At its most basic level, risk management for design firms includes selecting and signing sound contracts. a/e ProNet’s Risk Management & Contract Guide for Design Professionals (2005) can assist with the specifics of this process.
An excerpt from Chapter 7, Some Do’s and Don’ts of Contract Language:
7.2 Words to Avoid
Certain words create the impression that the design firm has a greater duty or responsibility than required by the generally accepted standard of care and scope of services stated elsewhere in the contract. Some words that risk managers often advise the design firm to avoid using in their contracts to the greatest extent possible include the following:
“supervise contractor’s work”
“control contractor’s work”
“direct contractor’s work”
“guarantee or warrant either your services or the contractor’s work”
“certify that contractor’s work meets the plans and specifications”
“inspect contractor’s work to assure it meets the plans and specifications”
This risk management guide was previously out of print, but has since been re-released in electronic format. The book includes three updated optional AIA-approved continuing education courses! Visit the a/e ProNet Web Store to purchase and download your copy today! Also available is our most recent guide, Risk Management for Design Professionals in a World of Change (2009). If you have any questions about these resources, find your local a/e ProNet broker or Contact Us.
The March 2013 issue of ProNetwork Newsis the second installment of a two-part article; the author, Tim Corbett of SmartRiskexplains the origins and principles of project coverage and introduces the reader to two of the four main types of Project Insurance. For a recap of the first part, including details about types 1 (Project Professional Liability Insurance) and 2 (IPD Project Specific Insurance), download the full March issue, or, better yet,download the February 2013 newsletter here.
Now, let’s examine the remaining three types of project coverage.
3. Project Specific Insurance Limits
Sometimes, contracts demand that design professionals carry a higher limit than they usually do. This can occur on any kind of project, but is more common on larger, higher risk projects, and more recently, on public ones. One of the more common strategies for obtaining increased limits for a project is through a Project Specific Insurance Limit. This is provided by endorsement through your current practice policy insurance carrier.
Benefits and typical features of Project Specific Insurance Limits:
Provides a higher limit for the firm, for a specific project only.
Can be more cost effective than raising the limits on the entire practice policy.
Makes the cost of the project-specific limit a reimbursable expense.
Cautionary Points and Tactics:
Having a project specific increased limit may not always be the best strategy, and it may not even be available from your practice policy carrier. From an insurance company’s perspective, comparing construction costs to policy limits is part of the underwriting process. Construction value and requested limits may not be in line with the insurer’s potential exposure: those higher limits requested could place a target on the design firm’s back. The insurer doesn’t want to provide the higher limits that could be used as a cost recovery strategy.
Ensure that requested limits are in line with exposures and construction costs. For example, is it necessary to require a $5 million limit of professional liability insurance from a firm performing services on a $20 million project?
Contact the contract administrator, and state that your firm normally carries a lower professional liability limit than requested, and that it is consistent with industry practice. Inquire if your current limit will be acceptable.
* Include language similar to the following in your contract:
“The expense of any additional insurance coverage or limits requested by the Owner in excess of that normally carried by the firm shall be a reimbursable expense paid by the Owner.”
To find out more about types 4 (The Wrap-Up Policy) and 5 (Owner Protective Insurance Policy or OPIP), download the full March 2013 issue from our website.
About the Author: Timothy (Tim) Corbett is Founder and President of SmartRisk, a Pasadena, CA based consultancy with over 25 years of experience providing risk management and performance management solutions to Design and Building Professionals. Mr. Corbett holds a BS Degree in Security & Risk Management, MS Degree in Management; a degree in Environmental studies as well as concentrated studies in Architecture Design and is LEED accredited. For more information on this or other topics, visit the SmartRisk website or email Tim at tcorbett@smartrisk.biz.
Photo via Victor O. Schinnerer’s War Stories: Budget Buster
I shouldn’t need to buy insurance! I’ve never had a claim.
This is a common refrain from architects and engineers purchasing professional liability insurance for the first time. We hear you. There are lots of design professionals who feel this way. That’s why it’s important to recognize that insurance isn’t about punishing you for past claims; it’s about protecting you from future claims. Contractual insurance requirements aren’t merely expensive obstacles to bidding for a job; they’re supposed to protect the individual parties from the far more expensive burden of an uninsured professional liability claim. And, like it or not, industries like Architecture and Engineering are rife with potential claims.
Oh yeah? Like what?
Don’t just take our word for it. Check out this library of War Stories and Claims Scenarios from Architects, Engineers, Surveyors & Consultants, an excellent resource offered by Victor O. Schinnerer, one of the leading Professional Liability insurance companies. These are real life claims stories. Here you can read through scenarios which happened to other firms, often in spite of their best efforts to avoid such things! While the names have been changed, details are included. In each case, you’ll find out what the mistake was. How it was made. How much it ultimately cost. How it could have been avoided.
