Construction Design Professional Insurance and Indemnity

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Presenting a live 90-minute webinar with interactive Q&A Construction Design Professional Insurance and Indemnity: Reconciling Coverage With Contractual Risks Assessing Indemnification, Additional Insured and Other Service Provider Agreement Terms to Ensure Adequate Coverage

TUESDAY, FEBRUARY 4, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Today’s faculty features:

John D. Broghammer, Partner, Greve Clifford Wengel & Paras, Sacramento, Calif. William E. Kelley, Attorney, Drewry Simmons Vornehm, Carmel, Ind.

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Construction Design Professional Insurance and Indemnity: Reconciling Coverage With Contractual Risks

WILLIAM E. KELLEY, JR. DREWRY SIMMONS VORNEHM, LLP CARMEL/INDIANAPOLIS/MERRILLVILLE, INDIANA WWW.DSVLAW.COM

E - MAIL: [email protected] T W I T T E R : @ WILLKELLEYJR

FEBRUARY 4, 2014

Overview

 Overview of Professional Liability Insurance  Intended Coverage  Common Exclusions  Overview of CGL Insurance  Intended Coverage  Common Exclusions  Overlap in Coverage  The Professional Liability Exclusion Professional Liability Insurance

Professional Liability

1. Commonly referred to as “errors and omissions”, “E&O” or “E/O” insurance policies

2. Provide coverage for claims arising from negligent acts, errors or omissions during the performance of a design professional’s services Professional Liability

3. An E&O policy is intended to insure against liability arising out of the mistakes inherent in the practice of that particular profession or business. National Ben Franklin Ins. Co. of Illinois v. Calumet Testing Services, Inc., 60 F.Supp.2d 837 (N.D. Ind. 1998).

4. An E&O insurer does not have the duty to indemnify for the malicious and intentional, rather than careless and negligent, acts of the insured. Stevenson v. Hamilton Mut. Ins. Co., 672 N.E.2d 467 (Ind. Ct. App. 1996)

Professional Liability

5. Typically “claims-made” policies

6. Under “claims-made” policy, coverage is provided for alleged acts, errors or omissions, so long as the claim is made within the applicable policy period

10 Professional Liability

7. Typically include “defense within limits” or “expenses within limits” provision

8. A “defense within limits” provision provides that every dollar spent on defense costs and litigation expenses “erodes” or diminishes the amount available under the insurance policy to satisfy settlements or judgments

11 Professional Liability

9. When the policy limits are exhausted, the insurer’s obligation to provide coverage and a defense terminates, and the insured is exposed to any additional liability for both defense costs and any resulting settlement or judgment

12 Professional Liability

10. E&O policies are commonly referred to as “cannibalizing,” “self-consuming,” or “self- liquidating” policies, or as policies with “wasting,” “eroding,” or “exhausting” limits

13 Professional Liability Common Exclusions 1. Claims arising from dishonest, intentional fraudulent, malicious, willful or knowingly wrong acts

2. Express warranties

3. Consulting in the area of asbestos abatement or hazardous waste

14 Professional Liability Common Exclusions 4. Claims made against the design professional by an entity partly owned by the design professional

5. Claims that arise from actual construction services (i.e., construction, assembly, fabrication, installation, demolition, excavation) performed by the design professional

15 Professional Liability Common Exclusions

6. Wrongful acts that occurred prior to the effective date of the policy—unless there is a prior acts endorsement

16 Commercial General Liability (CGL) Insurance

17 CGL Insurance

1. Provides coverage for damages relating to tort liability, as opposed to contractual liability or professional liability for defective work or services

2. Intended for tort liability for physical damages to others, and not for contractual liability of the insured for economic loss suffered because the completed work is not what the damaged person bargained for

18 CGL Insurance

3. Covers “accidents” or “an unexpected happening without an intention or design.”

4. CGL insurance does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident R.N. Thompson & Associates, Inc. v. Monroe Guar. Ins. Co., 686 N.E.2d 160 (Ind. Ct. App. 1997)

19 CGL Insurance

5. Typically an “occurrence-based” policy

6. Under “occurrence-based” policies, there may be coverage for alleged acts, errors or omissions that occurred during the applicable policy period, so long as the act, error, or omission giving rise to the claim actually took place during the applicable policy period

