The word standard implies many things. A bar to be cleared; a rubric to be followed. But for design professionals, the word becomes tricky when applied to contracts. Project owners often want to keep things simple by requiring so-called Standard Contracts for all parties. This is a problem for architects and engineers, especially from an insurance perspective.

Construction contracts cause problems for design professionals.

The following are a few Frequently Asked Questions we see from architects and engineers on this issue:

My project Owner insists on using their own contract for hiring my professional services. They are adamant this is a Standard Contract. How should I respond?

There is no such thing as a Standard Contract. Be sure to read each contract submitted by your clients carefully. You need to understand both the client’s expectations and your firm’s rights and responsibilities. It is a good idea to have all owner-drafted agreements reviewed by your attorney and/or insurance broker. This will help to determine whether you are accepting responsibility beyond what common law would hold you to in the absence of the agreement.  If, for example, you agree to accountability beyond the protection afforded by your professional liability insurance, that’s a problem.

When I perform professional services for a Contractor in lieu of an Owner, should I be concerned?

Yes. Construction contracts are not meant to be used in this arrangement; they are not designed to meet the needs of the design professional.

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

Construction contracts are problematic for design professionals. A General Contractor’s contract with a project Owner includes certain requirements (e.g. means, methods, procedures, sequences, safety, etc.). These requirements trickle down to construction subcontractors the verbiage of construction contracts. Beyond that, none of these requirements meet the test of what a design professional should required to do on the same job.

Contract document libraries available via the AIA and EJCDC can be a good place for design professionals to begin. These are standard in the sense that they are templates. However, it’s still important to seek individualized guidance from your attorney and/or insurance broker.

What are some of the other problems with utilizing “construction contracts” for design services?

Most construction contracts contain warranties/guarantees, and some have performance standards. To our knowledge, all professional liability insurance policies for design professionals exclude coverage for warranties/guarantees and (likely) performance standards. Remember: if you commit your design firm to more responsibility than the law expects of you, your insurance policy cannot protect you the way that it should.

We hope you’ve found this helpful. As always, be sure to contact your local a/e ProNet broker if you have further questions.

Some of the most frequently asked questions we hear are triggered by the disparities between the insurance coverage available to design professionals and the demands made for coverage by general contractors and their standard contracts.

 

shutterstock_333194531

This is a nuanced area, and you should call your local a/e ProNet broker if you have specific questions. In the meantime, here are a few quick answers to the biggest FAQs concerning this issue:

Is it wise of General Contractors to require professional subconsultants to sign their usual sub-contract form?

No. Contractors that require the use of the same contract form used for construction sub-contractors may unwittingly void the precise coverage they are seeking from their design professional. Professional Liability (Errors & Omissions, or E&O) policies for design professionals typically exclude warranties and guarantees, which are generally an integral part of construction sub-contracts. 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?

It is not a good idea to name the contractor as an additional insured in the sub-consultant’s design E&O policy, because an “Insured vs Insured” exclusion exists in virtually all design E&O policies. If the contractor believes he has a cause of action against his subconsultant 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 will 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 brings 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 E&O policy covering their general practice.

Why would the General Contractor need Professional Liability coverage?

Several reasons:

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 subconsultant’s 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 subconsultant, which excludes professional design activities and responsibilities.

Meeting halfway, in this case, really involves helping everyone acquire appropriate coverage. If you are a General Contractor in need of Professional Liability (E&O) insurance, or if you are a design professional who needs someone to explain all this to a General Contractor demanding such ill-advised insurance/contract decisions, please don’t hesitate to call on us.

More answers to Frequently Asked Questions can be found on our FAQ page.

smoothsailing_engineeringinc

Design firms preparing to purchase or renew professional liability insurance ask the same few questions every year.

How will my professional liability premium be calculated? Will my professional liability premium go up? Should I change professional liability insurance companies?

One helpful resource to answer these questions is the 2015 Professional Liability Insurance Survey of Carriers, a report published annually by the ACEC along with a companion analysis in Engineering, Inc. that includes insight from insurance companies and other experts  This year, the title of the article says it all: 2015 was “Smooth Sailing” for the professional liability insurance industry, and that means good things for architects and engineers.

“The ACEC Risk Management Committee worked with the American Institute of Architects, the AIA Trust, and the National Society of Professional Engineers to survey 18 carriers.” With construction spending higher than it’s been in years and expected to rise, the number of insurance companies providing professional liability insurance to architects and engineers is also growing. New markets increase the competition for more established companies, and keep rates stable, which means Eric Moore, President of a/e ProNet and Vice President of Moore Insurance Services, is optimistic.

