Architects & Engineers - Contracts (Part 4): Insurable?

“Is it safe?” ~ Dr. Szell, Marathon Man (1976)

When I think of this topic (insurance and claims), I think of the gut-wrenching scene from the movie Marathon Man, where the villain, a Nazi war criminal in hiding, Dr. Christian Szell (Sir Laurence Olivier) tortures "Babe" (Dustin Hoffman), drilling his teeth without anesthetic, repeatedly asking him “is it safe” in reference to stolen diamonds that Szell thinks Babe has.

Professional liability claims aren’t much different, where the question, “is it safe,” manifests itself as “is it insured,” during a process (litigation) that feels much like torture for the design professional.

Unfortunately, the answer isn’t always clear, and is muddied in insurance policy language and reservation of rights letters.

Today’s topic will hopefully help answer this question. Babe answers Szell's question with a question:

“ I don't know what you mean. I can't tell you something's safe or not, unless I know specifically what you're talking about.”

Like Babe (but without drilling), I’ll answer this question by addressing specifically what a professional liability policy is talking about (insures) and, more importantly, what it isn’t talking about (what isn’t insured).

In the most general sense, a professional liability policy insures costs and claims for damages to third parties which may arise out of an act, omission or breach of a professional duty. It does not insure: (1) a contractually assumed liability (other than a promise to perform professional services within the standard of care), or (2) any duty beyond the customary “standard of care” for professional services.

The First Category - Contractually Assumed Liability

Let’s hit the big one first: taking contractual responsibility for your subconsultants, i.e., defense and/or indemnity for your subconsultant’s errors or omissions. This is not safe. You’ll see this in the indemnity section of the contract. If you cannot strike this entirely, there is a workaround: either (a) make your subconsultant defend and indemnify you outright for the subconsultant’s negligent services and/or (b) incorporate the terms of your agreement into the agreement with your subconsultant: this agreement incorporates all terms and conditions of Design Professional’s agreement with Client and Subconsultant assumes all obligations that Design Professional owes Client as it applies to Subconsultant’s services.

The next one: agreeing to defend the client. Clients typically slide a duty to defend alongside the indemnity language, but this is not safe - a professional liability policy does not insure this duty. In other words, professional liability insurance will not insure a claim “up front,” meaning that, no money will paid to someone other than the insured in response to a professional liability claim until liability is determined (at the end – settlement or final judgment). Even then, the client’s attorneys’ fees will not be insured. This means that if you agree to defend a client, don’t expect insurance to assume the defense of your client or pay its attorneys’ fees.

Some good news on indemnity: most states have anti "broad form" indemnity clauses. See Texas Insurance Code 151.102 and Texas Local Government Code 271.904 (this covers defense also). Meaning that if a client requires indemnity for all acts or omissions, without qualifying that the indemnity is limited solely to the architect’s/engineer’s negligence/breach of the standard of care, then the entire indemnity obligation is void and unenforceable by law. How to fix this so you don’t have to rely on a judge to properly apply the law? Add:

". . . in no event shall the architect/engineer provide indemnity other than for its own negligence or breach of the standard of care."

The Second Category - More Than Professional Negligence

Fiduciary Duties. I previously addressed “four-letter words:” (1) relationship of trust and confidence, (2) good faith and fair dealing, (3) best interests of owner. Professional liability policies generally cover “professional liability” claims – not a higher standard of care, which a fiduciary duty is. Strike this whenever possible.

Warranties. A warranty is any promise, such as “error-free design,” or that “design will comply with all applicable laws.” This goes for statements about budgets, schedules, and even LEED or other green projects. Any promise that the project will meet a particular standard of performance (other than the standard of care) is a warranty. These promises are not safe - they are not insured.

As discussed before, modify so the duty is for design in conformance with the standard of care (not error-free) and use professional care to comply with applicable laws (and not responsible for the interpretation of applicable laws by others).

As to budget, I like to add the following language:

"Client recognizes that Design Professional does not have control over the cost of labor, materials or equipment, over the methods of determining bid prices, or over competitive bidding, market or negotiating conditions; accordingly, Design Professional cannot and does not warrant or guarantee a stipulated or guaranteed construction cost, or that bids or negotiated prices will not vary from the Client’s project cost estimate or from any estimate of construction cost or evaluations."

With regard to scheduling, I add:

"In all cases Client acknowledges and agrees that timing of the services is subject to Consultant’s obligation to comply with the Standard of Care and is subject to extension for reasonable cause, such as delays caused by circumstances beyond Consultant’s control or other unforeseeable circumstances."

 If LEED or other green standards are at issue, I include that the architect/engineer will “endeavor” to achieve LEED silver (gold, etc.), but that design professional does not certify or warrant that the project will achieve any particular standard.

Finally, know that not all insurance policies are created equal. Visit with your attorney or an insurance professional steeped in design professional coverage to ensure you get what you pay for.

For that matter, while insurance companies oftentimes control who your attorney is, be sure that the attorney of your choosing is allowed to represent you before you buy insurance. Believe it or not, you can negotiate this in advance when you buy insurance and pick your own counsel.

Next time (it’s October): Is Your Contract a Treat or Trick?