design professional insurance: coverage andd clcontractual

Presenting a live 90‐minute webinar with interactive Q&A

Design Professional Insurance: E l i C d C l Ri kEvaluating Coverage and Contractual RisksReconciling Indemnification, Additional Insured and Other Terms of the Service Provider Agreement With Policy Provisions

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, NOVEMBER 15, 2012

Today’s faculty features:

William E. Kelley, Attorney, Drewry Simmons Vornehm, Carmel, Ind.

John D. Broghammer, Partner, Greve Clifford Wengel & Paras, Sacramento, Calif.

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Design Professional Insurance: Evaluating Coverage and Contractual RisksEvaluating Coverage and 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 MT W I T T E R : @ W I L L K E L L E Y J R

N O V E M B E R N O V E M B E R 1 5 , 2 0 1 2

Overview

Overview of Professional Liability Insurancey Intended Coverage Common Exclusions

Overview of CGL Insurance Intended Coverage Common Exclusions Common Exclusions

Overlap in Coverage The Professional Liability Exclusion The Professional Liability Exclusion

6

P f i l Li bili I Professional Liability Insurance

7

Professional LiabilityProfessional Liability

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

2. Provide coverage for claims arising from li i i d i negligent acts, errors or omissions during

the performance of a design professional’s services

8

Professional Liability

3 An E&O policy is intended to insure 3. An E&O policy is intended to insure against liability arising out of the mistakes inherent in the practice of that particular

f i b i 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 yintentional, rather than careless and negligent, acts of the insured. Stevenson v. Hamilton Mut Ins Co 672 N E 2d 467 (Ind Ct App 1996)Hamilton Mut. Ins. Co., 672 N.E.2d 467 (Ind. Ct. App. 1996)

9


5. Typically “claims-made” policies

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

ithi th li bl li i dwithin the applicable policy period

10


7. Typically include “defense within limits” 7 yp yor “expenses within limits” provision

8 A “defense within limits” provision 8. A defense within limits provision provides that every dollar spent on defense costs and litigation expenses “ d ” di i i h th t “erodes” or diminishes the amount available under the insurance policy to satisfy settlements or judgmentsy j g

11

P f i l Li bilitProfessional Liability

9 When the policy limits are exhausted the 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 is exposed to any additional liability for both defense costs and any resulting settlement or judgment

12


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

13

Professional LiabilityCommon Exclusions

1. Claims arising from dishonest, intentional fraudulent, malicious, willful or knowingly

rong actswrong acts

2. Express warranties

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

14

P f i l Li bilitProfessional LiabilityCommon Exclusions

4. Claims made against the design professional by an entity partly owned by the design professionalthe design professional

5. Claims that arise from actual construction i (i t ti bl services (i.e., construction, assembly,

fabrication, installation, demolition, excavation) performed by the design ) p y gprofessional

15

Professional LiabilityProfessional LiabilityCommon Exclusions

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

16

Commercial General Liability (CGL) Insurance

17

CGL Insurance

1 Provides coverage for damages relating to 1. Provides coverage for damages relating to tort liability, as opposed to contractual liability or professional liability for d f i k idefective work or services

2. Intended for tort liability for physical y p ydamages to others, and not for contractual liability of the insured for economic loss suffered because the completed work is 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 d i ”design.”

4. CGL insurance does not cover an accident 4of faulty workmanship but rather faulty workmanship which causes an accident R.N. Thompson & Associates, Inc. v. Monroe Guar. Ins. Co., p , ,

686 N.E.2d 160 (Ind. Ct. App. 1997)

19

CGL InsuranceCGL Insurance

5 Typically an “occurrence-based” policy5. Typically an occurrence-based policy

6. Under “occurrence-based” policies, there b f ll d t may be coverage for alleged acts, errors or

omissions that occurred during the applicable policy period, so long as the act, pp p y p , g ,error, or omission giving rise to the claim actually took place during the applicable policy periodpolicy period

