Subcontractor Archives

Design Professionals and the Give-and-Take of “Standard Contracts”

By Lynda

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.

Demanding General Contractors and How to Meet Them Halfway

By Lynda

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.

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.

Certificates of Insurance: Why You Can’t Always Have It Your Way

By Lynda

Design professionals are often asked by their clients to sign contracts that include comprehensive—sometimes unreasonable—insurance requirements and indemnification terms. These are usually drafted with the goal of protecting owners, clients, contractors, or other project participants. But how does this work when the required coverages aren’t found in the commercial insurance marketplace?

Certificates of insurance (COIs)—which are also often requested in those professional service contracts—provide summaries or verification of current coverage, including policy effective dates, insurers, and certain policy limits. A certificate gives a snapshot to the requestor (usually known as the certificate holder) for informational purposes. It’s important to understand that in no way does a certificate endorse, amend, alter, or extend coverage; nor does it act as a contract. Certificates are often provided using a set of industry standard forms produced by ACORD (formally known as the Association for Cooperative Operations Research and Development), which indicate:

THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS ON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE REPORTED BY THE POLICIES DESCRIBED BELOW.

Issuers of COIs generally strive to accurately reflect the insurance policies that are in effect, but those who are relying on the forms need to keep in mind that it’s virtually impossible to summarize an insurance policy of over a hundred pages in a form that contains a few boxes. Adding to this, those who are issuing insurance certificates often struggle as they try to confirm in a COI that specific and detailed contractual requirements are—or aren’t—being met.

One common challenge is meeting a request that an insurer provide notice of a policy’s cancellation to the insured’s clients. To do so, the insurer would need to track all such requirements for all insureds for the duration of each contractual requirement—which may even be unspecified. With this in mind, ACORD made changes in 2010 to clarify that insurers’ notification duties are as defined in the insurance policy, not in the professional services contract.

Generally, courts agree that a certificate of insurance is not a contract. One fundamental reason is that no consideration—or payment—is given by the certificate holder to the issuer. However, there is a duty to make accurate representations within the confines of the overall system. To consider this, we’ll review a few recent cases interpreting the obligations for COIs and their issuers. Continue reading “Certificates of Insurance: Why You Can’t Always Have It Your Way”

The Down-Low on Broker-Verification Questionnaires

By Lynda

In 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”

Drones: Should Architects & Engineers use them?

By Lynda

They offer a bird’s eye view of construction sites. They provide breathtaking photographic opportunities for architects looking to showcase their work. And they’re fun to fly. However, while they may be intriguing tools for architects and engineers, drones open up the design firms that use them to many possibly unanticipated risks. These days, obtaining a drone is as simple as stopping at your local WalMart, but all drones are not created equal, nor are all drone pilots equally skilled and certified.

Victor O. Schinnerer’s Risk Management Blog recently offered an overview of this issue. Should your design firm use a drone in your administration of contracted services? Read on:

“Professional service firms have to be aware that the use of drones is not a simple transition in the process of observing the work on a project site. As with web cameras, drone cameras often produce far more images than are used in the evaluation of a project. If not properly denoted in a contract, the scope of the firm’s services could include the use of all the available images as part of the firm’s duty to observe and evaluate the project as part of construction contract administration duties.

“Additionally, while licensed drone operators are undoubtedly careful about having general liability insurance that protects others from their negligence in aerial activities, and follow the FAA’s rules and guidelines, many firms using drone photography are doing so as amateurs. Turning hobby activities into commercial uses is likely to be unlawful, dangerous, and uninsured.”

Continue reading Drone use can put firms at risk beyond their knowledge by Frank Musica

Risk of Misclassifying Employees vs. Independent Contractors

By Lynda

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!

To Report or Not To Report? A Potential Claims Question…

By Lynda

Before a design professional decides whether or not to report a professional liability claim, or circumstance out of which a claim might arise, he or she must understand the definition of a claim, circumstance and what is required of them under their policy. The pros and cons of reporting or not reporting a claim are more fully explored in this Practice Notes.

Why Firms Neglect to Report Claims

From an insurance provider’s point of view, it seems that design firms faced with a claim (or a potential claim) too often come close to jeopardizing their professional liability insurance (PLI) coverage. Many firms resist calling their insurance provider to report the matter or ask for advice. Their reasons tend to fall within one of four categories:

Ignorance. They do not realize what their policy requires of them when they are presented with a claim or possible claim.

Fear. They fear the black mark on their claim history more than they fear the claimant.

Denial. They believe that ignoring the problem will produce the best result.

Resolve. They have read their policies, understand the risks, embraced that the issue exists andafter this careful analysis, choose not to report.

Know Your Terminology

Claims

It is critical that insurance policyholders understand their duties, responsibilities, and benefits under their PLI contract. One of the duties is to report all claims promptly.

What defines a claim? Most policies refer to it as a “demand for money or services.” So the telephone call from the angry client asking you to pay for damages they believe they have suffered as a result of your professional services would rise to the definition of “claim” under most policies.

Why is this definition important? Remember, you must report claims promptly. Failure to meet your obligations under the insurance policy may jeopardize your coverage.

Possible claims

It is important to know how your insurance policy defines a “claim” versus a “possible claim.” Possible claims typically do not rise to the definition of “claim” but could become one. Policies generally define possible claims as “a circumstance from which you reasonably expect that a claim could be made.”

Are you required to report these instances to your insurance company? Maybe. Most policies read, “if you report a circumstance,” but some state, “you must give written notice.” The circumstance provision in most policies goes on to say that if you follow the reporting requirements, “then any claim that may subsequently be made against you arising out of such circumstance shall be deemed to have been made on the date the insurance company received written notice of the circumstance.”

With some policy forms, firms have a fair amount of discretion on whether to report a “circumstance,” unlike the requirement that you promptly report all claims. Keep in mind that most PLI policies for design firms are claims-made, which means that insurance cove rage is not retroactive to an unreported occurrence. Continue reading “To Report or Not To Report? A Potential Claims Question…”

Construction Phase Services: Considerations for a Successful Outcome

By Lynda

The 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”

Subcontract Termination: The right business decision?

By Lynda

Sometimes the grounds for termination are absolutely clear. And sometimes several legal options are available. But when preparing to terminate a subcontract, there’s one more question to ask: Is this the right business decision? We turn to Burns Logan’s Southeast Construction Law Blog for the answer.

The following is an excerpt from a September 2014 post on the blog titled Subcontract Termination: Not for the Faint of Heart:

After a few weeks of poor performance by the stucco subcontractor, my client and I sat down to determine all the possible avenues to resolve the issues. The first thing we did was pull out the subcontract which controlled the stucco subcontractor’s work. We wanted to be sure that the subcontract included all the necessary provisions to allow my general contractor client to remedy the situation. Some of the common default provisions in subcontracts include:

failure to prosecute the work promptly and with due diligence;
failure to prosecute the work in a workmanlike and safe manner;
failure to supply proper supervision;
failure to properly staff the job;
failure to supply materials and equipment of proper quality and quantity;
failure to promptly correct defective or deficient work;
failure to pay sub-subcontractors or suppliers;
failure to maintain the project schedule as directed by the contractor; and
failure to submit proper progress and completion schedules.

We found that this subcontractor had violated many of the standard default provisions in my client’s subcontract. Therefore, we felt we had the proper authority to issue notices of default.

Continue reading “Subcontract Termination: The right business decision?”