Frequently Asked Insurance Questions from Architects and Engineers

Why do I have to worry about the insurance coverages usually mandated in contracts; e.g., CGL-CAL-WC-UMB-Professional Liability coverages?

Because these are the basic coverages that most clients will require and this does not include the usual modifications that are mandated.if you don’t have these coverages – you can’t work for this client or if you do, you are in breach of your contract with them automatically.

What is the Standard of Care?

It identifies the legal standard of professional care that you are required to maintain for this client. Care and caution is always warranted here particularly to make sure the standard of care required is not greater than the normal standard applying under common law applying in your community for the type of work to be performed.

Indemnification – Why do I have to be concerned with this clause?

These provisions allow you to allocate the risks you are willing to accept. You can easily assume more risk than your insurance protection covers. This should be considered along with your “standard of care” – very carefully. All agreements of indemnifications, written or verbal, should be reviewed by your attorney and insurance broker before accepting.

What is a Force Majeure Clause?

This identifies the circumstances under which you are not responsible in the event you are not able to complete your work because of circumstances none of the parties to the contract can control. As a result, the parties to the contract will not be in default because events beyond their control prevent the project from being completed in a timely manner.

How should I view the termination clause of contract clauses?

The reasons for termination should be obviously expressed and reasonable to the contracting parties. The conditions for payment of services performed to the date of termination should be expressed very clearly.

How should I review hazardous materials found on the project site?

Your contract for professional services should clearly state you are not responsible or liable for any hazardous materials found on the project site. Your contract for professional services should state that all hazardous materials encountered on the site are the responsibility of the owner(s). Your contract for professional services should state that if hazardous materials are encountered during the course of the project, all work shall cease until the owner(s) retain the services of a licensed and qualified Environmental Consultant to determine the extent and type of hazardous substances and the remedial actions to be taken to remove the hazardous substances to the extent required by law, prior to resuming work on the project.

How should I address the use of electronic media?

This exposure can be very risky and must be handled with great care. You should mandate that a hard copy always be retained and updated as changes are made. The “hard copy” documents will be the “final determinant” of the “original documents” including amendments to each project. Releasing electronic media to owners or contractors that may be changed or amended without the knowledge of the originator of the design represents an unacceptable risk to the design professionals on the project.

How do I handle Opinions of Cost and Cost Estimates?

It is very important to understand that costs are estimates only – and that they are based on your experience and qualifications. They represent your experience and best judgment, but are not guarantees! Remember, all design professional liability policies exclude coverage for warranties and guarantees.

How should I deal with “ownership of documents?”

Always remember that drawings, specifications, reports and other documents that are produced by you are instruments or deliverables of your professional services and are not products! Also, you are the ultimate owner of these documents and any reuse by your client will only be done for additional compensation. Building codes vary from location to location and the exact duplication of an approved design in one location can be in violation of building codes in another. You should include a “hold harmless, indemnity and defense clause” for unauthorized reuse in your contracts for professional services.

How should I respond to owners that insist on using their own documents for hiring my professional services and are adamant the documents are Standard Contracts?

Remember, there is no such thing as a “standard contract,” and it is imperative that you read each and every one submitted by your clients, so that you know what the client’s expectations are and what your rights and responsibilities. It is a good idea to have all owner drafted agreements reviewed by your attorney and insurance agent or broker to determine if you are accepting responsibility beyond common law that would apply in the absence of the agreement and if you are agreeing to accountability beyond the protection afforded by your professional liability insurance.

What is the key to effective remediation?

The most important factor is a quick response by qualified and educated people who are capable of developing a reasonable remediation plan that is tailored to each specific set of circumstances.

What are some of the problems of using construction contracts for design services? 

First, the phraseology used is to make sure “construction subs” meet the same requirements as the General Contractor has to the owner in performing the required construction means-methods- procedures-sequences and safety to accomplish the agreed upon construction process. Needless to say…none of these requirements meet the test of what a design professional is required to do…which provides the mandated design function of the project.