A couple of examples from the War Stories library:
ABC Engineers provided design services for a residential project. The owner obtained a construction loan from a bank for $2.7 million; believing he could obtain additional funds from the bank if needed. As construction progressed, they expended the $2.7 million budget before the project was complete. The bank believed $2.7 million was adequate to complete the project and denied the owner’s request for an additional $1.3 million. The owner could not obtain additional funds and the contractors stopped working, leaving the project incomplete. Read more at Schinnerer’s website…
Gerard Coins Architecture, a sole proprietor, was retained by a housing authority to provide architectural design for Blanket Apartments, a low income housing development. Gerard Coins Architecture also provided mechanical design, which was permitted by state law. The architect’s design called for standard, 30 gallon water heaters but the owner wanted electric, tankless water heaters instead. The architect checked with a supplier and based on verbal information, sized the water heaters for the apartment units.
After the apartments were built, it was discovered that the water heaters did not supply enough hot water. The architect contacted the water heater manufacturer who told him the water heaters were intended to be used at a source, such as a sink or bathtub—not to heat the water for an entire apartment. Read more at Schinnerer’s website…
Homer Watkins Engineering, a civil engineering firm, was retained to provide a limited inspection and design report for a historic building. Several years later, they provided an inspection report for the sale of the same building.
A painting contractor employee, who was working on the historic building, fell three stories sustaining serious injuries after the railing collapsed on a balcony he leaned against. The painting contractor employee filed suit claiming he was permanently, partially disabled and disfigured. After filing suit against a number of parties, Homer Watkins Engineering’s inspection report was found during discovery and the suit was amended to add them.
The painting contractor employee contended that while Homer Watkins Engineering’s inspection report put the new owner on notice that the railing was too low and posed a safety hazard, it did not go far enough in warning the owner that it should be fixed immediately. While it was felt the height of the railing had nothing to do with the fall, the defense counsel felt the inspection report should have been more detailed as it was dealing with a very old brick and wood building that may have had weaknesses requiring more investigation. Read more at Schinnerer’s website…
Protect yourself and your firm from situations like these by purchasing a Professional Liability policy tailored to the specific needs of design professionals. Our members are specialists in this field, so find and contact your local a/e ProNet broker today.
The February 2013 issue of ProNetwork News is the first installment of a two-part article; the author, Tim Corbett of SmartRisk explains the origins and principles of project coverage and introduces the reader to two of the four main types of Project Insurance.
Project insurance for design professionals was initially established to provide higher, dedicated limits for larger and more complex projects. The other main driving force behind the development of project coverage was to provide owners the security of having project specific limits both during and after the project was complete. Project insurance has evolved and continues to change based on market needs and conditions, as well as insurance company underwriting standards and “appetite,” or the desire to write certain kinds of risks.
More recently, the collaborative project delivery method sometimes referred to as the integrated delivery (ID) or integrated project delivery (IPD) process has impacted project insurance. In IPD, design professionals are no longer the sole authors of the project design: greater contributions are provided by other entities, including the general contractor and the major trade subcontractors. A few select insurance companies have begun to offer project specific policies tailored to the methods and exposures of IPD.
The key to selecting the correct coverage is theoretically simple: match the benefits of the insurance with the entity or entities requiring the protection. Will one option meet that goal? That’s a very good question: you may need a combination of alternatives to accomplish your insurance and risk management objectives. You should also be aware that even obtaining project insurance has been a challenge in the past, and continues to be so today. Continue reading “Project Insurance: Benefits and Cautions – Part 1 of 2”
Where does professional liability end and personal liability begin? For design professionals, the line can sometimes be fuzzy, especially with regard to personal injury claims.
Now, Florida’s lawmakers have taken steps to limit liability in for design professionals in these cases.
“On April 24, 2013 Governor Scott signed Senate Bill 286 into law creating section 558.0035, Florida Statutes. This new law grants individual design professionals employed by a business entity or an agent of the entity immunity from liability for economic damages resulting from negligence occurring within the course and scope of a professional services contract under the following conditions: (a) the contract is made between the business entity and a claimant or another entity for the provision of services to the claimant; (b) the contract does not name an individual employee or agent as a party to the contract; (c) the contract prominently states that an individual employee or agent may not be held individually liable for negligence; (d) the business entity maintains any professional liability insurance required under the contract; and (e) any damages are solely economic in nature and do not extend to persons or property not subject to the contract. The law takes effect on July 1, 2013 and does not state that it is retroactive…
This new law erodes Florida’s common law which has allowed professional negligence claims against an individual design professional based on the professional’s violation of her duty of care to those who may be foreseeably injured. Florida’s common-law imposes a duty of care on all individual professionals that exceeds the duty of care of the general public. Professionals, such as doctors, lawyers, accountants, and design professionals, have always been held to a higher standard of care and associated individual liability for professional negligence. This new law will afford design professionals protections that other professionals do not enjoy.”
