from the desk of Nahom Gebre
From the desk of Judy Mendoza
Many clients of design professionals do not understand the difference between design professionals and contractors. This is particularly true when a design professional is being retained as a subconsultant to a design-builder, but it can occur with all types of clients on a myriad of projects.
- The engineer was asked to secure a performance bond.
- The Agreement contained a “time is of the essence” provision as well as a “liquidated damages” provision.
- The indemnification was not limited to the extent damages were caused by the “Contractor’s” negligent acts, errors and omissions, and it contained an uninsurable duty to defend the client.
- The engineer was required to provide an uninsurable one-year warranty that the “workmanship and materials be proper and sufficient for the purpose contemplated,” “be free from defects,” and that the “work shall conform to, perform as set forth in, and meet all requirements of this Agreement.”
- No professional standard of care language was included and there was no requirement to carry professional liability insurance.
Chinese building technology could affect US construction industry
Have you ever heard of a 15-story building being constructed in less than one week? China’s Broad Group, with the goal of showcasing the efficiency and pure speed of its construction technology, accomplished such a feat in constructing the Ark Hotel in Changsha in less than six days. Well, kind of. The foundation and other below ground construction was completed before they started the clock, and the building was constructed from prefabricated parts which had already been manufactured off-site. Nevertheless, the speed with which the building was erected is very impressive.
From the desk of Frank Musica
A professional service firm, like any business, is responsible for harm to its client caused by the firm’s breach of its contract. But breach of contract is not what professional liability insurance covers. All professionals must meet an applicable standard of care for the services provided, and must rectify any harm caused if they are negligent in their performance. It is this professional obligation that is within the scope of professional liability insurance coverage.
Many clients, however, want to conflate the two responsibilities. At times this is accomplished through a liquidated damages provision—a stated amount due from a party based on a specific contractual occurrence or nonoccurrence. Clients may also set up elaborate payment withholding or contractually obligated payment schemes based on their decision that professional services were deficient. Sometimes these are applied beyond a “threshold of harm” amount.
Illinois Supreme Court lays down the law about the duty of an engineer
On January 21, 2011, the Illinois Supreme Court ruled in Thompson v. Gordon that a design professional’s duty is described by the terms of the contract and cannot be expanded based on expert testimony offered by an opposing party. The engineering firm in this case had been hired to design the replacement of an existing bridge deck. Approximately six years after construction was completed, the plaintiff was injured when another driver lost control of the car, hit the median separating traffic, and landed on the car the plaintiff was traveling in. The plaintiff’s expert testified that the replacement of an existing bridge deck required the engineering firm to consider adding a Jersey barrier in the median to improve the bridge deck. The court held that as a matter of law the engineering firm’s duty to a third party is described by the contract and cannot be expanded by plaintiff’s expert testimony.
Results Could Affect Design Professionals
In construction defect cases it is often difficult to determine what damages were caused by negligent design and what damages were caused by faulty construction. Design professionals have coverage under a professional liability policy for damages caused by their negligent acts, errors, and omissions. Traditionally, damages caused by contractors have been covered by the contractor’s comprehensive general liability (CGL) policy. Although CGL policies excluded damage to the contractor’s “work product,” it covered damages to other property that resulted from the contractor’s faulty work. For example, a poorly constructed roof might result in water damage to the contents of a warehouse. The CGL policy would not pay to repair the roof but would pay for the damage to the contents. Several recent cases, however, may change an insurance company’s obligation to pay for these “other” damages. If the courts hold that these damages are not covered by the contractor’s CGL insurance, contractors may have to pay these claims out of their company’s personal assets. This could result in design professionals becoming bigger targets with “deeper pockets” due to the availability of their professional liability insurance policies.
These cases have caused the courts to address the issue of whether or not construction defect claims constitute an “occurrence” under a CGL policy. In Crossman Communities of North Carolina, Inc. vs. Harleysville Mutual Insurance Co. the Supreme Court of South Carolina found that an “occurrence” is an accident that occurs by chance with unintended and harmful results. The court ruled that there was no “occurrence” when a contractor’s faulty workmanship on a condominium project resulted in water intrusion because the water intrusion and ensuing damage were foreseeable consequences of the faulty workmanship and therefore not covered under the contractor’s CGL policy.
However, a similar case in Colorado was overturned by the state legislature.
A recent case in Hawaii (Group Builders, Inc and Tradewind Insurance Company, LTD vs. Admiral Insurance Company and National Interstate Insurance Company) also held that construction defect claims do not constitute an “occurrence” under a CGL policy. Interestingly, however, the majority of insurance carriers in Hawaii have not been denying coverage to contractors. There is speculation that the carriers are doing this so that the state legislature does not become as involved as it did in Colorado.
More than ever, design professionals should use sound risk management practices when selecting new projects—especially condo projects. Design professionals should insist upon providing full construction phase services and should urge developers to retain contractors using qualifications-based selection procedures.
It will be interesting to see if the courts in other states follow suit.