The Five Commandments

Question 1

Willis A&E’s 5 Commandments

Answer 1

Contracts are thy friend
Thou shall not assume liability above the standard of care
Thou shall define thy scope
CYA with CA
Thou shall document – Wisely!

Question 2

The Cost of a Claim

Answer 2

Deductible out of pocket expense
Potential loss in excess of available limits
Insurance costs for firms with poor loss history
The emotional stress and hassles of a claim
Loss of client relationships
The significant distraction to your firm’s practice
Your firm’s reputation

Question 3

Risk Management 101

Answer 3

You can transfer your risks by insurance
You can transfer your risk by contract
You can assume and control your risk
You can avoid risk

Question 4

The standard of care for Architects and Engineers is perfection

Answer 4

FALSE

What if I loaded this room with a handful of your clients or your peers? Would they get it right. They don’t know what the standard of care

Importance of managing expectations

Question 5

The liability of a Consultant is based on the principles of negligence.

The liability of a Contractor is based on warranties and guarantees.

Answer 5

Liability of consultants based on negligence – contractor is warrantees/guarantees
Important to recognize the Difference between contractor SOC and a design professionals
There is legal precedent out there from MN that the judge found the SOC of a design Pro is more closely laligned with a doctor or a lawyer – and just as they won’t guarantee to cure every ill or win every case.
It is the design pro’s responsibilty to educate there client and not take on anything over the SOC
McGraw Hill review published that the average E&O for new construciton 3-6% - renovation is over 12% - Design Build Fast Track is over 20%. – Who is going to pay for that delta? They don’t and change orders and claims end up paying for it
Largest claim from our clients last year was a large DOT project out west – lowest irresponsible bidding contractor - $50M lawsuit

Question 6

Who Sues A&Es (the most)?

Answer 6

Depends on who you contract with, but textbook answer is ‘B’ - Owner/Client. If you do residential condos ‘A’ if design build contractor led it could be C
Stems from what is the Economic Loss Doctrine – Who you have a financial relationship with. If I have a relationship with owner they sue me. If Subs mess up – the owner sues me to get to subs.
Every state varies when it comes to practice acts, statute of limitations, repose, etc. Always a good idea when in a state to understand what the unique laws are

Question 7

Comparative Claims Experience

Answer 7

Architects are sued the most because they take on more vicarious liability by hiring more subconsultants. 30-40% of revenues may be through Subs.
Civils are next which illustrates there are liabiities through your subs
Example – Geotechs – if you do not provide geotech services – you should not hire the geotech – the owner should – is that a ‘no/go’ not necessarily there is a business relationship that you need to manage as well. They have less than stellar coverage
Hiring structurals – if they are underinsured – you are handling the bag at the end of the day – make sure you have consistency of documents – don’t let them strike LOL if you didn’t in the prime agreement
Structurals are disproportionately higher in claims because they have a severity issue – if there is a claim, the fix is often complex and more costly

Question 8

Where are most claim dollars spent

Answer 8

A - Claims due to economic loss
A is the pain and suffering of the design community
Delays if the casino (at a million $ a day) isn’t ready by opening day or the stadium isn’t ready for game day
What did you do contractually to performance based and scheduling that are out of your control – ie permits. That can be outside of your control
Like to see Waiver of consequential damages and limitation of liability

Question 9

Frequency and Severity by Project Type

Answer 9

Illustrates all the different types of human beings design firms work with
On one end you have the home owner and their personal homes ‘somehow interpret their dreams’ and on the other end you have a condo developer with an attorney rep and a 2 page indemnity clause in the middle is a school board with 10 or more prople that know more than you do with a tight referendum
It’s very challenging for design professionals to manage the different people and different levels of sophistication with each project type
Goes back to the Standard of Care and perfection – how would each group respond
Condos: Big area of groweth for our clients. They make sense for urban residential. They are the greatest exposure by project type. Insurance companies keep score through a Loss Ration explanation – if I a make a dollar on premiums and I sell out 90 cents on losses and expenses I have a 90% loss ration. I am only making 10 cents on that dollar as underwriter profit – that is better than the avg insurance company is making across the board. If you ask them for a loss ratrio on condos – it’s 200+ to 300% on condos. They are losing money. However, some of our clients are successfully designing condos because they understand the risk and manage it very well

Question 10

Why Are Condo Projects The Riskiest Project Type?