20

CGL Insurance

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

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

b. Agreement to provide unrestricted defense against claimsg

21

CGL InsuranceCGL Insurance

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

22

CGL ICGL InsuranceCommon Exclusions

1. Expected or intended damagesp g

2. Contract liability

3. Worker’s Compensation

4 P ll ti4. Pollution

23

CGL InsuranceCGL InsuranceCommon Exclusions

5. Property damage to “your work”

6. Express warranties

7. Professional services

24

Overlap in Coverage:p gThe Professional Services Exclusion

25

CGL InsuranceProfessional Services Exclusion

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

i d (f) i i iservices; and (f) engineering services

26


2 The Policy: A general liability policy is not 2. The Policy: A general liability policy is not a substitute for a professional “errors and omission” or malpractice policy. Erie Ins. G Alli E i t l I 921 F S 3 (S D I d Group v. Alliance Environmental, Inc., 921 F.Supp. 537 (S.D. Ind.

1996)

27


3. Professional Services Defined: “A professional act or service is one arising p gout of a vocation, calling, occupation, or employment involving specialized knowledge labor or skill and the skill knowledge, labor or skill, and the skill involved is predominantly mental or intellectual, rather than physical or manual 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 any business activity conducted by the insured, which involves specialized knowledge, labor or skill, and is

d i tl t l i t ll t l predominantly mental or intellectual as opposed to physical or manual in nature.”Hurst-Rosche Engineers, Inc. v. Commercial Union Ins. Co., 51 g

F.3d 1336 (7th Cir. 1994)

29


5. Another Definition: “Acts which could be done by an unskilled or untrained done by an unskilled or untrained employee are not subject to a professional services exclusion. Professional services involve discretion acquired by special 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


6. The Erie Definition: When the professional draws upon (or at least professional draws upon (or at least should draw upon) his or her professional knowledge, experience and training in t ki ti th t i f i l taking some action, that is a professional service for insurance purposes. Erie Ins. Group v. Alliance Environmental, Inc., 921 F.Supp. 537 p pp

(S.D. Ind. 1996)

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 performance bond. Exclusion applied because the letter was written in the course of its professional services.

h i f d id & d i Hurst-Rosche Engineers, Inc. v. Hartford Accident & Indemnity

Co., 51 F.3d 1336 (7th Cir. 1994)

32


Exclusion Applies: Contract required architect to “endeavor to guard” the owner 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 for deficient work by contractor, alleging architect failed to properly supervise the work. Court finds that the exclusion

li d applied. Prisco Serena Sturm Architects, LTD v. Liberty Mut. Ins. Co., 126 F.3d 886 (7th Cir. 1997)

33


Exclusion Applies: Architect sued after parking garage collapse; Court applies parking garage collapse; Court applies test: “whether a substantial nexus exists between the context in which the acts complained of occurred and the complained of occurred and the professional services performed”. Finds supervision of A/E work is a professional

i service. Wimberly Allison Tong & Goo, Inc. v. Travelers Property Casualty Company of America, 559 F.Supp.2d 504 (D. New Jersey 2008).

34


Exclusion Applies: Engineer sued after trench collapse. Court finds that exclusion trench collapse. Court finds that exclusion applies because Complaint did not “allege that it was improper performance of engineer’s non technical activities that engineer s non-technical activities that caused the injuries”, but explicitly alleged liability stemmed from breach of

f i l d i i professional duties as engineer. QBE Insurance Corporation v. Brown & Mitchell, Inc., 591 F.3d 439 (5th Cir. 2009).

35


Exclusion Applies: Court finds claims against design professional excluded against design professional excluded under professional liability exclusion, even for actions that did not require “specialized knowledge” because actions specialized knowledge because actions in question occurred in the course of performance of the professional service. Ad i l I C F d 6 F d ( th Ci 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 p y p p gthe 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 A hit t LTD Lib t M t I C 6 F d 886 ( th Ci Architects, LTD v. Liberty Mut. Ins. Co., 126 F.3d 886 (7th Cir. 1997)

37


Exclusion Does NOT Apply: Engineering firm sued for failure to locate underground pipelines; when digging underground pipelines; when digging trench, worker struck underground pipeline and caused damage. Court finds h d i i l i f d dthat determining location of underground

pipelines was not a contractual obligation undertaken by the engineer, and thus undertaken by the engineer, and thus exclusion did not applyAetna Fire Underwriters, Ins. Co. v. Southwestern Engineering

