Professional liability insurance for architects and engineers.


By on Feb 9, 2016 in All Topics, Claims, Contracts, Newsletters |

By Mark E. Jackson, JCJ Insurance Agency Most contracts between a design professional and their client or subconsultant contain an Indemnity clause. An Indemnity clause may include any, or all three, of the following obligations: (I) indemnify; (II) hold harmless; and (III) duty to defend. “Indemnify” means to reimburse your client following a claim. “Hold Harmless” may have several meanings; however, it is most often understood to protect the client against harm from suits by a third party or yourself. “Duty to Defend” means to pay the client’s legal expenses as the client defends itself against a third party claim. We recommend that a duty to defend clause be removed from a contract. If you agree to “defend” your client, you may incur your client’s legal expenses as the client defends itself against a third party claim. Attorney’s fees and costs accrue from the first day a claim is made against them. In essence, the client can hire an attorney of their choice and send you the monthly invoice. Your obligation to pay these defense costs is based on your contractual commitment, not common law. Most likely, your professional liability policy’s contractual liability exclusion will not provide coverage for your client’s defense costs, leaving your firm to pay for the client’s legal fees. Professional liability insurance covers claims caused by the design professional’s negligence. Your negligence must be determined before the policy will cover costs to defend other parties. A court case in California illustrates the importance of not agreeing to defend your client. In UDC-Universal Development, L.P. v. CH2M Hill, a condominium homeowners’ association brought suit against UDC, the developer. UDC then cross-complained against its design professional, CH2M Hill, based on an indemnity provision in their contract. The UDC jury returned with a finding of no negligence and no breach of contract by CH2M Hill. Therefore, CH2M Hill had no duty to indemnify UDC. However, the court ruled that CH2M Hill still had a duty to defend UDC and pay UDC’s defense costs in the suit brought by the condo association. The language of the indemnity provision in CH2M Hill’s contract explicitly called for CH2M Hill to defend UDC from “any claim or demand”. Therefore, CH2M Hill was...

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By on Jun 10, 2014 in All Topics, Claims, Coverages, Newsletters |

When a project developer sued its engineer that was responsible for the site and grading plan, the engineer’s carrier refused to defend the suit because it asserted the engineer had not provided notice of the claim within the time permitted for reporting under the policy. The developer wrote a letter to the engineer in March stating that the engineer’s slope design failed to follow the recommendations of a geotechnical report and therefore resulted in the parking not draining. The letter concluded by directing the engineer to “develop a plan to correct the drainage problem.” The engineer did not notify its insurance carrier of this letter as a “claim” against it but instead responded by letter to the developer with an explanation that the problems were caused by defective construction rather than defective design. After follow-up meetings with the developer at which the causes for the problem were reviewed, the engineer sent another letter reiterating that the problem was caused by construction defects. After receiving that letter the developer sent a second letter or e-mail to the engineer in the month of May specifically accusing the engineer of design error and chastising him for failure to “accept responsibility.” Three months later (August), the engineer advised its carrier that this May correspondence by the developer constituted a “claim” against him. Subsequently, the developer filed suit against the engineer, as well as the architect and contractor, and the engineer’s carrier refused to defend the suit because the engineer didn’t give timely notice of the claim as required by the policy. The engineer filed suit against the carrier in a separate action for alleged breach of duty to defend it in the underlying litigation. The court in this case (Matkin-Hoover Engineering, Inc. v. Everest National Insurance Company, 2009 WL 1457669 (W.D. Tex., 2009)) denied the insurance carrier’s motion for summary judgment – meaning that the case will go forward on its merits to determine whether the carrier properly declined to defend the engineer. The issue of what communication from the developer to the engineer first constituted a “claim” that the engineer must report to its carrier was carefully analyzed by the court, but it seems to this author that the decision failed to...

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By on Mar 23, 2013 in All Topics, Claims, Newsletters |

