Evaporation clause meaning

An evaporation clause is a contractual liability cap that tracks the amount of professional indemnity insurance actually available to meet a claim. In practice, liability is limited to the sum recoverable under the insured party’s professional indemnity policy, so the cap may reduce—or “evaporate”—if cover is unavailable, excluded or exhausted. It is commonly proposed in appointments of architects, engineers, design consultants, design-and-build contractors and other professional service providers. This is a descriptive term, not one defined by legislation or case law. Typical features include: pegging the cap to “amounts recoverable” under insurance (each and every claim or in aggregate); coupling with an obligation to maintain specified insurance; and interaction with other limitation devices (for example, aggregate caps and net contribution clauses). A key risk for clients is that recovery can fall to nil if the policy does not respond. Enforceability is subject to controls on limitation clauses: reasonableness under the Unfair Contract Terms Act 1977 in England & Wales and Scotland, similar principles in Northern Ireland, and general contractual and statutory controls in Ireland. Common negotiating responses are to require a fixed monetary cap with a separate insurance obligation, or to include a non-evaporating floor and carve-outs (e.g., fraud and death/personal injury).