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Case Study: No Common Law Indemnification Duty Owed by General Contractor

By Lynda

No Common Law Indemnification Duty Owed by General Contractor to Project Owner for Subcontractor Employee Injuries Where GC Did Not Control and Supervise the Subcontractor’s Work

In a case whose principles apply to design professionals as well as general contractors, a GC was performing a build-out for a store tenant (not the project owner) and retained the services of a subcontractor for certain work. An employee of the subcontractor was injured by falling from a ladder, and the project owner sued the contractor for common law indemnification and contractual indemnification for damages for which the Owner had been found vicariously liable under the state’s statutory law.

Although the general contractor had not itself been found to be directly liable or vicariously liable for the subcontractor employee injuries, the property owners argued they were entitled to common law indemnification. They asserted the general contractor contractually assumed sole responsibility and control of the entire project, and had the contractual authority to (1) direct, supervise and control the means and methods of plaintiff’s work, and (2) institute safety precautions to protect the workers.

The Owner asked the Court to adopt a general rule that a party may be liable for common-law indemnification upon a showing that the party (i.e., the proposed indemnitor) either was actually negligent or had the authority to direct, control or supervise the injury-producing work, even if it did not exercise that authority. What the Owner asked to court to do was equate a party that merely has authority to direct, control or supervise the work with a party who is actively at fault in bringing about the injury suffered by the plaintiff.

The appellate court held that in the absence of proof of any negligence or actual supervision of a general contractor, the mere authority the general contractor has to supervise the work and implement safety procedures is not a sufficient basis to require common law indemnification of the project owner. McCarthy v. Turner Construction, Inc., 953 N.E. 2d 794, (New York, 2011).

Although the GC interacted with the subcontractor and the sub-subcontractor firm whose employee was injured, the GC had no supervisory authority over the sub-subcontractor’s work and it provided no tools or ladders to subcontractors that worked at the site.

No Contractual Indemnification

Citing case law that stands for the proposition that through a contractual indemnification clause, an owner who is only vicariously liable by statute may seek full indemnification from the party that is wholly responsible for the accident, the court found in this case that there was no direct contractual relationship between the project owner and the general contractor. The contract was in fact between the contractor and a store tenant of the project owner. In addition, the owner had no third party beneficiary rights under the contract between the contractor and the store tenant. For these reasons, the contractual indemnification claim was dismissed on summary judgment by the trial court, and that dismissal was affirmed on appeal.

This has been an excerpt of the June 2012 edition of ProNetwork News. Download the full PDF version of this newsletter to read more about Common Law Indemnification and the implications for design professionals.

About the Author: J. Kent Holland is a construction lawyer with the risk management consulting firm Construction Risk Counsel, PLLC, in Tysons Corner – Vienna, Virginia. The firm provides consulting services including: Contract Risk Management and Insurability Review; Change Order and Claim Preparation and Analysis; Insurance Risk Management; Insurance policy and endorsement review and drafting; and Risk Management Training. Mr. Holland is admitted to practice law in Virginia and Maryland and concentrates on construction and environmental law, insurance and risk management. For more information, call 703-623-1932 or e-mail Kent@ConstructionRisk.com. This article is adapted from one originally published in ConstructionRisk.com Report, Vol. 14, No. 5 (May 2012). and is used here with permission.

Integrated Project Delivery: Changing the Insurance Landscape

By Lynda

With more project owners demanding the use of Building Information Modeling (BIM), project delivery is necessarily carried out through greater contributions of design input by the general contractor and the major trade subcontractors. The design professionals are no longer the sole authors of the project design. This collaborative project delivery method has been called integrated project delivery (IPD). The contribution of design input from each of the various project players using IPD is a significant break from the traditional division of responsibility recognized in the standard design-bid-build project delivery method. Players who never participated in the project design now face potential risk of professional liability. Additionally, the new, cutting-edge technologies being used for BIM expand the types of risks born by the design professional if there are errors and omissions within the computer modeling system or the improper management of the computerized data.

What is BIM?

