construction design professional insurance and indemnity
TRANSCRIPT
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
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TUESDAY, FEBRUARY 4, 2014
Presenting a live 90-minute webinar with interactive Q&A
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
C A R M E L / I N D I A N A P O L I S / M E R R I L L V I L L E , I N D I A N A
W W W . D S V L A W . C O M
E - M A I L : W K E L L E Y @ D S V L A W . C O M
T W I T T E R : @ W I L L K E L L E Y J R
F E B R U A R Y 4 , 2 0 1 4
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
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)
9
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
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
21
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
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
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)
CGL Insurance Professional Services Exclusion
29
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)
CGL Insurance Professional Services Exclusion
30
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)
CGL Insurance Professional Services Exclusion
31
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)
CGL Insurance Professional Services Exclusion
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
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)
CGL Insurance Professional Services Exclusion
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
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)
CGL Insurance Professional Services Exclusion
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
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).
CGL Insurance Professional Services Exclusion
43
PROJECT DOCUMENTATION AND INSURANCE
COVERAGE
Using Documentation For Risk Allocation Presenter:
John D. Broghammer
Greve, Clifford, Wengel & Paras, LLP
2870 Gateway Oaks Drive, Suite 210
Sacramento, CA 95833
Telephone: (916) 443-2011
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
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
Top 4 Non-Technical Risk Drivers
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Negotiation and Contracts
Client Selection Project Team Capabilities
Communication
2001
2012
Percentage of Claims Affected
Top 4 Non-Technical Risk Drivers
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Negotiation and Contracts
Client Selection Project Team Capabilities
Communication
2001
2012
Percentage of Claims Affected
Top 4 Non-Technical Risk Drivers
13%
16%
24%
27%
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Negotiation and Contracts
Client Selection Project Team Capabilities
Communication
2001
2012
Percentage of Claims Affected
Top 4 Non-Technical Risk Drivers
13%
16%
24%
27%
6%
23%
25%
39%
GET IT IN WRITING!!!
• 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
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
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
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
Top 4 Non-Technical Risk Drivers
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Negotiation and Contracts
Client Selection Project Team Capabilities
Communication
2001
2012
Percentage of Claims Affected
Top 4 Non-Technical Risk Drivers
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Negotiation and Contracts
Client Selection Project Team Capabilities
Communication
2001
2012
Percentage of Claims Affected
Top 4 Non-Technical Risk Drivers
13%
16%
24%
27%
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Yellow 2
R= 213
G= 206
B= 146
Orange 2
R= 203
G= 125
B= 101
Mag 2
R= 182
G= 114
B= 146
Red 2
R= 239
G= 63
B= 107
LG2
R= 156
G= 162
B=63
Green 2
R= 0
G= 137
B= 143
Cyan 2
R= 0
G= 182
B= 190
DB2
R= 0
G= 65
B= 89
Yellow
R= 255
G= 255
B= 0
Orange
R= 244
G= 121
B= 32
Magenta
R= 236
G= 0
B= 141
Red
R= 237
G= 28
B= 36
Lt Green
R= 141
G= 198
B= 63
Green
R= 57
G= 181
B= 74
Cyan
R= 0
G= 174
B= 239
Dk Blue
R= 45
G= 49
B= 146
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Negotiation and Contracts
Client Selection Project Team Capabilities
Communication
2001
2012
Percentage of Claims Affected
Top 4 Non-Technical Risk Drivers
13%
16%
24%
27%
6%
23%
25%
39%
SCOPE OF WORK
• 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
CRITICAL CONTRACT CLAUSES
A. Detailed Scope of Work Language.
B. Construction Administration Language.
C. Indemnity Clauses.
D. Standard of Care.
E. Miscellaneous. 70
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
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.
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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.
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Daily Field Reports
• Utilize standard limitation language in your reports and summary letters.
• Avoid expansive words and promises.
• When in doubt, briefly explain.
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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.
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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.
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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.
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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.
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CRITICAL CONTRACT CLAUSES
A. Detailed Scope of Work Language.
B. Construction Administration Language.
C. Indemnity Clauses.
D. Standard of Care.
E. Miscellaneous. 91
INDEMNITY
≈
INSURANCE
• "An indemnity contract resembles an insurance agreement.” (MacDonald & Kruse v. San Jose Steel
(1972) 29 Cal.App.3d 413, 420.).
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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.
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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.
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INDEMNITY
You do not generally have insurance coverage for
contractual defense and indemnity liability.!!!!
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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.)
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
“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.
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“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.
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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.
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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.
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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
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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.
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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.
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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.”
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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.
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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.
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NON-ASSIGNMENT
• Neither the Client nor the Architect shall assign this Agreement without the express written consent of the other.
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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.
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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.
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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.
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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.
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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.
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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
Website: http://www.greveclifford.com
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