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Shortening a Contract’s Limitations Period A New Concept for Insurance

Alan L. Stefaniak

Shortening a Contract’s Limitations Period

If you have entered into a contract with an owner or a subcontractor for construction work there is usually a provision that states the general contractor or subcontractor warrants its work for one year from the time the job is complete. However, in Illinois the statute of limitations for bringing an action for breach of contract is ten years. Therefore, although the job may be out of warranty a lawsuit can be brought up to ten years from the time there is a breach of contract.

Recently an Illinois Appellate Court issued an opinion that upheld a contract provision that shortened the time for bringing suit to two years. The case arose in the context of a homeowner suing a building inspector who had done a home inspection and failed to note certain defects in the house. The contract provision stated “Any legal action must be brought withing two years from the date of the inspection.” The Appellate Court held that parties to a contract can agree to a shortened contract limitations period to replace a longer statute of limitations so long as the shortened period is reasonable. The homeowners argued that they did not know of the two year limitations period or that it was negotiable. The Appellate Court was not persuaded by this argument. The Court stated that the homeowners argument had to fail because parties to a contract can contract for any lawful purpose on any terms agreeable to them and it is not the duty of one party to a contract to inform another of the duties or obligations assumed under the contract.

I am of the opinion that this decision can be useful to those of you in the construction industry. We need to note the Appellate Court said its alright to shorten a limitations period so long as the shortened period is reasonable. If you are warranting the work for one year from the time of its completion or one year from the time the entire job is complete, I see nothing to prohibit you from then providing that any legal action regarding a breach of contract has to be brought within two years of when your work is complete or when the entire job has been finished.

Based upon this Appellate Court decision, I am going to start recommending that a shortened limitations period be set forth in the form contracts I draft for those of you who have me do this work for you. If you would like me to review your form contract and recommend this and other possible changes or provide you with a paragraph that provides for a shortened limitations period please give me a call or send me an email request.

A New Concept for Insurance

If you are a small to medium sized business owner you know that if you borrow money for working capital or other business needs, your bank is going to want you to sign a personal guarantee. Once you sign a personal guarantee not only are your business’s assets collateral for the loan but your personal assets are now subject to seizure if a business failure occurs.

A new concept for insurance is now being offered called Personal Guarantee Insurance. This insurance is available for loans of $500,000 to $5,000,000. There is a 50% limitation on the amount of the risk. The 50% limit is imposed because these policies are not meant to eliminate an insured’s risk but to share it. If this limit did not exist then upon a default the borrower, guarantor and lender would have no incentive to address the issues that exist and try to come to a resolution. Personal guarantee insurance is intended to provide a safety net without eliminating the motivation to overcome the difficulties that exist and attempt to correct the business’s faults.

These types of policies are annual policies with premiums based upon the size of the loan and the risks characteristic of the underlying business. Not all businesses qualify for coverage by a personal guarantee policy. There are eligibility criteria that have to be met and reviewed by the underwriter.

If a business calamity occurs and you have personally guaranteed your business loan, your personal assets will be on the line and a personal bankruptcy might have to be considered. If your business loans are up for renewal and you are being asked to sign a personal guarantee either for the first time or again in order to renew the loan, this type of insurance may be something to consider. If you are faced with this type of situation, give me a call and we can look into personal guarantee insurance to see if it might be a reasonable solution to a common business problem.

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