TZL 1479 (web)



A nytime a prime design firm has a contract with an owner reviewed for insurability, it will likely see a recommendation from its legal or risk advisor that a third-party beneficiary clause be stricken from the agreement. It’s important for design firms to understand the potential peril to all parties involved should there be a third-party beneficiary clause in any contract. Beware third-party beneficiary clauses

There’s a sound reason for this: Depending on the jurisdiction and its acceptance or interpretation of the Economic Loss Doctrine, a claim arising from such a clause can result in a serious coverage issue – or possibly no coverage, whatsoever. To get their arms around this issue, design firms should become familiar with the concept of a third-party beneficiary. Basically, a third-party beneficiary is an individual or business that benefits from a contract between two other parties. HOW DO THIRD-PARTY BENEFICIARY CLAUSES IMPACT THE DESIGN CONTRACT? The most obvious scenario for design professionals involves the prime designer’s contracts with their consultants. While the consultants’ work ultimately is for the project owner’s benefit, the owner typically does not contract with them directly. Thus, the consultants are not subject to a direct claim by the owner. Yet, owners increasingly have been requesting that third-party beneficiary clauses be inserted into the

prime designer’s contract. Unfortunately, they are not beneficial – either for the prime design professional or the owners – given the significant coverage issues they can create. Certainly, from the prime’s perspective, it might appear more convenient to let the owner make a claim directly against a consultant whose work is at issue. However, by including a contractual provision that allows such a direct action, which may be the case under a third- party beneficiary clause, the prime designer might find itself in a position where its consultant has no insurance coverage. Under its contractual relationship with the owner, the prime is responsible for the work of its consultants. Thus, as the prime, you require your consultants to carry professional liability coverage, so you absolutely want the protection in place to respond should their work be at issue. Ultimately, the prime is legally responsible for the work

Lauren Martin

See LAUREN MARTIN , page 10


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