Answer 10

3rd Party Exposures
Emotionally Charged exposure
Multiple potential claimants
Single purpose LLC
Developer client
Plaintiff attorney
HO Association

Question 11

TRUE or FALSE: Very few professional liability claims stem from non-technical aspects of a design practice.

Answer 11

FALSE - Very few professional liability claims stem from non-technical aspects of a design practice.

Question 12

The Top 4 Non-technical Contributors to claims

Answer 12

Negotiation and Contract
Client Selection
Project Team Capabilities
Communication

Question 13

Negotiation and Contract Issues

Answer 13

Deal Makers Deal Breakers
Certain things that if you don’t have in your contract – it’s a deal breaker
My job is not to tell you it’s a deal maker/deal breaker – it’s to inform you and educate you on what the risks are potentially uninsurable
For example - Every contract should have in there that you are not responsible for jobsite Means and Methods
Deal Makers: Mediation Clause, Limitation of liability, Waiver of Consequential Damages
Important when looking at contracts to have the deal makers/deal breakers
Most firms have one person responsible for managing the contracts and then once it is signed, a different team works on the project and is often on site. Before you send that team out, you should have a dramatic reading of the contract with the team. Here is what is unique about this project…..we don’t have this in the contract, be aware of this….they are using the word inspection sho we need to be careful about on site and be careful to document well.
Using the contract as a vehicle for managing expectations

Question 14

Client Selection Issues

Answer 14

Difficult because it’s hard to pass up work – especially for design firms who are by nature problem solvers and excited about creative opportunities
There are firms that have to qualify clients – there are clients with a litigious history or contractors with a history of underbidding projects
Having a conversation about the Standard of Care and having a contingency fund

Question 15

Project Team Capabilities Issues

Answer 15

The best Architect or Engineer doesn’t necessarily make the best project manager
There is a lot involved regarding communication, core skills and training
Right now we are going to see a lot more claims due to actual design error in the near future because it’s hard to find enough qualified staff. We lost a lot od senior level qualified stafdf during the 08-09 economic downturn, but now the high level work is being pushed down onto less qualified staff.

Question 16

Communication Issues

Answer 16

Difficult with the new technology, BIM, CAD etc.

Question 17

T or F: The use of absolute words, such as any, all, complete, final can impose absolute conditions on you that may be impossible to meet.

Answer 17

TRUE
These are Warranty Guarantee words
We as design pro’s like squishy soft words like Endeavor to, applicable, perhaps
When you see those words – you want to ask yourself if that is putting you outside of your control - over and above the standard of care
Think about that in your documentation, field notes, etc. Could this be taken out of context

Question 18

T or F: Personnel policies have very little to do with a design firm’s risk management profile.

Answer 18

Not allow moonlighting because there is no insurance and the attorney looks for the deep pockets
Work for your church, charity, your neighbor – If there is a claim they will look to your company PL policy

Question 19

T or F: A simple letter agreement gives the design professional all the protection needed for small projects.

Answer 19

It Depends
NO - FALSE – because typically the letter agreement won’t say anything more than – we’ll see you on Monday. HOWEVER – if it says, we’ll see you on Monday, until we have had a chance to finalize our contract, let’s work under the attached one page terms and conditions – puts you in a lot better position
Example – client of ours – She does a great job negotiating contracts – significant high rise hotel renovation. Client calls on Friday saying we start on Monday but my client is on vacation – let’s finalize the contract on Monday. As the accommodating design pro she is, she says ok. As luck would have it, an employee of the contractor falls down the elevator shaft and dies. In walks the Plaintiff attorney with widow in tow and sues everyone and the nearest railroad including our client. So you could say, reasonably so, not an employee of our client, not an architect, it’s day one, why would that be our problem. Unfortunately, it cost her the entire deductible, several depositions and a bad client relationship that she was forced to resolve because of a contract that wasn’t resolved. If she just would have said, sorry – we put a lot of effort in this and I need you to sign it before I work. IN the contract she had – Responsibility of the contractor for all jobsite safety and they were to be named as an additional insured on the contractor’s GL policy. She would have been work soon after the incident.
The Terms & Conditions would have saved her in this case

Question 20

T or F: You should always try to get a clause in your contracts that requires arbitration as the first step in the dispute resolution process.