20 CGL Insurance

7. Typical CGL policy has two separate and distinct protections:

a. Agreement to indemnify the insured in amount not to exceed policy limits; and

b. Agreement to provide unrestricted defense against claims

CGL Insurance

8. This means that the policy limits are independent and separate from the defense costs incurred—no eroding policy limits relative to defense costs

22 CGL Insurance Common Exclusions

1. Expected or intended damages

2. Contract liability

3. Worker’s Compensation

4. Pollution

23 CGL Insurance Common Exclusions

5. Property damage to “your work”

6. Express warranties

7. Professional services

24 Overlap in Coverage: The Professional Services Exclusion

25 CGL Insurance Professional Services Exclusion

1. CGL policy will not cover damages arising from the performance of professional services, which include (a) preparation of drawings; (b) preparation of specifications; (c) supervisory activities; (d) inspection services; (e) architectural services; and (f) engineering services

26 CGL Insurance Professional Services Exclusion

2. The Policy: A general liability policy is not a substitute for a professional “errors and omission” or malpractice policy. Erie Ins. Group v. Alliance Environmental, Inc., 921 F.Supp. 537 (S.D. Ind. 1996)

27 CGL Insurance Professional Services Exclusion

3. Professional Services Defined: “A professional act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or skill, and the skill involved is predominantly mental or intellectual, rather than physical or manual. Terre Haute First Nat’l Bank v. Pacific Employers Ins. Co., 634 N.E.2d 1336 (Ind. Ct. App. 1993)

28 CGL Insurance Professional Services Exclusion

4. Professional Services Further Defined: “any business activity conducted by the insured, which involves specialized knowledge, labor or skill, and is predominantly mental or intellectual as opposed to physical or manual in nature.” Hurst-Rosche Engineers, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336 (7th Cir. 1994)

29 CGL Insurance Professional Services Exclusion

5. Another Definition: “Acts which could be done by an unskilled or untrained employee are not subject to a professional services exclusion. Professional services involve discretion acquired by special training and the exercise of special judgment.” Thermo Terratech v. GDC Enviro-Solutions, Inc., 265 F.3d 329 (5th Cir. 2001)

30 CGL Insurance Professional Services Exclusion

6. The Erie Definition: When the professional draws upon (or at least should draw upon) his or her professional knowledge, experience and training in taking some action, that is a professional service for insurance purposes. Erie Ins. Group v. Alliance Environmental, Inc., 921 F.Supp. 537 (S.D. Ind. 1996)

31 CGL Insurance Professional Services Exclusion

Exclusion Applies: Engineering firm sued for defamation and tortious interference with contract for writing highly critical letter about contractor to company issuing performance bond. Exclusion applied because the letter was written in the course of its professional services. Hurst-Rosche Engineers, Inc. v. Hartford Accident & Indemnity Co., 51 F.3d 1336 (7th Cir. 1994)

32 CGL Insurance Professional Services Exclusion

Exclusion Applies: Contract required architect to “endeavor to guard” the owner against defects and deficiencies in the contractor’s work. Owner sues architect for deficient work by contractor, alleging architect failed to properly supervise the work. Court finds that the exclusion applied. Prisco Serena Sturm Architects, LTD v. Liberty Mut. Ins. Co., 126 F.3d 886 (7th Cir. 1997)

33 CGL Insurance Professional Services Exclusion

Exclusion Applies: Architect sued after parking garage collapse; Court applies test: “whether a substantial nexus exists between the context in which the acts complained of occurred and the professional services performed”. Finds supervision of A/E work is a professional service. Wimberly Allison Tong & Goo, Inc. v. Travelers Property Casualty Company of America, 559 F.Supp.2d 504 (D. New Jersey 2008).

34 CGL Insurance Professional Services Exclusion

Exclusion Applies: Engineer sued after trench collapse. Court finds that exclusion applies because Complaint did not “allege that it was improper performance of engineer’s non-technical activities that caused the injuries”, but explicitly alleged liability stemmed from breach of professional duties as engineer. QBE Insurance Corporation v. Brown & Mitchell, Inc., 591 F.3d 439 (5th Cir. 2009).

35 CGL Insurance Professional Services Exclusion

Exclusion Applies: Court finds claims against design professional excluded under professional liability exclusion, even for actions that did not require “specialized knowledge” because actions in question occurred in the course of performance of the professional service. Admiral Insurance Company v. Ford, 604 F.3d 420 (5th Cir. 2010).