BIM involves computerized design software tools that help create a model that reflects all of the building components’ geometric and functional qualities. The general contractor and trade subcontractors provide product-specific information for building components and that data is inputted into the model, including performance specifications, connection details and cost data. However, the model is more than a mere representation of the design in a three-dimensional computer graphic. Embedded within the design programs are rules that define each of the components’ relation to the other components. Continue reading “Integrated Project Delivery: Changing the Insurance Landscape”

Construction Observation: Important Risk Management Service

By Lynda

Construction observation is a powerful weapon for architects and engineers (A/E) in their risk management arsenal. Certain clients understand the benefits when A/E firms offer construction phase services. However, driven by slow economic conditions, many clients are asking firms to do more, with less, including reducing or eliminating construction phase services. Other clients decide they will administer the construction contract themselves or decide to use a third party instead of the A/E firm.

Clients have also held the A/E to a higher standard of care when providing construction observation services. How do these actions affect A/E firms? It significantly increases the A/E’s risk and liability exposures.

Construction Phase Risks

Details in design documents cannot anticipate every contingency that may occur during the construction phase. If the A/E firm of record is not retained to provide clarification of the plans and specifications the risk of misinterpretation of the contract documents increases. Bad decisions can lead to project confusion, delays, increased costs, disputes and claims between the owner and the A/E.

The exposure of the A/E is increased due to certain owners and contractors asserting that the designer has a similar responsibility of the contractor for discovering all defects on the project. Based on this distortion and unrealistic expectation of construction observation services, owners and contractors have stated the A/E should be a guarantor of the contractor’s work. These expectations dramatically increase the A/E’s standard of care and risks associated with construction phase services. Court decisions have ruled in Owners’ favor holding that the A/E has a duty to guard the owner against all non-conforming work on the project, although much of that work was completed when the firm was not present on-site. Members of the plaintiff’s bar continue efforts to hold the A/E accountable for this higher standard of care for construction phase services. Continue reading “Construction Observation: Important Risk Management Service”

Responding to an RFP: Risk Management Tools to Guide the Bidding Process

By Lynda

Competition among design professionals can be fierce, so it is critical to be as prepared as possible when trying to win new projects, especially those that are put out for bid. Just as you have project quality control procedures to review a design, you also should have a similar process for responding to an RFP (Request for Proposal) to assess the appropriateness of the project for your firm, to minimize risk and to insure profitability.

When first considering whether to bid on a project, ask these questions:

Does our firm have experience with the project type?
Is our staff capable of handling a project of this size and scope?
Do we have confidence in our design team, including sub-consultants?
Can we turn in a successful project and make a profit?

Once you decide to respond to the RFP, you will take many steps to ensure your firm has a good chance at being awarded the project. You will choose a project manager and team that have the most experience with the project type. You’ll take great care in selecting your sub-consultants. You’ll follow your customary quality control procedures and review every aspect of the design phase; the costs of construction, the construction schedule and most importantly, your fees.

So, what could possibly go wrong when responding to an RFP? The answer may lie within the RFP itself.

Project Owners and Project Expectations

When you assemble your project team, you need to call upon the staff members who are best suited to understand the project and the terms spelled out in the RFP. Your team should be asking the following questions. Who is the project owner? Is it a government entity? A school district? Is the project publicly funded? Is the project owner a developer? If it is an LLC, who are the parties that comprise it? Understanding who the project owner is as well as the expectations set forth in the RFP is as important as delivering the winning bid. Continue reading “Responding to an RFP: Risk Management Tools to Guide the Bidding Process”

The Impact of Sub Consultants in the Design Build Process

By Lynda

The Perspective of the Fire Protection Engineer

Integrated Project Delivery (IPD) is a collaborative alliance of people, systems, business structures and practices into a process that harnesses the talents and insights of all participants. Its aim is to optimize project results, increase value to the owner, reduce waste and maximize efficiency through all phases of design, fabrication, and construction. The most popular method of IPD is Design-Build, one of the most significant trends in design and construction in the U.S. today.

The Design-Build Team works under a single contract with the project owner to provide design and construction services: one entity, one contract, one unified flow of work from initial concept through completion. It consists of many players, including the General Contractor, Architect, Engineering Consultants, and a variety of sub contractors. Collectively, the team has the knowledge and expertise to complete a project from start to finish and each team member is equally important in the outcome of the project.