C 6 6 E d (T A 8 )Co., 626 s.E.2d 99 (Tex. App. 1981)38


Exclusion Does NOT Apply: Engineer contracted to perform inspection services. p pCourt finds that alleged failure to make sure that contractor remained in compliance with both its contract and compliance with both its contract and relevant safety laws did not require “engineering acumen”, but rather “normal powers of supervision and observation ”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


Exclusion Does NOT Apply: Engineer disconnects power to incinerator’s cooling 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 individuals with no engineering training or no ability to exercise special judgment unique to the field of engineering, so

l i did l exclusion did not apply. Thermo Terratech v. GDC Enviro-Solutions, Inc., 265 F.3d 329 (5th Cir. 2001).

40


Exclusion Does NOT Apply: Engineer hired to supervise project site and report 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 act in question (supervision of cement head removal) did not require professional engineering expertise, so exclusion did not

l apply. Cochran v. B.J. Services Co., USA, 302 F.3d 499 (5th

Cir. 2002).

41


Exclusion Does NOT Apply: Engineer sued for “negligent supervision” of wastewater for negligent supervision of wastewater treatment plant after worker injury. Court finds “supervisory” services can include purely professional activities or more purely professional activities, or more broad services that include non-professional activities. Due to ambiguity, i h d d d f d 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 courts have found that the exclusion does not apply to failure to warn of a known danger and misrepresentation of a

diti f h it i k t b condition as safe, when it is known to be dangerous.St. Hudson Engineers, Inc. v. Pennsylvania National Mut. Cas. g yCo., 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

44

THE ART OF WAR AND NEGOTIATION OF THE

A/E CONTRACT

Presenter:John D. Broghammer John D. Broghammer

Greve, Clifford, Wengel & Paras, LLP

2870 Gateway Oaks Drive, Suite 210

Sacramento CA 95833Sacramento, CA 95833Telephone: (916) 443-2011

[email protected]:

http://www.greveclifford.comp g

SUN TZUSUN TZU• Chinese Military Commander and Philosopher

• Historians estimate date of birth: 722-481 BC

• Read and quoted by Kissinger, Schwarzkopf, Patton, h l dMacArthur, Napoleon and even Tony Soprano.

47John Broghammer [email protected]

Even Paris Even Paris Hilton????

W.T.F.??


CONTRACT NEGOTIATIONSCONTRACT NEGOTIATIONS

d h f k d• “It is said that if you know your enemies and know yourself, you will not be imperiled in a h d d b l f d khundred battles; if you do not know your enemies but do know yourself, you will win

d l f d kone and lose one; if you do not know your enemies nor yourself, you will be imperiled in

l b levery single battle.” Sun Tzu


WHO IS YOUR CLIENT’S ENEMY

IN NEGOTIATIONS?IN NEGOTIATIONS?


Sun Tzu meet Pogo; SPogo meet Sun Tzu


Clients need to look in a mirror. A/Es are their own worst enemy.

• Per a prominent A/E insurer, studies have shown the genesis of most lawsuits, in one gway or another, is a contract problem.

– 1 No or poorly drafted contracts;1. No or poorly drafted contracts;– 2. Failure to manage owner’s expectations;– 3. Failure to document file and follow up (delay); 3. Failure to document file and follow up (delay);

and– 4. Not staying ahead of issues/problems.


Sooooo…………..why is ynegotiating so difficult?

• It is a very unsexy task for A/Es.

h d d f h d d f• They don’t get paid for the drudgery of contracting.

• The other side is actually fighting on issues which hi k id d f h iyou think are stupid-and some of these issues cannot

be insured.

A d C li P ll id “N b l l • And as Colin Powell once said: “No battle plan survives contact with the enemy.”


SUN TZU

“The general who wins the battle makesThe general who wins the battle makesmany calculations in his temple before thebattle is fought The general who losesbattle is fought. The general who losesmakes but few calculations beforehand.”

A/Es must prepare for contract negotiations and understand insurance implications.understand insurance implications.