Answer 20

FALSE
Mediation Yes – Arbitration NO
That’s my experience
Both are alternative dispute mechanisms and they both make sense on the front end as opposed to litigation
However, Arbitration is Binding – mediation is non binding. Arbitration is now lasting as long as litigation and you losing certain rights of due process and discovery and more often than not we see them split the amount and you can’t appeal it.
Let’s mediate and if that doesn’t work – Let’s litigate
I also don’t like the AIA docs that bring in mediation but it’s buried in with Arbitration. But the Attorneys are blowing through mediation and getting to arbitration

Question 21

T or F: Use of the word Supervise can imply you have control over a jobsite - and thus responsibility for safety.

Answer 21

TRUE
We don’t want to use this word because implies you are supervising workers. Don’t include it in your field notes or emails either

Question 22

T or F: A design professional can amend the contract after it is signed simply by virtue of his or her conduct.

Answer 22

TRUE
In your contracts, I am quite certain you are not responsible for jobsite means and methods
If you have an employee (Cape Crusader) on the jobsite that is crossing the line and making recommendations on the site RE: Unsured trench, why aren’t people wearing hard hats, etc. – If someone gets hurt on the jobsite and OSHA comes in to interview everyone and they find out that the ‘nice architect’ was very helpful
. You can be fined significantly, but also find yourself in an uninsurable position.
We want you OBSERVING in conformance with your specs – we want you there and we want you doing that however if they bring in a 3rd party we want you to have a hold harmless so you are not responsible
2 Scenarios – (1) You go onto the sight and the contractor is a slob and what do you do? (2) You go onto the site and you see someone in imminent harm and if you don’t say something he will surely perrish before your eyes. What do you do?
You don’t want to be perceived as the Cape Crusader, but you need to inform the forman that this site is not OK and if you don’t do something I need to inform my manager….
In the unsured trench example – you tell the poor slob to get out of the ditch and don’t get hurt in the process, but then, you need to come back to the firm and discuss the issue with your manager. SOMETHING HAPPENED ON THE JOBSITE. You need to document and memorialize what transpired on the site.
Photographs: 3 or 300 rule. If you are out on the site you want to take pictures up close or so far back that there is nothing specific. You don’t want to have a picture of the smoking gun that is discoverable and used against you by an attorney.
Site Safety and documentation: At a project meeting the issue of site safety comes up (which isn’t your responsibility) however sombody ten drafts the minutes for the meeting and it is then emailed to everyone and reply all land. You want to reply and make it clear that in reference to sub paragraph XX – we did not participate and are not responsible for Jobsite safety means and methods

Question 23

T or F: Performance of construction observation on your projects can reduce your exposure to claims.

Answer 23

TRUE: Studies have proven this. We want you out there observing

Question 24

T or F: The Prime A&E, and all their sub consultants, should be named on the GC’s GL policy on a primary and non-contributary basis.

Answer 24

TRUE
This is a conversation that I would like to have with everyone negotiating contracts
The point is that most GL policies have a provision that they give you AI simply by contractually requiring it and if you are in design bid build you have to do that through the owner and if you are the sub you need to do that through the prime. It’s a more complicated negotiating process, but it can save you big time because you can simply tender it to the Contractor GL policy and go back to work

Question 25

T or F: Documentation is overrated.

Answer 25

FALSE
PL is a long term exposure. Whatever you are working on today by the time it is built and then you are brought into a suit, mediation, arbitration – it can be months if not years from today. So if you recognize that fact – Auto ins. Is short term for example. If you get into an accident you will know relatively quickly what the extent of the damage is. Not the case with this.
If you recognize that you must understand how important it is to document so you can tell your story in the future. This includes documents to the file, but also letters, emails to the file
It is by far the most valuable tool to extricate yourself from a situation in the event of a claim, but it can be a double edged sword
Be careful what you put in an email. If I am your client and I think you screwed up, I will find a 12 year old in russia to rip out your hard drive
“Boy Bob – we really screwed up on this one.” Don’t say that. It’s ont thing to admit there is a problem, but it’s a lot different to admit that you are at fault. Until you have somebody to review all of the details.
Bottom line: treat an email as a business. Keep it short and sweet. Don’t forget you can pick up the phone.
$200,000 lunch. Guy talked about a project and lunch s well and it was brought up in court

Question 26

1 Contracts Are Thy Friend

Answer 26

Agreements are the best vehicle the A/E has in establishing expectations and educating their client.