The role of the specialty sub-consultant is no different. For example, the Fire Protection Engineer (FPE) is a critical member of the Design-Build Team, and provides comprehensive input and guidance on all aspects of fire and life safety for the project. This includes, but is not limited to, building code analysis, water supply, smoke control, fire department access, exiting, and an analysis of the active and passive fire protection systems.

From an FPE’s perspective, the design-build process can be broken down into four separate and distinct phases: the teaming phase, the pre-proposal phase, post-award phase, and the construction phase.

Teaming Phase

The client should understand the value of the FPE in the teaming phase and that communicating with the key individuals responsible for selecting the team is a priority. Generally, the people responsible for selecting team members are the general contractor’s project manager, project estimator or the project architect. They may or may not be familiar with the value that the FPE provides so it is important to reaffirm the FPE’s role. Other disciplines can contribute to fire protection and life safety, but none of them take the total fire protection and life safety perspective that an FPE does. Continue reading “The Impact of Sub Consultants in the Design Build Process”

Is there such a thing as a Standard Contract?

By Lynda

The most common refrain I hear when talking to clients about Contract Review and Administration is: “I only sign a standard contract.”

Most clients feel there is no reason for contracts to be reviewed prior to signing, because they only sign a standard contract. Unfortunately, the only standard contract I ever see is one in which an owner or client uses and wants their consultants and contractors to sign. Ironically, one of the few things that makes any contract a “standard contract”…is the omni-present and onerous broad hold harmless/indemnity and defense clause.

Contract Review and Administration is probably one of the most important aspects of a prudent risk management and loss prevention program. A contract that any Contractor or Consultant signs should identify their rights and responsibilities to the owner and third parties. All of this should be determined at the “request-for-proposal” stage. If done here…it allows the Contractor or Consultant to identify, evaluate and treat the risks in the Owner or Client standard contract. Please remember that no one is putting a gun to the Contractor’s or Consultant’s head when he or she signs the contract; so it’s absolutely essential that the Contractor or Consultant knows what he is signing and what his rights and responsibilities are when negotiating for future work.

The prudent Contractor or Consultant should discuss all contracts with their counsel and agent before signing. Some general practice tips to consider when reviewing contracts are:

Scope of services: Think about whether the contract is exactly what you thought is was going to be in terms of encompassing more or less services, added responsibilities or services outside your area of expertise. It is also wise to describe things you are not doing to reduce the potential for misunderstandings.
Change orders: Find out if the Owner is allowed to change the scope of work once under way, and, if so, under what conditions. For instance, look at what input or options you have and what time frame you have to consider this.
Warranties and Guarantees and Performance Standards: First, you have to know if there are any. Try not to assume any and don’t agree to unreasonable ones…if you must assume any! Don’t forget that all professional liability policies exclude the assumption of liability policies which turns out to be a warranty or guarantee or performance guarantees.
Compliance with all laws, regulations, etc.: These responsibilities can be difficult to live up to since no one knows what all the laws, regulations, ordinances, rules, etc. are, much less how to comply with all of them. Continue reading “Is there such a thing as a Standard Contract?”

Just a Rabbit? Small Projects Can Bite

By Lynda

Who doesn’t love a good Monty Python reference? With our latest ProNetwork Newsletter, Just a Rabbit? Small Projects Can Bite, we’ve proven that the classic moments in Monty Python and the Holy Grail can be made analogous to anything, even insurance. Or, more accurately in this case, to potential professional liability claims:

“King Arthur and his knights approach a cave known to be guarded by a ferocious beast. Upon seeing that the beast is but a wee rabbit, they let down their guards, proceed forward and are savagely attacked. Was the mistake having approached the cave at all or having done so without anticipation of the risk and use of appropriate protection? I sometimes ask the same question of design professionals who undertake small fee projects and unhappily receive large claims. But it has always been true that little projects can generate big claims, particularly where we let informality replace careful practice and appropriate documentation. In a troubled economy, a/e’s want to take the work and no responsible lawyer should tell you to minimize your risk by eliminating your work. Take the work but don’t skimp on process, procedures and gut feelings in contract negotiations and documentation, even if done less formally.