PREPARATIONS FOR WARPREPARATIONS FOR WAR

The critical first thing in contract negotiations is to g gunderstand what the A/E is negotiating for.

“Thus it is that in war the victorious strategistThus it is that in war the victorious strategistonly seeks battle after the victory has been won;whereas he who is destined to defeat first fightsgand afterwards looks for victory.” Sun Tzu

In other words you and your client must know: In other words, you and your client must know: What is a “victory” in contract negotiations?


OVERALL STRATEGY FOR VICTORY IN NEGOTIATIONSIN NEGOTIATIONS

“If asked how to cope with a great host of the enemy If asked how to cope with a great host of the enemy in orderly array and on the point of marching to the attack, I should say: “Begin by seizing something , y g y g gwhich your opponent holds dear; then they will be amenable to your will.” Rapidity is the essence of

k d f h dwar, take advantage of the enemy’s unreadiness, make way by unexpected routes, and attack unguarded spots ” Sun Tzuunguarded spots. Sun Tzu


NEGOTIATIONSNEGOTIATIONS

• First, understand that negotiations are an exchange , g gof what each side “holds dear.” The owner/client has money and the A/E has their time/services.

• Second, negotiations are about personal relationships established before negotiating not relationships….established before negotiating, not during the process. The owner then holds the relationship “dear” with your client.


CONTRACTING BASICSCONTRACTING BASICS

• Contracts should be in writing and many Contracts should be in writing and many states require it, including specified provisions E g Cal Business and Professions Code provisions. E.g. Cal. Business and Professions Code sections 5536.22 (architects) and 6749 (engineers).

A i Chi b “Th f i f • Ancient Chinese proverb: “The faintest of ink is worth more than the strongest

”memory.”



A Detailed Scope of Work LanguageA. Detailed Scope of Work Language.

B. Construction Administration Inspection Services LanguageServices Language.

C. Third Party Beneficiary/Non A i LAssignment Language.

D. Indemnity Clauses.

E. Standard of Care.


SCOPE OF WORK SCOPE OF WORK “If words of command are not clear and distinct, if

d t th hl d t d th l i orders are not thoroughly understood, the general is to blame.”

Sun Tzu

The scope of work is THE critical provision. It defines EXACTLY what the A/E is going to do (and not do) Make these orders “clear and distinct” in your do). Make these orders “clear and distinct” in your negotiations.

M th li t’ t ti U d t d th t Manage the client’s expectations. Understand that some work the A/E may want may not be covered by insurance. E.g. construction management, design build, work out side the A/E’s stated field of practice.side the A/E s stated field of practice.


The Following is According to a CProminent Insurance Company

• Thi i h t t A/E i t bl t ft• This is what gets an A/E in trouble most often:

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

• This management must be started during negotiations.


SAMPLE ATTACHMENTSSAMPLE ATTACHMENTS


NASTY CLAUSESNASTY CLAUSESGOOD!!

AWFUL!!


NEGOTIATION TIPSNEGOTIATION TIPS

• If possible ALWAYS take the initiative to If possible, ALWAYS take the initiative to draft letters, memos, meeting minutes and contracts CONTROL THE NARRATIVEcontracts. CONTROL THE NARRATIVE.

“Th kill d i b i h • “Those skilled in war bring the enemy to the field of battle, and are not brought there b hi ” S Tby him.” Sun Tzu




B. Construction Administration or Inspection Services LanguageInspection Services Language.

C. Third Party Beneficiary/Non-A i LAssignment Language.




CONSTRUCTIONADMINISTRATION

• “Management of many is the same as management • Management of many is the same as management of few. It is a matter of organization.”

• “A leader leads by example not by force.”A leader leads by example, not by force.Sun Tzu

“Once construction has started CA is the quickestOnce construction has started, CA is the quickestway to expose yourself to liability.”John Broghammer

• Know the law and custom and practice in your state.