Is it finally a good time to be an architect? We saw this question posed recently by ChicagoBusiness.com and, like many of you, we were excited to know the answer.
“I think there’s optimism—a very guarded optimism, given where we’ve been over the past four or five years,” says Scott Sarver, principal at Chicago-based SMDP LLC, which hopes to latch on to the better economy here, boosting its billings from domestic projects to 50 percent this year from 25 percent in 2012.
Among industry giants, San Francisco-based Gensler plans to add 50 professionals here through next year, to 273, says Nila Leiserowitz, a managing director in the Chicago office.
The pool of new architects is rising, too. Architecture schools awarded 10,252 degrees in the 2011-12 academic year, up 13 percent from 9,073 degrees in 2008-09, according to the National Architectural Accrediting Board.
Things a looking up. And if the “industry giants” are hiring to meet the increase in project opportunities, it’s also probable that seasoned professionals will take this chance to open their own shops. We hope so! Continue reading “A Good Time to be An Architect”
For design professionals, it’s good business to have a solid, fair contract in place before you begin work on a project. So, what are the three essential rules of putting together a construction contract? Our January 2013 ProNetwork News newsletter has the answer:
In the construction world, the contract rules the parties. It is the blueprint (pun intended) that says what you can be sued for, when you can sue the other party, and what your damages will be. If you do not have any written contract, the law presumes certain things that you may not want it to presume. Therefore, you must treat the contract seriously, and consider these three essential rules.
Put all agreements in writing
Negotiate or strike through unfair or one-sided terms
Deal with discrepancies between the Proposal for Services and the Contract
(1) Put all agreements in writing
Design professionals who rely on “handshake” or “gentlemen’s agreements” are playing a game of Russian roulette. One bad project, and you’ll wish that you had a well-written, reviewed and negotiated contract.
Written contracts are crucial to enforcing binding agreements once the dirt begins to turn. Memories fade, records are lost, and key employees leave. Having all the crucial terms in writing eliminates the need to argue over how changes are handled, how compensation issues are dealt with, and how disputes are decided.
(2) Negotiate or strike through unfair or one-sided terms
Design firms go through their Professional Liability insurance renewals annually. Did you know the insurance companies actually get reviewed annually, too?
One incentive to switch carriers is better risk management services. Her firm might recommend a switch, for instance, if a designer moves into a specialized industry sector, such as condominium design, or if an opportunity exists to lock in a fixed premium for multiple years.
But be careful. Pancoast says that firms that switch PLI carriers too frequently can sometimes find it difficult to find a willing insurer, particularly if a firm begins to experience claims or is driven back to the market by higher billings.
Residential work continues to generate a lot of claims, and schools and other public projects are beginning to experience claims increases.
Best practices for PLI coverage continue to include good communication and proper documentation.
It is no secret that in the current economic environment, it can be difficult to find projects, and the problem may not end there. It can be even more difficult to secure prompt payment from your client. Sometimes, it is difficult to secure payment at all.
There are certain statutory protections for architects in many states: design professionals’ liens for certain projects and mechanics’ liens for others. But like other legal remedies, statutory protections require timely legal action, and the legal fight can be both financially and personally arduous.
Most of the time, architects and other design professionals have one potential weapon in their arsenals that no one else on the project can bring to the unpaid fees fight: the ability to control the use of their work product through copyright protection. As long as the work product meets certain statutory requirements and their rights are not otherwise waived, design professionals own a copyright by authorship alone. Additionally, registering the copyright with the U.S. Copyright Office entitles the copyright owner to additional statutory damages and attorneys’ fees in any ensuing infringement action.
Copyright is an underutilized tactic in the fee collection “gun fight.” On a project where construction had been in full progress but is stalled because no one – design professionals, project manager, general, and subcontractors – has been paid by the owner, the standard litigation tactic is to sue for breach of contract and file an action for foreclosure on any lien rights. But what if the owner is also in default on its construction loan? Continue reading “Shootout At The Copyright Corral”
At its most basic level, risk management for design firms includes selecting and signing sound contracts. a/e ProNet’s Risk Management & Contract Guide for Design Professionals (2005) can assist with the specifics of this process.