Are there other problems with utilizing “construction contracts” for design services? 

Yes, numerous ones. Most construction contracts contain warranties, guarantees and some have performance standards. To our knowledge, all design errors & omissions insurance policies exclude coverage for warranties and guarantees and most likely performance standards, based on the manner in which they are phrased in the construction contract.

What if an owner wants me to provide a Performance Bond to guarantee my performance on time and within budget?

Most construction contracts for major projects and almost all contracts with public entities will require performance and payment bonds. Most design professionals are not structured financially to have the necessary financial assets to induce a Surety Company to provide bonding for a design firm. Also one of the main functions of a performance bond is to “Warrant” their construction work product. A very common misconception is that bonds are the same as “insurance”. Bonds are not “insurance”. Any payment made on behalf of the Principal named in the Bond for failure to perform is subject to a recovery action against the bonded entity by the bonding company.

Does utilizing construction contracts for design services impact my common law Standard of Care?

Using a construction contract for design services may well alter a design firm’s Standard of Care, particularly if the construction contract contains warranties or guarantees. Warranties and guarantees may be found in numerous forms. They may include (but are not limited to) construction costs not exceeding original estimates, project completion by a specific date, time of the essence clauses, the design meeting the project objectives, penalties for project delays, construction safety responsibilities and other obligations normally the contractor’s responsibility. The common law standards for a design professional do not require the design professional to “warrant or guarantee” their design services, only that the design professional meet a standard that a prudent professional would perform with comparable education, training and experience in the same area of expertise and locale where the services are being rendered. HOWEVER, if a design firm AGREES to the increased obligations of a construction contract or any owner drafted agreement, in all likelihood, the design professional will be bound by the contract terms, regardless if the contract provisions impose responsibility beyond the common law standard. Signing a contract with an elevated standard of care is not necessarily binding on the designer’s insurance company. Agreeing to warranties and guarantees as well as other “excluded” activities will mean the design firm will be “uninsured” in these areas and claims for allegations excluded by the policy form will have to be defended and paid, if found negligent, by the design firm.

Is it wise of General Contractors to require professional subconsultants to sign their usual subcontract form?

No. Contractors that require the use of the same contract form used for construction subcontractors may unwittingly void the precise coverage they are seeking from their design professional. Again, design errors & omissions policies typically exclude warranties and guarantees which are generally an integral part of construction sub-contracts. As previously stated, if the design firm “agrees” to the warranties and guarantees or any other responsibility excluded by their professional liability policy, the design firm will be assuming the defense costs and payment obligations if an award is granted by the courts.

The General Contractor has requested to be named as an “Additional Insured” on my professional liability policy. Can I accommodate this request?

No. It is extremely rare to name the Contractor or Owner as an Additional Insured on your professional liability policy. The principal reason involves the “insured vs insured” exclusion found in virtually all design professional liability policies. If the contractor believes he has a cause of action against his sub-consultant design firm, this exclusion will eliminate coverage for both the contractor and the design firm.

How can the General Contractor protect themselves?

The General Contractor may purchase Contractor’s Professional Liability insurance. This would protect the General Contractor from vicarious liability claims from third parties and also solves the problem of the “Insured vs.Insured” exclusion that would apply if the contractor would bring an action against the subconsultant design firm, when named as an additional insured. Another benefit is a separate set of insurance limits. The General Contractor would have their own set of insurance limits that would not be subject to dilution or reduction from other claimants against the design professional’s errors & omissions policy covering their general practice.

Why would the General Contractor need Professional Liability coverage?