Cal. Business & Professions Code S i 5536 25(b)Section 5536.25(b)

• (b) The signing and stamping of plans specifications (b) The signing and stamping of plans, specifications, reports, or documents which relate to the design of fixed works shall not impose a legal duty or responsibility upon the person signing the plans, specifications reports or documents to observe the specifications, reports, or documents to observe the construction of the fixed works which are the subject of the plans, specifications, reports, or documents. However, this section shall not preclude an architect, pand a client from entering into a contractual agreement which includes a mutually acceptable arrangement for the provision of construction observation services This subdivision shall not modify observation services. This subdivision shall not modify the liability of an architect who undertakes, contractually or otherwise, the provision of construction observation services for rendering those

iservices.


Cal. Business & Professions Code S i 5536 25( )Section 5536.25(c)

• (c) “Construction observation services” • (c) Construction observation services means periodic observation of completed work to determine general compliance with the plans, specifications, reports, or other contract plans, specifications, reports, or other contract documents. However, “construction observation services” does not mean the superintendence of construction processes, site conditions, p , ,operations, equipment, or personnel, or the maintenance of a safe place to work or any safety in, on, or about the site. For purposes of thi bdi i i “ i di b ti ” this subdivision, “periodic observation” means visits by an architect, or his or her agent, to the site of a work of improvement.


CONTRACTUAL EXPECTATIONSCONTRACTUAL EXPECTATIONS


CONTRACTUAL FAILSCONTRACTUAL FAILSTerms from Contractor’s contract for major home remodel project ($1.5 million). Standard of care for contractor raised significantly.

“best modern best modern practice….highest, best and first class quality.”q y


ARCHITECT’S CONTRACTARCHITECT S CONTRACTArchitect’s contract language on same remodel project:

HUH!?!? Wise negotiations avoid these inconsistenciesinconsistencies.


ARCHITECT’S CONTRACTARCHITECT S CONTRACT

• Likely no coverage for highest, best and first class qualityclass quality.

• It pays for you clients to know what is in the contractor’s contract

The Other Side Re: C/AThe Other Side Re: C/A

• “Bring war materials with you from home Bring war materials with you from home, but forage on the enemy.” This is called, using the conquered foe to augment one’s using the conquered foe to augment one s own strength.” Sun Tzu

• The owner will forage on what you give. “Beware that no good deed will go unpunished.”

DO NOT VOLUNTEER C/A!!



A. Detailed Scope of Work Language.p g g


C. Third Party Beneficiary/Non-Assignment LanguageAssignment Language.




THIRD PARTY BENEFICIARY

• Nothing contained in this agreement shall create a contractual or legal relationship with, rights in favor of, or a cause of g p , g ,action in favor of any third party against the Engineer. The Engineer's services under this Agreement are being performed solely for the Client's benefit, and no other party

tit h ll h i ht l i i t th E i or entity shall have any rights or a claim against the Engineer because of this Agreement or the performance or nonperformance of services hereunder.

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


NON-ASSIGNABILITYNON ASSIGNABILITY• The Client and Engineer, respectively, bind themselves,

their partners successors assigns and legal their partners, successors, assigns, and legal representatives with respect to all covenants of this Agreement. Neither the Client nor the Engineer shall assign this Agreement without the express written assign this Agreement without the express written consent of the other. The Client may without written consent but with notice in writing, assign this Agreement to an institutional lender providing financing for the to an institutional lender providing financing for the Project. In such event, the lender shall assume all of the Client’s rights and obligations under this Agreement. Consent to assignment by either party shall g g y p ynot be unreasonably withheld.



A. Detailed Scope of Work Language.A. Detailed Scope of Work Language.

B. Construction Administration or Inspection Services Language.g g

C. Third Party Beneficiary/Non-Assignment Language.g g

D. Indemnity Clauses.E Standard of CareE. Standard of Care.


INDEMNITY CLAUSESINDEMNITY CLAUSES• “To the fullest extent provided by law” and “sole” or

“ l l ” i di t d fl l !! P d ith “solely” are immediate red flag language!! Proceed with extreme caution!!

• Indemnity duties not tied to negligent conduct. “Arising out of” or “connected with” covers any type of Arising out of or connected with covers any type of conduct related in any way to the services provided.


INDEMNITY CLAUSESINDEMNITY CLAUSES

• Technically, the plumber’s work “arises out of” and architect’s plans and specs.

