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Column: Risk Management

Laughing at Limits

By: | November 1, 2013 • 3 min read
Joanna Makomaski is a specialist in innovative enterprise risk management methods and implementation techniques. She can be reached at [email protected]

Imagine you were set up on a blind date. Your date picks you up in a dirty, banged up car. As soon as you pull away from the curb, this person starts to brag about how little they invest in car maintenance and how they proudly buy only the most basic insurance cover. Your date further boasts about their maverick schemes for getting other people to pay for car damages even though your date actually caused the damage.

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Thoughts as to your blind date so far? Future partner? See a long-term, healthy, trustworthy relationship with this person? How soon you will be fighting and battling over some inequity?

The way I see it, every time we decide to join forces with an outside business partner, we should be as cautious as we would be on a blind date. Listen to what the future partner is saying. Pay attention to all the unnerving signs.

To those who really pay attention, signs are everywhere — like a Da Vinci code — in the contract negotiation process. You can puzzle out your future business partner piece by piece during that time.

Pay attention to what they’re saying in the contract language they propose to you. The negotiation can reveal much about the type of partner you are about to be bound to for what could be a very long time.

A telltale sign is the extent to which your future partner is willing to ensure LOLs in their favor. No, not laugh-out-louds, but limits of liability. Ironically, laughing out loud is often what I do when I first see some examples of proposed liability limits language.

Ask yourself why your future partner is so driven to limit their responsibility for their blunders, poor workmanship or faulty product?  Don’t they have faith in their internal controls and risk management systems to ensure minimal losses for you? If they did, they wouldn’t need to limit their exposure to such a degree.

Is it fair that your new partner plans to protect their assets at the expense of yours? Did the price quoted by your future partner include this limited exposure? It’s easy to give a great price for something if you have capped or little responsibility for it afterward.

What is also instructive is how your future partner suggests to structure limits of liability. My favorite is when a limit of liability equals the value of the proposed contract. If the scope of services costs $30,000, your partner wants to limit their losses to $30,000. Really? What does one have to do with the other?

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The value of a service does not indicate the liability risk of that service. Imagine the cost of hiring an engineering firm to design a theatre roof and imagine again the cost of loss if that same roof collapsed on a crowded audience. One does not compare to the other.

Another laugh-out-loud structure includes liabilities limited to losses covered by your partner’s insurance. Who knows what kind of coverage your partner has. How dependable is their insurer? How many exclusions exist? What is your partner’s loss history for intentional damages? The list goes on.

Limits of liability and how they are structured can speak volumes about the partner you plan to enter into a long-term business relationship with. They speak even louder as to what that potential partner thinks of you.

There’s no need to be blindsided by a new partner. When it comes to limits of liability, make sure you always have the last laugh … freely and out loud.

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The R&I Editorial Team can be reached at [email protected]