36 CGL Insurance Professional Services Exclusion

7th Circuit Observation: “If someone entering [the architectural firm’s] trailer at the construction site were to slip and fall and then file an injury against [the architectural firm], [the insurer’s] CGL policy would provide coverage. Or, where an [architectural firm] employee were to leave a coffee pot on after departing for the day, resulting in a fire that caused damage to the construction project, claims based on that occurrence would be covered by the CGL policy.” Prisco Serena Sturm Architects, LTD v. Liberty Mut. Ins. Co., 126 F.3d 886 (7th Cir. 1997)

37 CGL Insurance Professional Services Exclusion

Exclusion Does NOT Apply: Engineering firm sued for failure to locate underground pipelines; when digging trench, worker struck underground pipeline and caused damage. Court finds that determining location of underground pipelines was not a contractual obligation undertaken by the engineer, and thus exclusion did not apply Aetna Fire Underwriters, Ins. Co. v. Southwestern Engineering Co., 626 s.E.2d 99 (Tex. App. 1981)

38 CGL Insurance Professional Services Exclusion

Exclusion Does NOT Apply: Engineer contracted to perform inspection services. Court finds that alleged failure to make sure that contractor remained in compliance with both its contract and relevant safety laws did not require “engineering acumen”, but rather “normal powers of supervision and observation.” Reliance Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 262 A.D.2d 64 (N.Y.A.D. 1999)

39 CGL Insurance Professional Services Exclusion

Exclusion Does NOT Apply: Engineer disconnects power to incinerator’s cooling system and causes fire. Court finds actions at issue could have been performed by individuals with no engineering training or no ability to exercise special judgment unique to the field of engineering, so exclusion did not apply. Thermo Terratech v. GDC Enviro-Solutions, Inc., 265 F.3d 329 (5th Cir. 2001).

40 CGL Insurance Professional Services Exclusion

Exclusion Does NOT Apply: Engineer hired to supervise project site and report on work of contractors. Injured worker sues for negligent supervision. Court finds act in question (supervision of cement head removal) did not require professional engineering expertise, so exclusion did not apply. Cochran v. B.J. Services Co., USA, 302 F.3d 499 (5th Cir. 2002).

41 CGL Insurance Professional Services Exclusion

Exclusion Does NOT Apply: Engineer sued for “negligent supervision” of wastewater treatment plant after worker injury. Court finds “supervisory” services can include purely professional activities, or more broad services that include non- professional activities. Due to ambiguity, insurer had a duty to defend. Camp Dresser & McKee, Inc. v. Home Ins. Co., 568 N.E.2d 631 (Mass. App. 1991).

42 CGL Insurance Professional Services Exclusion

Exclusion Does NOT Apply: Several courts have found that the exclusion does not apply to failure to warn of a known danger and misrepresentation of a condition as safe, when it is known to be dangerous. St. Hudson Engineers, Inc. v. Pennsylvania National Mut. Cas. Co., 909 A.2s 1156 (N.J. Super. 2006); Gregoire v. AFB Const. Inc., et al., 478 So.2d 538 (La. App. 1985).

43 Practice Pointers

William E. Kelley, Jr. www.DSVlaw.com

E-mail: [email protected] Twitter: @willkelleyjr

45 PROJECT DOCUMENTATION AND INSURANCE COVERAGE Using Documentation For Risk

Presenter: Allocation John D. Broghammer Greve, Clifford, Wengel & Paras, LLP 2870 Gateway Oaks Drive, Suite 210 Sacramento, CA 95833 Telephone: (916) 443-2011 [email protected] Website: http://www.greveclifford.com YOUR ENEMY IS YOU!!

• Per a large A/E insurance carrier, a dispute is ALMOST ALWAYS caused by a documentation error— not a design error.

– 1. No or poorly drafted contracts;

– 2. Failure to manage expectations;

– 3. Failure to document and follow up.