One of the growth segments in the construction industry today is apartments. Apartment projects across the country are rising and are expected to continue through 2014. Particularly in hot markets including Washington, D.C, New York, Chicago, Los Angeles, and Atlanta. To meet demand, industry experts expect 235,000 units to be built in 2012, followed by 285,000 in 2013 and 320,000 in 2014. Rental Vacancy Rate Driving the need for apartments is the vacancy rate. In 2009, the national rental vacancy rate was at 8%. Today, the vacancy rate is at 4.7%, the lowest level since the end of 2001. That is down from 4.9% from the first quarter of 2012. This is only the third quarter in three decades that the vacancy rate has fallen below 5%. Values of apartment buildings are quickly rising. Record Level Rents Because of tighter lending standards and higher down payment requirements for mortgages, renting has become the only option for many. Rents have increased even in markets hit hard by the economic downturn. Cities such as Las Vegas and Phoenix had increases of 1% in the second quarter of 2012. Average rents have increased in 82 markets tracked by Reis Inc., a real estate data firm. Rents are at record levels in 74 of those markets with over $1,000 a month rental average in 27 locations including Miami, Seattle, San Diego, Chicago and Baltimore. New York City had the biggest increase in the second quarter with an average rent of $2,935 a month, up 1.7%. Condominium Projects & Claims Based on industry claims data, including a recent SmartRisk survey, condominium projects continue to be one of the most litigious project types. Twenty eight percent (28%) of claims were condo related in the law firm survey. From an industry-wide perspective, multi-family, condo projects constitute for five percent (5%) of design fees but 20% of the total losses. The most frequent claim categories for condo projects involve; foundations, roofs, waterproofing, soundproofing and HVAC. The risk on condo projects increases even further when they are initially designed and built as rental properties. In most cases, apartments fail to match the construction strength of an originally designed and constructed condominium project. There are many differences between an...

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By on Sep 23, 2012 in All Topics, Claims, Newsletters |

Insurance settlement related to a building information model shows that BIM without communication can be costly. By Nadine M. Post in Pittsburgh This article originally appeared in Engineering News Record, May 23, 2011 A lawsuit over construction of a life-sciences building at a major university stands as the first known claim related to the use of building information modeling by an architect. Furthermore, the claim and its settlement serve as a cautionary tale to others using BIM, says the insurer. “The creators of BIM claim its use reduces risk, and indeed it can—like any other tool, if it is used right,” says Randy Lewis, vice president of loss prevention and client education at the Denver office of XL Insurance, which provides professional liability insurance to licensed design professionals. “If you don’t use BIM correctly, you can get into trouble.” For the life-sciences building, the architect and its mechanical-electrical-plumbing engineer used BIM to fit the building’s MEP systems into the ceiling plenum. But the design team did not tell the contractor that the extremely tight fit, coordinated in the BIM, depended on a very specific installation sequence. When the contractor was about 70% through assembly, it ran out of space in the plenum. “Everything fit in the model but not in reality,” says Lewis. The contractor sued the owner, the owner sued the architect, and XL brought in the MEP engineer. “It was a very costly claim to negotiate,” says Lewis. XL did not litigate the claim because it would be difficult for any jury to comprehend. Lewis declines to offer specifics on the project, other than to say the building is open. He also declines to name the players. As far as the settlement goes, he will only say there was a “pretty significant cost,” totaling millions of dollars, which was shared by the architect, the MEP engineer and the contractor. Enhancing Communication The problem was poor communication. “The design team never discussed the installation sequence with the contractor, and the contractor wasn’t sophisticated enough” to understand the importance of assembling the components in a certain order, says Lewis. Insurers advise designers not to get involved in means, methods, safety and sequencing. But for this project, even though it...

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By on Jun 22, 2012 in All Topics, Claims, Newsletters |

By Mark E. Jackson and Erin L. Johnson.  This article originally appeared in the June 2012 publication of Florida Engineering Society Journal. For years, insurance companies have encouraged mediation as a way to settle disputes between design professionals and their clients. In fact, most insurance companies offer financial incentive to clients who choose mediation. Mediation is a form of Alternative Dispute Resolution (ADR) in which a neutral third-party mediator helps the parties reach an agreement in their dispute. Over 75% of claims against design professionals are settled in negotiations or mediations. Mediations offer many benefits and should be considered as an alternative to protracted litigation. Successful mediations can reduce both claim and defense costs. When mediations lead to a settlement they always take less time than going to trial and can therefore decrease the amount of legal fees. They also require less of the design firm’s time and resources. Mediations also have the potential to lower claim costs. During the mediation process, the parties may agree on a more creative solution, one that a judge or jury could not legally require such as free design services to correct the area of dispute. Mediations are considered favorable because the proceedings and settlements are confidential. This confidentiality allows parties to openly and safely discuss resolution of cases rather than battling issues out in front of a judge and jury. All settlements are confidential, so your professional reputation is protected from public opinion when cases are mediated. Lastly, mediations avoid the unpredictability of litigation. Rather than having a judge or jury deliver a resolution, the parties involved reach an agreement that is mutually acceptable. When parties decide to enter mediation, they are typically ready to work towards an agreeable resolution. Mediations may be the best option for preserving a relationship with the parties involved. Less than 5% of all claims against design professionals end up going to trial. When a lawsuit is filed against a design professional, the courts typically require mediation between the two parties prior to a trial. These “court-ordered” mediations must now adhere to the new rule. In November 2011, the Florida Supreme Court amended the Florida Rules of Civil Procedure 1.720 (Mediation Procedures) regarding how court-ordered mediations are conducted....

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