Just a Rabbit

“Like King Arthur’s knights, I have frequently heard that the project was just a rabbit, or just a slab on grade, or just a retaining wall, or just a room addition, or just a (fill in the blank). Insurance statistics prove that smaller firms do not necessarily get smaller claims, nor do smaller projects necessarily generate only small claims. A modest structural engineering engagement for balcony maintenance on a condominium building can bring in modest fees. When one of the balconies collapses or defects become apparent in 350 identical units with 350 separate plaintiffs, the defense and repair costs can be astronomical. The same can be true for a small church addition, with the church school remaining open during construction.

Just a Contract

“Aside from legalities, written contracts serve two important practical purposes. First, before work begins, the contract serves as a discussion outline with which a client can be educated about what you do for a living, what they have to give you in order for you to do the work, what work you have in mind and, equally important, what work is not included. All of these topics are much more easily and less emotionally discussed before anyone has started working and before a problem has arisen.

“I frequently receive calls about contracts just as the a/e is finishing Construction Documents and realizes either that nothing has been paid to date or that a risky project is about to go out for bid. This is not ideal, but very common, and still better than having the discussion after CDs are out or a problem has arisen. I also frequently receive calls after the contract is signed, work is proceeding and could I just take a quick look at the contract, because it is “just a room addition” or similar small project? Once signed, there is little I can do but warn the a/e of the teeth on that rabbit.

“Contracts serve a second important purpose as well – to tell a third party (judge, jury, arbitrator, Grand Inquisitor) what the parties thought about the scope of services, risks, rewards and the deal before they got to court. If you show up to court with a contract calling you “contractor,” saying that you will perform your services to the “highest, best” standards of care and that you intended to “ensure” a successful project, you will be hard pressed to proclaim otherwise, even if Mrs. Justaroomaddition was a little flaky and Mr. Justaroomaddition employed his brother-in-law to do some of the work. You will also create insurance coverage problems for the claim, perhaps ending up with two lawyers and two lawsuits instead of one of each. Use the same scrutiny of contract language for your small projects that you use for your large projects, because the same words can cause problems regardless of size of the work.”

Visit our website to continue reading this newsletter. You may download the full PDF version here.

ProNetwork News is the latest value-added resource produced by a/e ProNet. Each monthly edition includes an informative, timely article relevant to the design industry and authored by an industry expert. Contact your a/e ProNet broker for early access to these excellent newsletters.

About the Author: Eric Singer is a partner at Ice Miller, LLP. He concentrates his practice in construction law, with emphasis on the representation of architects, engineers, contractors, owners, and lenders as well as other professionals, in litigation and alternative dispute resolution of design and construction issues. Eric is an active speaker and prolific author on the subject of construction litigation and the liability of the design professional.

Right of Set-off on Unrelated Projects

By Lynda

The following is an excerpt for the most recent ProNet Guest Essay by Frank L. Pohl, Esq. and James C. Washburn, Esq.:

“Frequently, general contractors will work with the same subcontractor or supplier on two separate, unrelated projects. When that happens, the situation may arise that on the first project (Project A), the subcontractor defaults on its contract, resulting in a back-charge that exceeds the subcontractor’s contract balance, i.e. the subcontractor owes the general contractor money. On the second project (Project B), the subcontractor satisfactorily completed its work and is due money from the general contractor. It may seem obvious that the general contractor would have a right of set-off, allowing the general contractor to deduct the amount due from the subcontractor on Project A from the amount that the general contractor otherwise owes the subcontractor on Project B. Seemingly, the general contractor should only have to pay the net difference or be able to avoid paying the subcontractor anything if the back-charge on Project A exceeds the amount due on Project B. However, as outlined in this article, that seemingly straight-forward right to “net out” the competing claims might not always be available.

