Professional Liability

Verifying Construction Project Insurance

By Michael F. Davy, P.E., F.NSPE

One of the more effective ways A/Es have of managing risk is to see that all parties on a construction project have adequate insurance. The standard EJCDC and AIA specifications provide detailed requirements for the bonds and insurance to be provided by the owner and contractor. Most of the coverage is provided by the contractor. Having all the specified bonds and insurance in place during and following construction is important, but there are weaknesses in the current system that put everyone at risk.

Bonds are generally not an issue. There are standard forms, and as long as they are properly executed it’s simple for the parties to determine that they are in place and meet specifications.

Insurance is an issue. First of all, keep in mind that most projects are small and do not involve an owner with a risk manager on staff. The A/E is often the “reviewer” by default. Typically, owners and A/Es rely on the certificate of insurance to determine that the specified policies are in place. These one page documents are intended to be a summary of the coverage and provide little detail. To actually verify that the required coverage is provided would require collection and review of all the policies. Few owners or A/Es have the expertise or time to do this detailed review. We are all depending on the contractor’s insurance broker to review the specifications when issuing the certificate of insurance, but in our experience that rarely happens.

The second issue is related to the term of the insurance. Certainly the owner and other parties on a construction project are entitled to know if a policy is terminated or expires. The standard certificate of insurance form published by the Association for Cooperative Operations Research and Development and used by almost all insurance brokers is purposely vague: “Should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions.” Not a very reassuring statement. While you can insist on notification endorsements from each of the insurance companies, that seems an unnecessarily convoluted way of dealing with this issue.

From the A/Es perspective, a simple way of dealing with these two issues is to have the certificate of insurance edited so that the agent is certifying that the coverage meets the specifications and that 30 days’ notice will be provided if any of the policies are modified or terminated. While simple, brokers want to avoid liability. Understood. We all want to avoid unnecessary liability, but what’s the point of being an insurance expert if they don’t use their expertise?

A/Es are obligated to certify that that the documents we prepare meet certain standards. We accept the responsibility and liability and use insurance to mitigate our risk. Insurance brokers and agents are expected to have the expertise to certify coverage and monitor terminations and should be able to provide a similar certification. If there is concern about liability, they can get their own insurance.

NSPE member Michael F. Davy, P.E., F.NSPE, is a member of the Professional Engineers in Private Practice’s Professional Liability Committee.

Useful Risk Management Blog

If you’re looking for another source of information on risk management topics for professional engineers, check out Schinnerer’s RM Blog. Victor O. Schinnerer & Company is the managing underwriter for the NSPE-commended professional liability insurance program (CNA Insurance Company). Part of the commendation criteria that CNA must meet is to provide a robust risk management education program. One element of the program is the RM Blog, which furnishes excellent and timely information about engineering topics, with links to in-depth risk management materials.

The CNA Insurance Company created its insurance program in 1957, at the request of NSPE’s Professional Engineers in Private Practice and the American Institute of Architects, as there was no professional liability insurance available in the U.S. at that time. CNA/VOSCO has been the commended carrier ever since.

Sources of an Engineer’s Duty

Have you ever been on the defendant’s side of a lawsuit as an engineer? I hope not, but if you have, you probably learned about the four proofs plaintiffs must make to win. Many of you have not been unfortunate enough to have been educated through the school of hard knocks, so I will try to give you a basic education in this blog posting.

Four Essential Proofs
In order for a plaintiff to prevail in a malpractice (negligence) suit against an engineer, there are four essential proofs:

• Engineer had a duty to the plaintiff;
• Engineer breached the duty;
• Plaintiff suffered damages; and
• Breach of duty was the proximate cause of the damages.

Sources of an Engineer’s Duty
How does duty arise? Obviously, we can start with the contract. You will have established the scope of services, fees, and understandings of the parties in this document. Additionally, duties arise from three other sources:

• Laws, ordinances, regulations, and codes (whether known to you or not);
• Ethical and professional responsibilities; and
• Common law.

These four basic sources of duty establish your duties, not only to the parties to the contract, but also to the public at large, at least to the extent that they may be injured by your work product. Common causes of liability arising out of breach of duty include:

• Code violations;
• Violations or failure to comply with laws, regulations, and permitting processes;
• Unlicensed practice;
• Errors and omissions;
• Actions of subconsultants;
• Failure to meet appropriate standard of care;
• Breach of contract; and
• Breach of warranty or guarantee.

A key document for establishing duty is the professional services contract. This is why written contracts are so vitally important. Not only will they set forth the scope of services for which the client has contracted, but properly worded, they will handle vital peripheral interests. For instance, a good contract will not offer any guaranties or warrantees other than, perhaps, the duty to perform services in accordance with the locally recognized standard of care (here and here).

The possibility of violating laws, regulations, and permitting processes, as well as codes is an ever-present pitfall. To the extent possible, engineers need to keep abreast of the areas of those topics that are most relevant to the professional services being performed because they are not static and are subject to revisions and updates. The case for continuing professional competency training could not be more relevant than in this area.

The Engineer's Standard of Care: Part 2

Last week’s blog posting was a brief introduction to the standard of care. It noted that the standard of care doctrine applies to engineers, unless voluntarily relinquished by agreeing to provide a client with an express warranty or guarantee of something exceeding “services rendered with the degree of learning and skill ordinarily possessed by a reputable equivalent professional practicing under similar circumstances, at the given time and in a similar location.”