• Technically, a framer’s work is “connected” in some way to a structural engineer’s designs some way to a structural engineer s designs.

• MANY CLAUSES CANNOT BE INSURED and • MANY CLAUSES CANNOT BE INSURED….and defense obligations almost never have coverage!!!


INDEMNITY CLAUSESINDEMNITY CLAUSES

• Make sure the indemnity clauses are Make sure the indemnity clauses are integrated with all subconsultants. The clauses should be the same clauses should be the same

or stronger down the line.Owner

Architect

SubsThe owner contract or prime contract should be pattached to sub-consultant contracts.


POSSIBLE CLAUSES TO USEPOSSIBLE CLAUSES TO USE

• The Consultant will indemnify the Client for actual ydamages 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.p g g

• If the Client is determined to be liable for damage caused by the proven active negligence of the Consultant, the C l ill i b h Cli f h bl 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.

• BOTH SHOULD PASS MUSTER WITH THE CARRIERCARRIER.


POSSIBLE CLAUSES TO USEPOSSIBLE CLAUSES TO USE• Consultant agrees to indemnify Client from liability for

damages arising out of the performance of Consultant’s damages arising out of the performance of Consultant s services to the extent such liability is actually caused by the Consultant’s negligent acts, errors or omissions.

• Consultant shall not be responsible for the client’s costs of defense.

• YOU SHOULD HAVE SOME LANGUAGE DELETING DEFENSE COSTS FROM THE INDEMNITY LANGUAGE!!!!

• Attorney fees are usually NOT covered by insurance.


POSSIBLE CLAUSES TO USEPOSSIBLE CLAUSES TO USE

• Suppose the owner insists the A/E defend it if it is d Th

ppsued. Then, use:

• Consultant has no obligation to pay for Client’s defense costs until there is a final determination of 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 p g y pConsultant’s comparative fault.

• OFTEN CARRIERS WILL PAY FEES AFTER A OFTEN, CARRIERS WILL PAY FEES AFTER A VERDICT. CHECK WITH THE CARRIER AND CASE LAW IN YOUR STATE.


HOW TO NEGOTIATE C A S SINDEMNITY CLAUSES

“O k h t ith t b i bl • “One may know how to conquer without being able to do it.” Sun Tzu

• MOST IMPORTANT: Understand most of the time the A/E cannot win, esp. with large owners and/or public entities. public entities.

• But, if you cannot walk away, you MUST at least come d d h i k d h i i dto understand the risks and what is not insured.





C. Third Party Beneficiary/Non-A i LAssignment Language.




STANDARD OF CARESTANDARD OF CARE

• Again, know the law!! It is like knowing the terrain in warfare.

• As a general rule, never negotiate a clause that tinkers with the standard of care You risk an tinkers with the standard of care. You risk an insurance coverage battle for your client.


STANDARD OF CARESTANDARD OF CARE

**I could find no California case defining what “best efforts” means.**


EGO = Bad Contract


NEGOTIATING OWNER A C AC SGENERATED CONTRACTS

ALLIESALLIES

Many insurance companies and large insurance brokers y p ghave great resources for contract negotiation. Many have publications or “Contract Review Checklists.”

Many insurance companies or brokers will review A/E contracts for insurance coverage issues to help you spot

bl i t tiproblems prior to execution.


OTHER TROUBLESOME CLAUSES AFOR NEGOTIATION

1. Billing and Payment Provisions: Payment terms, g y yinterest, attorney fees and collection cost provisions. Terms for suspension or termination for non-payment.p y

2. Certifications, Guarantees & Warranties: Delete whenever possible Delete an agreement for code 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 define certify for architects and engineers to mean only an expression of opinion, not a warranty or guarantee. No insurance for these.



• 3. Arbitration and Dispute Resolution: My b a a d pu u Myview: generally avoid mandatory arbitration provisions. Other forms of dispute resolution are

blacceptable.

• 4. Job Site Safety: A/E should not be responsible J y p(directly or indirectly) for job site safety. A/E should not be responsible for construction means

d h d N i l h k and methods. Negotiate language that keeps these responsibilities with contractor or owner.



