DE 19904
Phone: (302) 739-4251
Fax: (302) 739-5280
URL: www.state.de.us/inscom

District of Columbia Department of Insurance and Securities Regulation

810 First Street, NW, Suite 701
Washington, DC 20002
Phone: (202) 727-8000
Fax: (202) 535-1196

Florida Department of Insurance

Plaza Level Eleven
Tallahassee, FL 32399
Phone: (850) 922-3130
URL: www.doi.state.fl.us

Georgia Insurance and Fire Safety

Two Martin Luther King, Jr. Drive
Atlanta, GA 30334
Phone: (404) 656-2070
Fax: (404) 651-8719
URL: www.inscomm.state.ga.us

State of Hawaii, Department of Commerce and Consumer Affairs

250 South King Street, 5th Floor
Honolulu, HI 96813
Phone: (808) 586-2790
Fax: (808) 586-2806
URL: www.hawaii.gov/insurance

State of Idaho Department of Insurance

700 West State Street, P.O. Box 83720
Boise, ID 83720
Phone: (208) 334-4250
Fax: (208) 334-4398
URL: www.doi.state.id.us

Illinois Department of Insurance

100 West Randolph Street, Suite 15-100
Chicago, IL 60601
Phone: (312) 814-2420
Fax: (312) 814-5435
URL: www.state.il.us/ins

Illinois Department of Insurance

320 West Washington Street
Springfield, IL 62767
Phone: (217) 782-4515
Fax: (217) 782-5020
URL: www.state.il.us/ins/

Indiana Department of Insurance

311 W. Washington St., Ste 300
Indianapolis, IN 46204
Phone: (317) 232-2385
Fax: (317) 232-5251
URL: www.state.in.us/idoi/

State of Iowa Division of Insurance

330 Maple Street
Des Moines, IA 50319
Phone: (515) 281-5705
Fax: (515) 281-3059
URL: www.state.ia.us/government/com/ins/ins.htm

Kansas Insurance Division

420 SW 9th Street
Topeka, KS 66612
Phone: (785) 296-7801
Fax: (785) 296-2283
URL: www.ink.org/public/kid

Kentucky Department of Insurance

215 West Main Street
Frankfort, KY 40601
Phone: (502) 564-3630
Fax: (502) 564-1650
URL: http://www.doi.state.ky.us/

Louisiana Department of Insurance

950 North Fifth Street
Baton Rouge, LA 70804
Phone: (225) 343-4834
Fax: (254) 342-5900
URL: www.ldi.state.la.us

Maine Bureau of Insurance

34 State House Station
Augusta, ME 04333
Phone: (207) 624-8475
Fax: (207) 624-8599
URL: www.maineinsurancereg.org

Maryland Insurance Administration

525 St. Paul Place
Baltimore, MD 21202
Phone: (410) 468-2000
Fax: (410) 468-2020
URL: www.mia.state.md.us

Massachusetts Division of Insurance

South Station, 5th Floor
Boston, MA 02110
Phone: (617) 521-7794
Fax: (617) 521-7772
URL: www.state.ma.us/doi

Michigan Office of Financial and Insurance Services

611 West Ottawa Street, 2nd Floor North, P.O. Box 30220
Lansing, MI 48933
Phone: (517) 373-0220
Fax: (517) 335-4978
URL: www.cis.state.mi.us/ofis

Minnesota Department of Commerce

133 East 7th Street
St. Paul, MN 55101
Phone: (651) 296-2488
Fax: (651) 296-4328
URL: www.commerce.state.mn.us

Mississippi Department of Insurance

P.O. Box 79
Jackson, MS 39205
Phone: (601) 359-3569
Fax: (601) 359-2474
URL: www.doi.state.ms.us

Missouri Department of Insurance

301 West High Street, Room 630
Jefferson City, MO 65102
Phone: (573) 751-4126
Fax: (573) 751-1165
URL: www.insurance.state.mo.us

Montana Department of Insurance

840 Helena Avenue, P.O. Box 4009
Helena, MT 59601
Phone: (406) 444-2040
Fax: (406) 444-3497
URL: www.state.mt.us/sao

Nebraska Department of Insurance

941 O Street, Suite 400
Lincoln, NE 68508
Phone: (402) 471-2201
Fax: (402) 471-4610
URL: www.nol.org/home/NDOI

Nevada Division of Insurance

1665 Hot Springs Road, #152
Carson City, NV 89706
Phone: (775) 687-7690
Fax: (775) 687-3937
URL: www.doi.state.nv.us

New Hampshire Department of Insurance

56 Old Suncook Road
Concord, NH 03301
Phone: (603) 271-2261
Fax: (603) 271-1406
URL: www.state.nh.us/insurance

New Jersey Department of Banking and Insurance

20 West State Street
Trenton, NJ 08625
Phone: (609) 633-7667
Fax: (609) 984-5273
URL: http://states.naic.org/nj/NJHOMEPG.HTML

New Mexico Department of Insurance

P.O. Box 1269
Santa Fe, NM 87504
Phone: (505) 827-4601
Fax: (505) 827-4734
URL: www.nmprc.state.nm.us

New York State Insurance Department

Agency Bldg. 1-ESP, Empire State Plaza, NY 12257
Phone: (518) 474-6600
Fax: (518) 474-6630
URL: www.ins.state.ny.us

Consumer Services Bureau NYS Insurance Department

65 Court Street #7
Buffalo, NY 14202
Phone: (716) 847-7618
Fax: (716) 847-7925
URL: www.ins.state.ny.us

North Carolina Department of Insurance

430 North Salisbury Street
Raleigh, NC 27611
Phone: (919) 733-7349
Fax: (919) 733-6495
URL: www.ncdoi.net

North Dakota Insurance Department

600 East Blvd. Avenue, 5th Floor
Bismarck, ND 58505
Phone: (701) 328-2440
Fax: (701) 328-4880
URL: www.state.nd.us/ndins

Ohio Department of Insurance

2100 Stella Court
Columbus, OH 43215
Phone: (614) 644-3378
Fax: (614) 752-0740
URL: www.state.oh.us/

Oklahoma Insurance Department

3814 North Santa Fe
Oklahoma City, OK 73118
Phone: (405) 521-2828
Fax: (405) 521-6652
URL: www.oid.state.ok.us

Oregon Insurance Division

350 Winter Street, NE, Room 440-2
Salem, OR 97310
Phone: (503) 947-7984
Fax: (503) 378-4351
URL: www.cbs.state.or.us/ins

Pennsylvania Insurance Department

1321 Strawberry Square, 13th Floor
Harrisburg, PA 17120
Phone: (717) 787-2317
URL: www.insurance.state.pa.us

Rhode Island Insurance Division

233 Richmond Street, Suite 233
Providence, RI 02903
Phone: (401) 222-2223
Fax: (401) 222-5475

South Carolina Department of Insurance

1612 Marion Street
Columbia, SC 29201
Phone: (803) 737-6180
Fax: (803) 737-6231
URL: www.state.sc.us/doi/

South Dakota Division of Insurance

118 West Capitol
Pierre, SD 57501
Phone: (605) 773-3563
Fax: (605) 773-5369
URL: www.state.sd.us/insurance

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