“Nonrenewal is about the only reason Moore would suggest changing carriers” this year. “If you do see a claim, a carrier you’ve been with a few years is less likely to drop you, he says.”

Also quoted in the article are representatives from several of the top-tier professional liability insurance carriers, like a/e ProNet sponsors Travelers, Beazley, and Victor O. Schinnerer, as well as Tim Corbett of SmartRisk, a performance management consultant for the design and construction industry, who has written for a/e ProNet many times.

You can read a digital version of this article in the January/February 2016 issue of Engineering, Inc.

As always, if you have any questions about this report or the professional liability market, please contact your local a/e ProNet broker today.

PNN_1511In what attorney Brian Stewart calls a “disturbing trend,” more and more project owners design professionals to procure separate questionnaires from their insurance brokers. These “broker-verification questionnaires” are meant to re-state or re-affirm the limits, exclusions, etc. of the relevant insurance policies to the project.  If you’re an architect or engineer who has met push-back from your broker on this issue, our November 2015 issue of ProNetwork News explains why:

I:  The Problem with Broker Verifications

The use of broker-verification questionnaires has been a growing trend seen most commonly in the context of construction insurance… Historically, a broker has satisfied this requirement through the production of a certificate of insurance or, if necessary, a copy of the policies themselves which demonstrate that the insured had the applicable coverage.  However, a number of project owners have recently been refusing to accept certificates alone and are requiring brokers to complete a questionnaire and verification, with the understanding that a failure to complete the questionnaire will cost the broker’s client the job.

The increasingly frequent use of such broker-verification questionnaires raises a number of legal issues for the broker.  The first issue deals with the broker’s authority to interpret the underlying policy between the insurer and the insured and whether a broker has the authority to confirm in writing whether a specific policy meets the requirements, not of the contract between the Owner and the insured but rather the requirements contained in the broker-verification questionnaires.  The second legal issue deals with the effect of a conflict between the underlying policy and the language of the questionnaire.  Specifically, what is the legal consequence when a broker completes a questionnaire that potentially contains conflicting language from the actual policy?  Finally, this opinion will analyze what risks and liabilities a broker is exposed to when completing  a questionnaire that contains language that is in conflict with  or amends, modifies, expands, etc. the underlying policy.

II:  Principles of Contract

Insurance is a matter of contract governed by the rules of contract. Unlike the ordinary commercial contract where the parties seek to ensure a commercial advantage for themselves, an insurance contract seeks to obtain some measure of financial security and protection against calamity for the insured.

Being a voluntary contract, as long as the terms and conditions made therefor are not unreasonable or in violation of legal rules and requirements, the parties may make it on such terms, and incorporate such provisions and conditions as they would see fit to adopt.  The rights and obligations of parties to an insurance contract are determined by the language of the contact and the insurance policy is the law between the parties unless the contractual provisions are contrary to public opinion or law.

III:  Role of the Broker

An insurance broker provides a professional service for the insured, its client and goes to the insurance market to determine what policy or policies best fit the needs of its clients.

Relevant distinctions exist between an insurance agent and an insurance broker.  Whereas an agent generally represents a particular insurance company, an insurance broker generally represents only the insured. Consequently, an insurance broker owes a duty to the insured and not the insurer. Continue reading “The Down-Low on Broker-Verification Questionnaires”

PNN_1411Which is better, more or less documentation in your project file after the job is complete? Despite recent advances in technology, document retention has become a difficult, expensive and complex proposition. Computers have changed design professionals’ work flows and methods, greatly increasing efficiencies, but also exponentially multiplying the volume of data; e-mails, attachments, drawing revisions, text and voice messages, not to mention folks are still sending faxes and letters, actual paper ones. All of this adds up and can become an unmanageable mess, even for the best of us.

Making decisions now about which project documents to keep and which to discard is like trying to pick who will win the Super Bowl in the year 2024. You never know which ones will be the most important until you are right in the middle of a claim. Experience and common sense tell us that there are certain documents that, no matter what, are probably safe bets to come in handy down the road. You may also be required by law or contract to keep certain records for certain time frames.

This article will offer suggestions on those categories of critical project documents necessary to defend claims, and which ones are better off being discarded as a matter of course after project completion. The question ultimately is framed as “what to keep and for how long?” Of course, these are only suggestions, and you should discuss implementation of any document retention program with your chosen legal and accounting advisors in your specific jurisdiction. Further, this article only addresses retention of construction project documents and not corporate, HR or tax records.