47 Top 4 Non-Technical Risk Drivers

Yellow Yellow 2 R= 255 R= 213 G= 255 G= 206 B= 0 B= 146 Orange Orange 2 R= 244 R= 203 G= 121 G= 125 B= 32 B= 101

Magenta Mag 2 R= 236 R= 182 G= 0 G= 114 B= 141 B= 146 Red Red 2 R= 237 R= 239 G= 28 G= 63 B= 36 B= 107 Lt Green LG2 R= 141 R= 156 G= 198 G= 162 B= 63 B=63 Green Green 2 R= 57 R= 0 G= 181 G= 137 B= 74 B= 143 Cyan Cyan 2 R= 0 R= 0 G= 174 G= 182 B= 239 B= 190 Dk Blue DB2 R= 45 R= 0 G= 49 G= 65 B= 146 B= 89

40% Yellow Yellow 2 R= 255 R= 213 G= 255 G= 206 2001 B= 0 B= 146 35% Orange Orange 2 2012 R= 244 R= 203 G= 121 G= 125 B= 32 B= 101 30% Magenta Mag 2 R= 236 R= 182 G= 0 G= 114 25% B= 141 B= 146 Red Red 2 R= 237 R= 239 G= 28 G= 63 20% B= 36 B= 107 Lt Green LG2 R= 141 R= 156 15% G= 198 G= 162 B= 63 B=63 Green Green 2 R= 57 R= 0 10% G= 181 G= 137 B= 74 B= 143 Cyan Cyan 2 R= 0 R= 0 5% G= 174 G= 182 B= 239 B= 190 Dk Blue DB2 0% R= 45 R= 0 G= 49 G= 65 Negotiation and Client Selection Project Team Communication B= 146 B= 89 Contracts Capabilities

40% Yellow Yellow 2 R= 255 R= 213 G= 255 G= 206 2001 B= 0 B= 146 35% Orange Orange 2 2012 R= 244 R= 203 G= 121 G= 125 B= 32 B= 101 30% 27% Magenta Mag 2 R= 236 R= 182 24% G= 0 G= 114 25% B= 141 B= 146 Red Red 2 R= 237 R= 239 G= 28 G= 63 20% B= 36 B= 107 16% Lt Green LG2 R= 141 R= 156 15% G= 198 G= 162 13% B= 63 B=63 Green Green 2 R= 57 R= 0 10% G= 181 G= 137 B= 74 B= 143 Cyan Cyan 2 R= 0 R= 0 5% G= 174 G= 182 B= 239 B= 190 Dk Blue DB2 0% R= 45 R= 0 G= 49 G= 65 Negotiation and Client Selection Project Team Communication B= 146 B= 89 Contracts Capabilities

© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO Top 4 Non-Technical Risk Drivers 45% Percentage of Claims Affected 39% 40% Yellow Yellow 2 R= 255 R= 213 G= 255 G= 206 2001 B= 0 B= 146 35% Orange Orange 2 2012 R= 244 R= 203 G= 121 G= 125 B= 32 B= 101 30% 27% Magenta Mag 2 R= 236 R= 182 24% 25% G= 0 G= 114 25% B= 141 23% B= 146 Red Red 2 R= 237 R= 239 G= 28 G= 63 20% B= 36 B= 107 16% Lt Green LG2 R= 141 R= 156 15% G= 198 G= 162 13% B= 63 B=63 Green Green 2 R= 57 R= 0 10% G= 181 G= 137 B= 74 B= 143 6% Cyan Cyan 2 R= 0 R= 0 5% G= 174 G= 182 B= 239 B= 190 Dk Blue DB2 0% R= 45 R= 0 G= 49 G= 65 Negotiation and Client Selection Project Team Communication B= 146 B= 89 Contracts Capabilities

• Contracts should be in writing and many states require a written contract with specific provisions for inclusion.

• Ancient Chinese proverb: “The faintest of ink is worth more than the strongest memory.”

52 FROM THE “DUH” FILES:

“An oral contract is not worth the paper it is written on.”

53 YOU DON’T WIN UNTIL YOU DRAG THE SIGNED CONTRACT HOME.

54 READ YOUR DAMN CONTRACT!!

I’ve never been told by any client embroiled in a lawsuit that he or she regretted taking the time to read and understand their contract.

Or reading or at least reviewing

their insurance policy. 55 Come on, you know this:

• Keep a copy of the contract in separate file.

• Add papers or e-mails that impact the contract and/or your scope of work.

• Scan your contracts and related documents an electronic file. 56 SUN TZU

“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand.”

• BE PREPARED….

57 Paris Hilton???

What the… what???

58 NEGOTIATIONS • Your contract is your friend…maybe your only friend on a project.

• It is the single most critical thing on a project.

• Never give contract negotiation short shrift.

• Never ignore your insurance policy as it

relates to your contractual scope of work. 59

NEGOTIATIONS

• Be specific. Let others review your drafts for content and errors.

• Better yet, use stock contracts (e.g., AIA).