The General Contractor has the same “vicarious liability” for the negligent acts, errors or omissions of their professional subconsultants as they do for the non-professional subcontractors. The General Contractor cannot rely solely on the hold harmless indemnity clause in the contract document. The hold harmless may not be enforceable in certain jurisdictions because of the language of the indemnity clause. The subconsultant may not have sufficient insurance or their policy limits may be reduced or exhausted from other claims. The policies may be cancelled by the carrier giving notice or for non-payment of premiums. The General Contractor is then left with a false sense of security if they rely on the general liability insurance of the sub-consultant, which excludes professional design activities and responsibilities.

Is there anything wrong with indemnifying my clients “to the fullest extent permitted by law?”

The problem here is that the law governing contracts for construction in most states is more permissive than the coverage afforded by your insurance. The law generally permits indemnification which extends well beyond your negligence. Some laws prohibit indemnification against the consequences of the sole (and in some cases the sole, active) negligence of others. If there is no negligence in your services, you cannot be made to answer for the negligence of someone else. But, if there is 1% negligence on your part, you could be made to answer for the 99% of negligence of another. Since “the fullest extent permitted by law” is inconsistent with where we are headed in our quest for fairness and insurability, these words have no place in your agreement. Take them out.

If I agree to indemnify my client and defend them as well, will this be covered by my insurance?

Yes and, possibly, no. This one gets a little complicated because there are two issues at hand, thus, two different insurance policies. From a general liability perspective, you are in a position to do this provided your client is included as an Additional Insured on you general liability policy (which is the case more often than not-check your insurance requirements in the contract). So, with your client as an Additional Insured, your insurance company is already obligated to do so. Professional liability policies are a different matter as Additional Insureds are not allowed. As a professional, the chances of you having a professional liability claim are much greater than you having a general liability claim. Professional liability policies will generally stand behind your agreement to defend your client, but only to the extent of your negligence. After all, this is what the law requires of you, and it mirrors the extent to which you are covered by your professional liability insurance policy.

What is the difference between defense and indemnification?

What does is really mean when you agree to defend as well as indemnify? It means that long before any legal liability is established, you have an obligation to retain an attorney and mount a defense on your client’s behalf. Under most circumstances, this is an obligation your insurer will likely refuse to accommodate. Remember, contractual liability coverage may afford compensation for defense costs once negligence is established, but absent negligence, there is no coverage. As a practical matter, the problem may well go away once the specific circumstances surrounding a loss are known. It may not be in your client’s interest to pursue your obligation to defend. On the other hand, your refusal or inability to retain counsel on behalf of your client could fuel the fires of the dispute. “Add it to the list” is an appropriate response here, but added fuel is not what is needed in a situation in which the interests of the parties might better be served by putting out the fire. Indemnify your client against costs of defense attributable to your negligence, if you must (and if your insurance stands behind it), but avoid agreeing to mount that defense if you can. That commitment is likely to be contrary to everyone’s interest in the long run.

Is there a problem with indemnifying my client’s representatives, designees, or agents?

Indemnification is serious business, far too serious in terms of its consequences for the Owner’s attorney to trivialize it by throwing in the kitchen sink. Who are these fine folks, and why should you stand in their shoes in the event of a loss? Anyone can be transformed into an agent at any time. “Zap, you’re an agent! I designate you” is all it takes. The same holds true for a representative or a designee. Accept this language and you may find you have agreed to indemnify an army of unknown and unwelcome beneficiaries-the construction manager, for example, or the owner’s nephew, or a trip and fall victim the owner would prefer to have you compensate regardless of fault. Delete these words and all like them. If you encounter resistance, ask for a list of those representatives, designees, and agents your client believes to be appropriate recipients of your largesse. At the very least, you deserve to know who they might be. Nor is it stretching the limits of fairness for you to insist on the opportunity to evaluate, in each and every case, the appropriateness of extending the security of your indemnification to any of them. This is not necessarily a make or break proposition, at least not in states where the protections of privity have long since been swept away. If the balance of your agreement to indemnify is limited to the consequences of your negligence, and if representatives, designees, or agents of the owner are damaged by your negligence, you are likely to have legal liability for those damages, and your insurance is likely to respond. You might ask yourself, nevertheless, whether you are willing to put your deductible on the line, undertake obligations with potentially serious consequences, and concede significant negotiating leverage in the event of a loss-all for the benefit of some third party with whom you have no contractual relationship, from whom you receive no consideration, and who you do not even know. Probably not.