“There are several different factors that can frustrate the general contractor’s right of set-off. In some jurisdictions, state statutes may prohibit the general contractor from withholding from the subcontractor the amounts received from the owner for the subcontractor’s work, such statutes holding that those funds are held in trust for the benefit of the subcontractor. Some states might even find the withholding of funds received by the owner for the subcontractor’s work to be statutorily criminal. On projects covered by a payment bond, courts in some jurisdictions have held that even if the general contractor has a contractual right to set-off, the Surety may not. As a result, in those jurisdictions, notwithstanding the contractor’s contractual right of set-off, the subcontractor may be entitled to recover the full amount on Project B (from our scenario above) from the Surety without any deduction of the amounts the subcontractor owes on Project A. Given that the general contractor must almost always indemnify the Surety, such a result has the practical effect of eliminating the contractual benefit of a right of set-off. Additionally, in certain circumstances, by the discretion afforded to judges under the rules of civil procedure, courts have required the two competing claims to be handled by separate lawsuits independently and without regard to the general contractor’s claim of set-off. This article discusses these scenarios and others that impact the right of set-off.”

To continue reading, download a the full PDF version of this article at our website.

About the Authors:

Frank L. Pohl, Esq. and James C. Washburn, Esq. are partners in the law firm of Pohl & Short, P.A. in Winter Park, Florida. Pohl & Short, P.A. is a business boutique law firm concentrating in four main areas of business law: commercial litigation, real estate law, corporate law and trusts and estates. Mr. Pohl has been advising clients involved in all aspects of real estate development for over 30 years. Mr. Washburn practices construction law and is Board Certified in Construction Law by The Florida Bar.

This article is intended for general discussion of the subject, and should not be mistaken for legal advice. Readers are cautioned to consult appropriate advisors for advice applicable to their individual circumstances.

Your Company’s Auto Liability – What’s Covered? What’s Not?

By Lynda

Other than Professional Liability claims, Auto Liability claims are the largest exposure faced by Architecture and Engineering firms.

If your design firm is small to mid-sized, often “a standard BOP (Business Owner’s Policy) is sufficient to meet your property and casualty coverage needs. A BOP combines the basic coverage requirements a small to medium sized business owner would need in a package.” Those insurance companies that understand the specialized needs of design firms sometimes combine certain coverage enhancements within their standard BOP. These enhancements can include extended coverage for architectural models, a waiver of subrogation (as is often required by project Owners during contract negotiations), and even some limited Auto Liabilty coverage.

“If your firm does not own any autos, the BOP can usually include ‘Hired and Non-Owned’ auto liability coverage. This would pay for damages to a third party, on behalf of your company, if an employee causes an accident while using a rented car or the employee’s own car while on company business. This addresses liability to others, but what about damage to the rented car? Some but not all insurers will provide this protection in a BOP; it’s usually referred to as Hired Physical Damage coverage.”

Our latest ProNetwork Newsletter, Your Company’s Auto Liability – What’s Covered? What’s Not?, focuses on the necessity of this coverage. A coverage which, if both architect/engineer and broker aren’t careful, can be overlooked at renewal time.

What does Hired Physical Damage cover? And why/when would you need this coverage?

Your star employees requests permission to attend a conference hosted by your state professional society. The conference is about 200 miles away. Public transportation isn’t an option; therefore, with an eye toward keeping expenses down, your employee decides to rent a car to drive to and from the event in one day. He asks you about taking out the rental car company’s insurance coverage. You mean to call your insurance broker, but, pressed for time, you decide that the BOP must cover this and you know that the extra insurance from the rental company would cost anywhere between $15 and $50 for the day.

Tragically, on the way home, your employee swerves to avoid some large debris in the roadway and inadvertently hits an oncoming car with a young adult driver and three co-workers who were headed home from a client’s golf outing. No one is killed, and fortunately your employee walks away unharmed. The other four, however, are not as lucky. All four are hospitalized, miss time from work, and require significant rehabilitation. Both vehicles suffer total loss.

To read about the outcome of this “doomsday scenario,” and to understand how Hired Physical Damage coverage can help, download the full PDF version of our newsletter here.

About the Author: Barbara Sable is Assistant Vice President for RLI’s Professional Services Group. She is responsible for developing the content of RLI’s risk management programs and addressing the day-to-day needs of policyholders. RLI is an a/e ProNet Platinum Sponsor.