• Read the RFP (or similar documents) closely and know whether you are insured for the work.

• Memorialize in writing additions/subtractions. 60 CRITICAL CONTRACT CLAUSES

A. Detailed Scope of Work Language.

B. Construction Administration Language.

C. Indemnity Clauses.

D. Standard of Care.

E. Miscellaneous. 61 Top 4 Non-Technical Risk Drivers

Yellow Yellow 2 R= 255 R= 213 G= 255 G= 206 B= 0 B= 146 Orange Orange 2 R= 244 R= 203 G= 121 G= 125 B= 32 B= 101

• From a prominent A/E insurance carrier re: Scope of Work claims/lawsuits:

“Failure to manage the owner’s expectations; failure to explain the scope of work and exclusions thereto.”

• This must be started during negotiations.

66 SCOPE OF WORK Should always be Exhibit A to your contract.

GOOD!!

UH…NOT GOOD

67 SCOPE OF WORK MATRIX

68 SCOPE OF WORK

69 CRITICAL CONTRACT CLAUSES

A. Detailed Scope of Work Language.

B. Construction Administration Language.

C. Indemnity Clauses.

D. Standard of Care.

E. Miscellaneous. 70 “YOU DO NOT INSPECT, ONLY

OBSERVE!!!!” 71 CONSTRUCTION ADMININISTRATION

• Construction observation is the periodic observation of completed work to determine general compliance with the plans, specifications and other project documents.

•IT IS NEVER, EVER, AN INSPECTION

72 CUSTOM AND PRACTICE

• Observation is the visual observation of the engineering system for general conformance with the approved plans and specifications.

• Inspection is the monitoring of materials and workmanship that are critical to the integrity of the project to ensure compliance with the approved plans, specifications and applicable laws. 73 74 SAMPLE PROBLEM: Contractor contract language

“best modern practice… highest, best and first class quality.” 75 Same Project…Architect’s Contract…

What does the owner reasonably expect if he expects the contractor to deliver the “highest, best and first class quality?” 76 SAMPLE PROBLEM

• The following language was contained in a construction/design defect problem.

• The claim is alleged to be between a $20-40 million dollar problem.

• Do YOU have insurance for this work or a claim of this size??

77 SAMPLE PROBLEM

• “[Design Professional] shall make…periodic on-site observations, not less than weekly…. Observations shall be conducted deliberately and thoroughly...”

• “Observations shall be for the purpose of ascertaining…that the …quality and detail of construction…complies with…the contract documents.” 78 EXPECTATIONS

• 1. Understand what the law in your state/locale requires.

• 2. Understand the local customs and practices.

• 3. Define your duties and rein in client expectations.

79 Daily Field Reports

• Keep out of other people’s business. Don’t deliberately look outside your area of expertise and scope of work.

• However, IF, and only IF, you see something, say something. Speak up when needed.

Daily Field Reports

• Be thorough. Document both what you saw and what you did (and did not see/do if relevant).

• Don’t assume anything and call the office for guidance.

• Know when to say “No” to poor construction and document your objections.

81 Daily Field Reports

• Utilize standard limitation language in your reports and summary letters.

• Avoid expansive words and promises.

• When in doubt, briefly explain.

REPORT LIMITATION LANGUAGE:

Limited observation services pursuant to the contract for this Project were performed in substantial accordance with the standard of care and generally accepted field observation practices for geotechnical entities under similar circumstances.

FOR EXAMPLE:

Any testing and information provided herein should not be taken as a guarantee of construction or a representation that the construction work is in conformance with the plans and specifications. No amount of testing or observation services relieves the contractor of his/her primary responsibility to perform construction work in conformance with the Project plans and specifications.

FOR EXAMPLE:

Testing services, if any, were done by representative sampling only as specifically directed and requested by the Client and/or Owner. Testing information and results are not intended to be a representation of site-wide conditions. Additional testing will be performed on a time and materials basis as requested by the Client and/or Owner.

85 CONSTRUCTION ADMINISTRATION BEWARE MISSION CREEP! Once you start to do something (e.g. inspecting, shop drawing review, warranty coordination, etc.) it will be expected that you continue to do it.

Don’t feed a stray cat.

86 THINGS THAT DRIVE INSURERS CRAZY

87 SAMPLE PROBLEM

NO!! YOU. DID. NOT. You arrived for “general observation” not 88 “inspection.” BAD GOOD!!!