An express warranty or guarantee specifies an outcome. Say an engineer was presented with an owner's contract that says the plans and specifications will be "suitable for the use intended by the Owner"—an admirable, but often unattainable goal. Signing the contract would mean the engineer agreed to perform better than a reputable equivalent professional practicing under similar circumstances; and the engineer would have essentially guaranteed the project’s outcome. What if there are unforeseen conditions, or a labor strike, or if a regulation is enacted that adversely affects the project? Can the owner say that you breached the contract? Probably. Can the engineer lose such a suit? Maybe. Will the engineer’s professional liability carrier make an indemnity payment? Probably not. Will you survive as a firm? I hope so.

To those unfamiliar with risk avoidance, there are some words—words used in everyday life—that design professionals should be wary of, even if they don't sound too harsh. If any of these words appear in the owner's contract, object. And don't ever put them in your proposals or contracts. I wouldn't even use them in letters or promotional material, unless they are very explicit as to the scope of meaning. What are some of the words on the alert list?

all
every
insure
ensure
represent
warrant
guarantee
declare
certify
highest
complete
fit for the intended purpose
accurate...
and others.

What would be an example of an engineering-type express warranty? How about "Engineer will perform all work necessary to obtain a major subdivision Planning Board Approval." If an engineer signed a contract with this language, the engineer would be making an express warranty, even though he or she knows that approval cannot be guaranteed. The engineer really should have agreed only to "perform services generally required for application to the Planning Board for subdivision."

Although most engineers strive to furnish adequate services with successful outcomes for their clients, engineers must recognize and understand the concept of standard of care. It is a powerful common-law defense. It is foolish to relinquish a universally accepted concept because you just didn't know how to avoid express warranties or guarantees in the contract language.

NSPE position statement 1750 covers guarantee/warranty provisions and other contractual provisions that attempt to shift risk to the engineer from the parties in the best position to assume those risks.

The Engineer’s Standard of Care: Part 1

The common-law standard of care doctrine is an essential concept that must be grasped and applied as the cornerstone of risk management for engineers. It holds that an engineer has a duty to perform professional services to a degree of learning and skill ordinarily possessed by a reputable equivalent professional practicing under similar circumstances, at the given time and in a similar location.

Courts do not expect perfection. In order to prove an engineer is negligent, a plaintiff must prove that he or she did not perform services with the degree of learning and skill ordinarily possessed by a reputable equivalent professional practicing under similar circumstances, at the given time and in a similar location. That is a time-honored principle of common law.

Differing from professional negligence is strict liability, applied largely to manufacturers, or commercial transactions. Common law expects purchasers and users of products and goods to be able to rely on them to function reliably and safely. This standard is relatively unforgiving of flaws or defects that cause injury or damages.

The standard of care doctrine applies to engineers, unless voluntarily relinquished by agreeing to provide a client with an express warranty or guarantee of something exceeding “services rendered with the degree of learning and skill ordinarily possessed by a reputable equivalent professional practicing under similar circumstances, at the given time and in a similar location.”

Owner prepared documents, especially purchase orders, frequently are designed to give the owner ultimate protection, i.e., a guaranteed outcome. Purchase orders are most threatening because they are often issued for small projects with insufficient remuneration to justify attorney review. Furthermore, they generally apply to the purchase of products, which are expected to be furnished in accordance with common-law principles of strict liability.

If a design professional enters into such a contract, the standard of care doctrine may have been waived, with consequences detrimental to any future litigation. Furthermore, it may void professional liability insurance coverage, if litigation is based upon breach of warranty or guarantee. Professional liability insurance policies conventionally exclude coverage for breach of express warranty or guarantee. PLI carriers expect insureds to practice within the standard of care.

If you are sued for negligence, your attorney and expert will spend a good deal of time examining your performance against the standard of care. The standard of care won’t provide protection, however, if you have provided a guarantee or warrantee upon which the matter is based.

Stay tuned for Part 2 next week.

Read “Upholding the Standard of Care” in the January/February 2011 issue of PE magazine.

New Resources on Professional Liability Insurance

Every fall, NSPE's Professional Liability Committee conducts interviews of professional liability insurance (“PLI”) carriers at its meeting in Chicago. The interviews, conducted with AIA and ACEC, are guided by a questionnaire that provides consistency to the information gathering process. The results are collated, and survey highlights are published in the December issue of PE magazine. You can also access the complete survey results on the NSPE Web site.

The results and the directory will give NSPE members an opportunity to compare the products and services of 16 competing PLI carriers. If you are a member who is involved with PLI decision-making at your firm, this will be very helpful. If you are not, it is a perfect opportunity for you to help your firm's management by pointing out the information in this blog post.

Engineers at Risk: New Blog

Welcome to the NSPE’s Professional Liability and Risk Management Blog. As a service to NSPE members and others interested in these issues, this blog will present an ongoing look at PL/RM, with input from the Society’s Professional Liability Committee.

Although not every employed engineer is required to make decisions about risk management practices, theories of professional negligence, or malpractice, these are major issues for all engineering organizations. The litigious nature of business in the U.S. continues to hover over the operations of all such organizations.

Through education and experience (often through trial and error, sometimes through participation in defending serious claims), engineers can expand their knowledge in these matters. It is the intent of this blog to offer useful information that will help in the education process.

Readers are welcome to post responses for all entries. It must be noted that the blog postings are informational, and are, by nature of the briefness of such postings, not to be considered exhaustive or authoritative. They are intended to acquaint readers with important issues and promote further investigation.

The information posted on this blog is solely for informational purposes and is not intended to constitute the practice of law or legal advice. For legal advice, consult competent legal counsel as necessary.