“Age of Discovery”

Modern construction projects, with all this data, are subject to modern lawsuits. These lawsuits are conducted by increasingly younger, tech savvy and sophisticated lawyers who sometimes make the litigation more about the discovery effort than about the facts of the case. Parties are allowed to submit detailed and specific “requests for production of documents” once in the lawsuit, or issue subpoenas to non-parties. State and federal court discovery rules could require parties to turn over copies of all information they have in their possession related to the project. Continue reading “Document Retention: More Paper or Paper-Less?”

ConstructionTradeContractors

The appropriate classification of employees is a frequent source of confusion for design firms, usually coming up around the renewal of a firm’s Workers’ Compensation policy. It is an issue ripe with risk on an Employment Practices level. Recent court rulings in Arizona and Utah have resulted in construction firms paying hundreds of thousands of dollars in back wages, damages, and penalties.

As explained on the Schinnerer Risk Management Blog:

In an age of rising benefit costs and other constraints on the operations of professional service firms, some firms are turning to a range of tactics to reclassify workers to take them off the formal payroll and, therefore, lower their costs and administrative burdens. However, doing so may subject the employer to state and federal employment law fines and penalties.

All this is happening against the backdrop of a broader shifting of risk from employers to workers, who are shouldering an increasing share of responsibility for everything from health insurance premiums to retirement income to job security. While the future might present a model where everyone is truly an independent contractor and neither those actually providing services nor those using the services have any continuing or controlling interest in each other, such a situation does not currently exist and any firm that thinks it can avoid employment responsibilities, tax obligations, or employment practices liability needs to carefully consider alternatives to hiring workers.

Regulators and courts have increased their scrutiny of the relationship between business entities and independent contractors. Alleged misclassification of workers has been one of the primary battlegrounds of this shift, leading to high-profile lawsuits.

For decades, some professional service firms have shifted work from employees to independent contractors to cut their overhead and labor costs and, at times, to qualify for special government procurement assistance. Often, this has been accomplished by relabeling workers and slightly altering the conditions of their work. And some professional service firms have simply ignored regulatory and tax guidance and “informally” used the services of professionals and clerical workers as “consultants” or “leased personnel” or “temps.”

Now, however, businesses—including design firms and construction contractors—are turning to other kinds of employment relationships, such as setting up workers as owners of limited liability companies (LLCs) in an attempt to shield the businesses from tax and labor statutes. In response, some state and federal agencies are aggressively clamping down on such arrangements, passing local legislation, filing briefs in workers’ own lawsuits, and closely tracking the spread of what they see as questionable employment models.

Visit the Schinnerer Risk Management Blog to continue reading.

If you have questions about the appropriate classification of your employees prior to your next workers’ compensation renewal, contact your local a/e ProNet broker. We’re happy to help!

Blog Love: ArchNewsNow – Nuts & Bolts

nutes_and_boltsNuts+Bolts is a “an exclusive ArchNewsNow monthly series to provide A/E professionals with practical tips for a more successful, profitable practice.” All ten articles currently listed are worth a read, and we hope the series is slated to continue. The authors are architects, consultants, insurance professionals, and financial advisers, all of whom offer a timely perspective on the state of the design industry. After perusing the library, here are four posts with the potential to help you and your firm in a risk management capacity:

#1 Nuts + Bolts: Mission Possible: Increase Your Value Without Lowering Your Fees

In this economic climate – or even in a good market – it may be tempting to lower your fees to stay competitive. However, lowering your price is not something you should immediately consider when faced with reduced revenue. As an alternative, you should seek to inject as much value into your services as possible. This will allow you to increase the intrinsic worth of your services, encouraging your clients to pay an appropriate fee for quality, not just quantity. But if you’re convinced that lowering your fees is a solid strategy that will boost your bottom line, think again. Here are a few reasons not to.

#2 You Can’t SELL If You Can’t TELL

You went to architecture school to become a good communicator…right? I’ll take a risk and say that chances are you probably didn’t. But if you want to be a great architect, engineer – or any other kind of professional – you need to know how to communicate clearly and effectively. You simply can’t avoid it. You communicate every day, whether you are meeting with colleagues in your office, talking to a client on your cell phone, e-mailing a consultant, or tweeting your followers. While we live in the digital age, and communication may seem to flow easily, there’s a lot more room for error. We’ve all had that gut-wrenching feeling of hitting the “send” button on an e-mail that had the wrong content or went to the wrong person.