AWFUL!!!! 89 OMG!!!

90 CRITICAL CONTRACT CLAUSES

A. Detailed Scope of Work Language.

B. Construction Administration Language.

C. Indemnity Clauses.

D. Standard of Care.

E. Miscellaneous. 91 INDEMNITY DESIGN OWNER PROFESSIONAL

INDEMNITY CLAUSE

92 INDEMNITY ≈ INSURANCE

• "An indemnity contract resembles an insurance agreement.” (MacDonald & Kruse v. San Jose Steel (1972) 29 Cal.App.3d 413, 420.).

93 INDEMNITY

• PURPOSE: Indemnity, like insurance, seeks to shift all or part of the risk of loss from Player A to Player B.

• Usually insurance clauses are strictly construed against insurers….not necessarily indemnity clauses.

94 INDEMNITY

• Insurer’s business model is to collect premiums and spread risk. Insurance works by receiving more premiums than the company pays out in benefits. You do not work this way.

95 INDEMNITY

You do not generally have insurance coverage for contractual defense and indemnity liability.!!!!

96 WHAT IS INSURANCE?

Third Party Insurance: A common definition of “insurance,” is a “contract whereby one undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event.” (1 Couch on Insurance (3d rev. ed. 2009) § 1:6, p. 1-16.)

97 INDEMNITY

“arising from an unknown or contingent event”

Contractual indemnity obligations are neither “unknown” or “contingent.” Indeed, the obligation is bargained for and voluntary. 98 INDEMNITY

What to look for….and why to look for it?

99 “Except to the extent of Contractor’s sole negligence or intentional misconduct, and without regard to any negligence or fault on the part of Consultant, Consultant agrees to defend and indemnify …Contractor from and against any and all claims, demands, losses, damages, … and/or liabilities …, arising out of, resulting from, or related to (a) the materials and services provided, (b) the performance or failure in performance of the work, (c) Consultant's contractual obligations, and/or (d)

…. 100 “Except to the extent of Contractor’s sole negligence or intentional misconduct....”

“Sole” and “solely” are red flag language in any indemnity clause.

It is a sure sign of trouble.

101 “and without regard to any negligence or fault on the part of Consultant”

This is not normally insurable. You do not have to be negligent to trigger the indemnity obligations—but you usually have to be negligent to trigger insurance.

102

“Consultant agrees to indemnify …, arising out of, resulting from, or related to…”

Again, possibly not insurable. Almost ANYTHING is “related to” your work. The plumber’s work is “related to” the mechanical engineer’s work. The framer’s work “arises out of” the architect’s design.

103 “Consultant agrees to defend and indemnify …Contractor from and against any and all claims, demands, losses, damages, … and/or liabilities….”

Normally, the duty to defend is very broad and also not insurable. In some states the duty to defend is automatically triggered by an indemnity obligation.

104 INDEMNITY

• The Consultant will indemnify the Client for actual damages for which the Client becomes liable if the damage upon which the liability is based was caused by the proven active negligence of the Consultant.

• If the Client is determined to be liable for damage caused by the proven active negligence of the Consultant, the Consultant will reimburse the Client for the reasonable value of the defense costs insured to defend against the damages caused by the Consultant’s proven negligence. 105

INDEMNITY

Suppose your Client insists that you defend it if it is sued. Then, use:

Consultant has no obligation to pay for Client’s defense costs until there is a final determination of liability. Consultant’s obligation to reimburse Client’s defense cost shall be limited to the Consultant’s percentage of liability based upon Consultant’s comparative fault.

106 HIRE A LAWYER!!

107 CRITICAL CONTRACT CLAUSES

A. Detailed Scope of Work Language.

B. Construction Administration Language.

C. Indemnity Clauses.

D. Standard of Care.

E. Miscellaneous. 108 STANDARD OF CARE

“A [professional] is negligent if he/she fails to use the skill and care that a reasonably careful [professional] would have used in similar circumstances. This level of skill, knowledge, and care is sometimes referred to as “the standard of care.””

Cal. Jury Instruction 600

109 STANDARD OF CARE

• As a general rule, NEVER, ever, agree to contract language that alters the standard of care. A higher standard, like indemnity, can impose liability for non-negligent conduct…and thus lead to no insurance.

110 STANDARD OF CARE

GOOD!

UH…NOT…GOOD!

Best means better than everyone else. 111 STANDARD OF CARE

• Perfection is not required.