Am I going too far by indemnifying my client against claims, demands, actions and suites?

You might be as this is an all-encompassing statement. A mere claim against you does not equal culpability. Remember that your insurance pays for damages, and it pays to the extent you are found to be negligent.

What if the indemnification includes the language “any and all claims, demands, actions and suits?”

Attorneys are overly fond of absolutes. Otherwise, they would stop using “of every kind, nature, and description” as if it were punctuation. Absolutes leave room for argument where clarity is the only appropriate goal. You know by now that where you have to be when your negotiations are over does not include “any and all” losses, nor does it include “claims, demands, actions, or suits”. It includes only those damages for which you are legally liable. Losses, liabilities, expenses, and costs are damages for which you could be legally liable if they are caused by your negligence. Even attorneys’ fees may be construed to be damages in some states, and where not, your limited contractual liability coverage may well respond. But claims, demands, actions, and suites, in and of themselves, are not damages, and the mere fact that they occur may or may not have anything to do with your negligence. This is not a make or break proposition, either, but clarity of intent finds offense in these words and the absolutes which precede them. Best they be deleted.

What is the significance of the statement in an agreement: “breach of any term or condition of this Agreement”?

Negligence may be difficult to prove, but breach of contract is not. To establish a breach, all an owner need do is prove that 1) you owed a duty to perform under your agreement, 2)you breached that duty, and 3) damages were sustained as a result. This is your client’s fall back position in the event negligence turns out to be impossible to establish. It is also your invitation to the owner to sue you at your expense. There is great leverage in this, and it flows in a single direction-from you to your client. Your client sues you for breach of contract, and you pay the associated attorneys’ fees and costs. Arguably, this is inconsistent with public policy. Public policy generally demands mutuality as a matter of equity where there is an agreement by one party to pay the attorney’s fees of another regardless of the outcome of a dispute between the two. Attorney’s fees are the only issue here, for if you are found to have breached your contract, there is a remedy for that in the law. As far as you are concerned, it is neither necessary, nor is it appropriate for you to add your indemnity to that remedy. Absent negligence your indemnification for breach of contract may be uninsurable; absent mutuality, it is unfair. Delete this language if you can. If you encounter sustained resistance, you might invoke the public policy argument and propose, as an alternative, to substitute language elsewhere in your agreement calling for the non-prevailing party to any dispute to compensate the prevailing party for costs of defense. There is leverage in this for you, but there is also some risk. Seek the advice of counsel before you pursue this strategy.

What are the major issues involved with residential design exposures and would should I be careful of with this type of work?

Residential design exposure are of increasing concern to professional liability insurers or architects and engineers. The issues are various, and to a great extent depend on the nature of the project. In other words condominium/townhouse developments are viewed as being more risk prone. Claims from this project type seem to be the result in the shared ownership and management of the property. Insurers are also troubled by housing developments. The problem with multi-unit design is that a single mistake is magnified by the number of units involved. While insurers seem to prefer to undertake the risks associated with single family custom homes, these projects also pose a unique hazard due to the fact that the client is typically an unsophisticated buyers of design and constructions services.

If I am working on a project and I sub out work to an insured subconsultant, can I still be held liable for the work of the subconsultant?

Yes. A consultant remains liable for the acts of its sub consultants. Depending on your agreement with the client, governing law and nature of the claim it is possible that the client will not have a direct action against the sub consultant. It is good practice to make certain the your sub consultants have coverage equal to or greater than your own. However, the existence of coverage does not provide a shield as respects your liability to third parties. It will however provide a source of recovery in the event that you seek indemnification against the sub-consultant for getting you embroiled in their mistakes.