A verbal agreement is worth the paper its written on

It is much more difficult to negotiate the terms of the agreement after the work has started

Know your agreements. Make sure your staff does too.

Question 27

1 Thy Contracts Continued

Answer 27

Have standard terms and conditions with key words/phrases– use as a baseline for all negotiations

Get your attorney or broker to review unfamiliar wording

Learn how to negotiate

Know the “deal breakers” and “deal makers”

Remember, nobody benefits from an uninsurable agreement

Question 28

2 Thou shall not assume liability above the standard of care

Answer 28

To the highest standard is not good – who is to say what is the highest

Define the standard of care in your agreements:

“In providing services under this Agreement, the Consultant will endeavor to perform in a manner consistent with the degree of care and skill ordinarily exercised by members of the same profession currently practicing under similar circumstances”

NOTE: Legal Standard of Care is minimum a reasonable designer would do.

Question 29

2 Standard of Care (Continued)

Answer 29

Liability over/above standard of care= potential uninsured exposures.

Don’t warrant/guaranty/certify success of the project.

Don’t agree to “perform to the highest standard”.

If possible, establish a contingency fund

Educate your client

Question 30

3 Thou Shall Define Thy Scope

Answer 30

Important: Your scope of services should be clearly defined and consist of three parts:

Services performed for a basic fee;

Services that are available for an additional fee;

Services that specifically excluded because the client has refused them, has agreed to have them performed by another party or because the consultant does not provide them.

Question 31

4 CYA with CA

Answer 31

Construction observation is important in reducing your exposure to claims.

Observation versus Inspection

….shall visit the site at intervals appropriate to the stage of construction (avoid “periodic”)

The purpose of construction observation is NOT to “guard the owner against all defects” or to “ensure strict conformance with the contract documents”.

Your contract should clearly describe the extent of your CA services.

In the event you are not responsible for CA your contract should be clear in holding you harmless.

EVERY agreement should include a clause stating that you are not responsible for job-site safety and means and methods.

Question 32

4 more CYAing…

Answer 32

Your contract should clearly describe the extent of your CA services.

If not responsible for CA your contract should b clear in holding you harmless.

EVERY agreement should include a clause stating that you are not responsible for job-site safety and means and methods.

Question 33

5 Thou Shall Document - Wisely

Answer 33

Every firm should have clear procedures regarding documentation

Forms of documentation:
Executed agreement
Certified mail
Memo to file

The use of a Zero Invoice – Design firms find themselves working for free. Redesign trap. The idea of a zero invoice is that every time you fix something or make a small change

Question 34

The Dark Side of Documentation

Answer 34

Documentation is a double-edged sword

Beware of documenting anything regarding site-safety or means & methods

Beware of email AND voicemail

Beware of field notes

Beware of brochures bragging to be “better than the best”

Question 35

It Ain’t Easy Being Green

Answer 35

Use of innovative products and techniques can often heighten risk to the design firm.

Need for sophisticated maintenance and untested/unknown life span of materials – and benefits

Warranty versus negligence based exposures.

Owner’s definition of “Green” may vary…

Don’t warrant or guarantee anything.

Question 36

Contract Negotiations Deal Makers & Breakers

Answer 36

Mediation
Hazardous Materials
Jobsite Safety
LOL – waiver of consequential damages
Ownership of Instruments of Service
Termination (one sided)
Assignment (without your consent)
Certifications, Guarantees and Warranties (by you of virtually anything)
Indemnities (not limited to your negligence, or defend obligation)
Insurance (containing unattainable requirements)
Jobsite Safety/Construction means, methods, techniques, sequences or procedures
Getting Named on GC’s GL!
Liquidated Damages
Permits and Approvals - “assist” only!
Lender Requirements - mandatory cooperation clauses
Stop Work Authority