• HOWEVER, you are generally held to a higher standard when performing inspections.

• Explain in the contract that perfection is not the standard.

112 STANDARD OF CARE

“C. Performance Standard. Architect’s services provided under this Agreement shall be performed and completed pursuant to generally accepted standards of professional practice, skill and care in effect at the time of performance, as expeditiously as is consistent with professional skill and care and the orderly progress of the Project. “

Many pages later in the same contract…..

“E. Architect will perform the Services in accordance with the highest standard of care and practice appropriate to the nature of the technical and professional services rendered.”

113 STANDARD OF CARE

This is in the Prime Agreement. Any blanket promise to correct defects may alter the standard of care.

Are you insured for this? 114 STANDARD OF CARE • Beware of warranties, guarantees, and certifications which effectively turn the Standard of Care into a promise of perfection.

• You normally do not have insurance coverage for such warranties, guarantees, and certifications.

115 CRITICAL CONTRACT CLAUSES

A. Detailed Scope of Work Language.

B. Construction Administration Language.

C. Indemnity Clauses.

D. Standard of Care.

E. Miscellaneous. 116 THIRD PARTY BENEFICIARY

• The Architect’s services under this Agreement are being performed solely for the Client's benefit, and no other party or entity shall have any rights or a claim against the Architect ….

• This provision may be waived only by express written consent of the Architect.

117 NON-ASSIGNMENT

• Neither the Client nor the Architect shall assign this Agreement without the express written consent of the other.

118 119 MISCELLANEOUS

1. Billing and Payment Provisions: Payment terms, interest, attorney fees and collection cost provisions. Terms for suspension or termination for non-payment. 2. Certifications, Guarantees & Warranties: Delete whenever possible. Delete an agreement for code compliance or that construction will be pursuant to “all laws, regulations and codes.” Some state laws define “certify” for architects and engineers to mean only an expression of opinion, not a warranty or guarantee.

3. Arbitration and Dispute Resolution: Generally avoid mandatory arbitration provisions. Other forms of dispute resolution are acceptable. 120 MISCELLANEOUS

4. Job Site Safety: You should not be responsible (directly or indirectly) for job site safety. You should not be responsible for construction means and methods. Ensure language that keeps these responsibilities with contractor or owner. 5. Liquidated Damages: Liquidated damages provisions should not be included in your contract. There are too many variables not in your control as the designer. 6. Limitation of Liability: Where possible insert limitation of liability clause or some type of cap on damages. Be willing to receive a lower fee to obtain this protection. Try to limit damages to “available insurance limits” or similar insurance limitations. 121

MISCELLANEOUS

7. Attorney Fees & Costs: Generally delete all such clauses where possible. Or, limit the clause to very specific disputes, such as fee disputes. 8. Insurance Requirements: Assure yourself that the owner agrees to what insurance is needed for a project (and make sure you AND subs comply). Many policies do not cover certain contractual risk assumptions. 9. Shop Drawing Review: Define shop drawing review responsibilities. Ensure non-responsibility shop drawings and that review is only for general plan conformance. Make sure owner and contractor know the scope of your review.

122 INSURANCE

Errors & Omissions Insurance is always “claims made,” meaning coverage is triggered by the date of a claim or suit—not the project date.

Claims made policies almost always have declining policy limits. Attorney fees and litigation costs reduce the policy limits.

Consider “project insurance” which covers a specific project rather than specific insureds. 123 INSURANCE

• Be aware: High deductibles can be fool’s gold. Deductibles must be paid by you first before the insurer will participate. A high deductible can bankrupt you.

• Some carriers do offer programs that allow you to spread out your deductible over time, such as a 20%/80% split or “first dollar defense” with the payment of the deductible later.

124 INSURANCE

•Buy enough primary E&O insurance!!

•Consider an umbrella or excess policy.

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INSURANCE

• Make sure your subconsulting contracts comply with insurance provisions of the prime contract.

• Have someone in your office responsible for obtaining Certificates of Insurance from your subs. Get renewal certificates annually.

• Have your insurance company review your contracts for coverage issues or lack of coverage.

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PROJECT DOCUMENTATION

Presenter: John D. Broghammer Greve, Clifford, Wengel & Paras, LLP 2870 Gateway Oaks Drive, Suite 210 Sacramento, CA 95833 Telephone: (916) 669-3905 [email protected] Website: http://www.greveclifford.com 127