5. Liquidated Damages: Liquidated damages qu da d a ag qu da d da agprovisions should be negotiated out of the contract. There are too many variables not in the

l f h dcontrol of the designer.

6. Limitation of Liability: Where possible i li i i f li bili lnegotiate a 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 lower fee to obtain this protection. Try to limit damages to “available insurance limits” or similar insurance limitations.


LIMITATION OF LIABILITYLIMITATION OF LIABILITY

“LIMITATION OF LIABILITY. Client agrees that g[consultant’s] liability for damages due to any cause or causes, including but not limited to negligence, errors or omissions, strict liability, or breach of contract or ywarranty, will be limited to a sum not to exceed $50,000 or [consultant’s] total fee, which ever is greater.g

In the event Client does not wish to limit [consultant’s] liability to this sum [consultant] agrees to raise the liability to this sum, [consultant] agrees to raise the limitation of liability to a sum not to exceed $500,000 for increased consideration….”


OTHER TROUBLESOME CLAUSES FOR NEGOTIATIONNEGOTIATION

7. Attorney Fees & Costs: Generally delete all such clauses where possible Or limit the clause to very clauses where possible. Or, limit the clause to very specific disputes, such as fee disputes.

“Ponder and deliberate before you make a move ” Ponder and deliberate before you make a move. Sun Tzu Fees clauses are dangerous ground and risks a lack of insurance coverage.

8. Insurance Requirements: Assure yourself that the owner agrees to what insurance is needed for a

j t ( d k ll b l ) M project (and make sure all subs comply). Many policies do not cover certain contractual risk assumptions. p


INSURANCE IS YOUR FRIENDINSURANCE IS YOUR FRIEND

BEWARE!!! If you don’t catch this or fail to ensure your subs are properly insured, you may become their insurer for the owner.



• If possible negotiate to get your client listed If possible, negotiate to get your client listed as an Additional Named Insured on the Contractor’s insurance policy and be named as Contractor s insurance policy and be named as an indemnified party in the Contractor’s contract with the ownercontract with the owner.

• Contractor’s can often obtain insurance coverage for indemnity clauses—A/Es cannot.



CAUTION!! Be generally aware what insurance you can obtain and be able to

l h h hexplain to the owner why this is important during negotiations.



9. Shop Drawing Review: Define shop drawing review p g p gresponsibilities between contractor and architect. Try to ensure non-responsibility for errors in shop drawings and that review is only for general drawings and that review is only for general conformance with the design concept. Make sure both owner and contractor know ahead of time the scope of the shop drawing review the shop drawing review.

10. Stop Work Authority: Only the owner should have the power to stop the work The duty of the architect the power to stop the work. The duty of the architect is only to “advise” the owner.



11. Retention of Documents/Storage: Explain in g pcontract what the document retention policy entails. Transfer all documents or plans or “as builts” with cover letter and obtain a signed receipt notice in the cover letter and obtain a signed receipt notice in the files.

12 St t t f Li it ti Cl S if h 12. Statute of Limitations Clauses: Specify when statute of limitations begins to run (date of substantial completion, regardless of punch lists or p , g pgovernment approvals). Send letter notifying owner of “substantial completion.”


ATTORNEYS IN NEGOTIATIONSATTORNEYS IN NEGOTIATIONS

• Remember what Sun Tzu said: “The natural formation of the country is the soldier’s best ally.” The law (case law, statutes, regulations, codes etc ) are fixed formations of the country to codes, etc.) are fixed formations of the country to be used during negotiations.

• “We shall be unable to turn natural advantage • We shall be unable to turn natural advantage to our account unless we make use of local guides.” Sun Tzu

• Local guides…..hmm…..like perhaps a skilled attorney….


Contract NegotiationsContract Negotiations

Presenter:Presenter:

John D. Broghammer Greve Clifford Wengel & Paras LLPGreve, Clifford, Wengel & Paras, LLP2870 Gateway Oaks Drive, Suite 210

CASacramento, CA 95833Telephone: (916) [email protected]: http://www.greveclifford.comp g
