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Contract risk management Paying close attention, knowing what to look for, and including the firm’s attorney or insurance broker during contract review can help prevent uninsured claims. O P I N I O N
A key component of any architect or engineer’s (A/E’s) risk management plan must be evaluating and minimizing inappropriate risks assumed by contract. This can be a difficult undertaking in light of the pressures to win more work in a competitive market, inflexible project owners with high-priced lawyers, and governmental entities that have limited or no ability to modify their standard agreements.
Dan Knise
“Plans, drawings, and specifications should be
Even against this backdrop, it is critical for design professionals to review their contracts carefully before signing them. At the very least, they should seek to understand the additional risks and ideally mitigate them by modifying the contract wording. This may require input from a knowledgeable attorney and/or an experienced insurance broker, who can evaluate the contract against the insurance coverages the design professional carries. A few of the key issues to keep in mind during the contract review process are: ❚ ❚ Standard of care. Design professionals are, by law, held to a “standard of care” that does not require perfection. That is, unless you, by contract, give away this protection and accept a higher level of contrac- tual liability. Do not allow this to happen and be sure that any contract includes a reasonable standard of care clause. An example of “good” language is: “The Design Professional will perform its services us- ing the degree of care and skill ordinarily exercised by design professionals performing similar services in the same locality under similar circumstances and condi- tions.” ❚ ❚ Express warranties and guarantees. Keep in mind that the A/E’s professional liability insurance policy typically excludes any liability assumed by contract, unless the liability would have “existed in the ab- sence of the contract.” This includes any express warranties and guarantees and reinforces the impor- tance of avoiding contract phrases such as “fitness contracts carefully before signing them. At the very least, they should seek to understand the additional risks and ideally mitigate them by modifying the contract wording.” “It is critical for design professionals to review their
for use,” “time is of the essence,” “best,” “error-free,” etc. This issue is often misunderstood by project owners accustomed to working with contractors who have a very different risk-reward situation and often make explicit warranties regarding fitness for use, time of delivery, etc. ❚ ❚ Indemnification. Project owners, and their attor- neys, are often confused by this issue because of their experience working with contractors, who rely on their general liability insurance for their primary liability protection. General liability insurance poli- cies include broad contractual liability protection as a standard coverage, allowing these contractors to sign contracts with relatively onerous indemnifica- tion clauses. Meanwhile, the typical A/E insurance policy states that any “liability of others assumed under contract” is excluded, unless “the liability would have existed in the absence of the contract.” This is a very narrow coverage grant that limits a design professional’s protection to only those instances where the A/E is otherwise negligent. Any indemnification clause must be tied to negligence and, even then, only to the extent of this negligence. Absent this modifying language, there is the likelihood that any claim for indemnification will be uninsured. A related issue is the “duty to defend” (versus the duty to reimburse reasonable legal fees). Most insurers consider the duty to defend to be a con- tractual commitment that goes beyond the coverage provided under the professional liability insurance policy. This is because, at the time the duty to de- fend kicks in, there has been no finding of fault or considered as “instruments of service” representing the design professional’s intellectual property and requiring his/her authorization for any additional use.”
See DAN KNISE , page 4
THE ZWEIG LETTER JULY 20, 2015, ISSUE 1112
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