IIRC, (Don't quote me on it) the FAA hold instructors liable for 3 years after the last flight. That's why instructors aren't required to maintain student records beyond that time frame. Don't know what the statute of limitations is for lawsuits though.
One way that I limited my own liability was through very meticulous notes of student progress. I created my own worksheet that I took with me on each flight to record the lesson areas covered, and any performance remarks I had regarding the flight. Afterwards, I signed it, the student signed it, and both of us kept a copy. It provided me with irrefutable proof of what was covered, as well as feedback for future lessons.
http://aviation.crosswindlanding.com...ds/Form100.doc