#6 Changing Habits: The Secret to Successful Time Management

No time to grow your business? Learn to set aside time, clearly identify goals, and change bad habits, and you’ll transform your business development efforts from a waste of time into a productive enterprise. Most budding architects are initially attracted to the design side, rather than the business side, of their profession. As a result, many architects never develop the skills necessary to build their businesses. But just as design and project management are part of your daily routine, you should set aside time for business development as well. How do you make time for business development when you’ve been avoiding it or aren’t sure how to fit it into your day-to-day practice? The trick is to fundamentally and permanently change your habits. This sounds daunting, but you can achieve it if you follow these practical steps.

#8 Best Friends Don’t Make the Best Partners

In popular culture (and at most architecture schools) the architect is often portrayed as a lone figure, from Howard Rourke in Ayn Rand’s seminal work, The Fountainhead, to Frank Lloyd Wright, to Frank Gehry. Most people perceive architects to be creators working alone in the dark. Contrary to popular belief, it takes more than a single artist to make a great building. Most architects know that. What’s less obvious is that, in reality, most successful architectural practices are not sole practitioners but partnerships.

About the Authors of the Nuts+Bolts Series:

Michael S. Bernard, AIA, Principal, Virtual Practice Consulting

Mary Breuer leads Breuer Consulting Group

Founder of integrated communications firm Hausman LLC, Tami Hausman

Donna L. Maltzan is a business development trainer, facilitator, consultant and coach

Michael M. Samuelian, AIA, AICP, vice president at Related Companies

Stanley Stark, FAIA, LEED AP, a New York City-based architect who has held senior leadership positions with major firms including HLW, HDR, and Francis Cauffman

Steve Whitehorn, managing principal of Whitehorn Financial Group, Inc., the creator of The A/E Empowerment Program®

PNN_1407The construction phase is a dynamic time of a project and a design professional’s involvement is significant from a risk management perspective since it allows the design professional the opportunity to provide input during the construction of the project.  Since no designs are perfect (and, moreover, are not expected to be perfect to still meet the standard of professional skill and care), all designs require some level of interpretation that is best done by the design professional who created them.  During construction, the design professional can visit the jobsite to determine if construction is proceeding in general accordance with the plans and specifications and clarify the design intent when necessary.  This article addresses issues design professionals should consider if they provide services during this phase.

Do you have the resources?

The firm must have sufficient staff to devote to this important phase of the project.  The services during this phase require experienced professionals who know how to handle themselves on the jobsite and how to successfully complete tasks in the office.  If junior professionals perform construction phase services, the firm must ensure senior professionals are available to (and actually do) mentor the junior staff.  A successful mentoring program requires regular and meaningful communication between junior and senior staff who need to be proactive to nurture the mentoring relationship.  Mentoring is a two-way street:  it will not be effective if busy senior professionals do not devote time to advance junior professionals’ development and junior staff must take the initiative to seek out senior staff for guidance.

What does your contract say?

Industry standard documents have relatively balanced language regarding the construction phase.  However, design professionals are often faced with a client-

proposed document that may not include appropriate language for the design professional’s involvement in the construction phase. Continue reading “Construction Phase Services: Considerations for a Successful Outcome”

PNN_1405Seen any changes the past thirty years in the delivery of professional design services?  Sure, you have—particularly in the area of construction documents. Raised stools and drafting tables, pounce, and lead-darkened calluses on the middle finger of the draftsmen have, for the most part, yielded to CAD. Although CAD’s promise of error-free drawing may have proven elusive, many of its other promises have been fulfilled. Some even appear understated in hindsight—in part because CAD and the Internet seem to have been made for each other. Their combined effect reduces trying to list all the ways CAD has changed project delivery to a futile exercise.

Like CAD in the ‘80’s, BIM seems to hold similar promise today—a fact not lost on contractors, A/E’s, and project owners alike. Digital models are more-and-more often offered or requested as “deliverables.”  And multiple models for the same project are not uncommon—as building team participants explore their usefulness at various stages of design and construction. Some models are used much like enhanced CAD construction documents, provided and controlled largely by the A/E. But many incorporate data contributed by sources other than licensed design professionals, including suppliers, fabricators, contractors, and subs. Not surprisingly, many contractors and construction managers view BIM as a means for carving out an increased share of the project delivery pie—and are taking full advantage of it as both a marketing and performance tool. Some of them have even become the primary creators and custodians of digital models. Of course, that is not altogether unnatural. After all, it’s hard to ignore a tool that can show what will be built—and also to be useful in actually building it. Continue reading “The Design Professional in the Age of BIM: Things that change; things that don’t.”