Do I really need my own lawyer if the insurer is giving me one? (law note; tip)

Several readers have reached out to me about my post on getting a Reservation of Rights letter with comments and questions.  The most common refrain has been something along the lines of: “Do I really have to hire my own lawyer after paying insurance premiums just because I got one of those pesky ROR letters?”

not break bankThe short answer is that you do not *have* to hire your own lawyer.  But, it can be very useful.  And, it can be done economically so you don’t have to break the piggy bank.  You see, if you hire your own lawyer, they can be “back up” and simply monitor the lawsuit, while the insurance-retained lawyer does the yeoman’s work.  That way, if the insurance carrier begins to make noise about filing a declaratory judgment to deny the claim, you have your own lawyer already in place, knowledgeable about what’s happened in the case from the get-go.  But if the insurance company never “pulls the trigger” on denying the claim, then your private lawyer’s involvement (and bill) will be minimal.

Is there still a cost associated with having your own private lawyer involved?  Of course.  But the costs can be small, while still giving you protection should you need it down the road.  Think of it as just one more safety mechanism for your Firm.

I’ve been on both sides of the lawyer role– I’ve served as the private lawyer, and I’ve served as the insurance-retained lawyer.  Either way, it is a very workable solution with some very real benefits for the design community.

Have you retained your own lawyer in a “ROR” situation?  Share in the comment section below, or drop me an email.

Photo (c) TaxRebate via Creative Commons, with alterations


Dear Engineer: Has your insurer issued a “Reservation of Rights” letter? (law note)

In my previous post, I made reference to getting a  “Reservation of Rights” letter.   I noted that the carrier may decide to defend you under a Reservation of Rights (i.e., hire your lawyer) but may not, necessarily, accept the responsibility for paying the claim.  Does this mean that the insurance company has denied your claim, or will never pay?  No.

Reservation of Rights (ROR) letters are sent for a variety of reasons- most notably, when some portion of the construction lawsuit against you is not covered under your E&O policy.  The letter must state the reason(s) that the ROR is being issued.

With the ROR, the insurance company is telling you that it reserves the right to withdraw from your defense and/or deny payment of damages at a later date, depending upon how facts in the case develop.  The notice is intended to let you know that there *may* be issues later, and to put you notice that  you have the right to hire your own lawyer (at your own expense) to protect yourself from that future potential risk.

How should you react to getting a ROR letter?  You should review it with your own lawyer, and consider retaining your lawyer to work with the lawyer the insurance carrier retains to protect your rights.

Is this required?  No.  Your insurance-retained lawyer still owes you the duty to protect your interests.  If the insurance company decides to later withdraw from defense, or seek a court ruling that they do not owe you a defense, your insurance-provided lawyer cannot represent the insurance company against you.  The insurance company would need to hire a different lawyer/law firm to make that argument.

It is never pleasant to get a ROR letter, but it is not unusual, depending on the particular facts in your case.  And it doesn’t mean that you won’t have a vigorous defense, or that the insurance-retained lawyer is not working for you.  They are, and they will.  However, it is never bad advise to have your own personal lawyer weigh in on the ROR letter and its ramifications for your Firm.

Have you ever gotten a ROR letter from your insurance carrier?  If so, share in the comment section, below.  And, be sure to get your White Paper on 7 Critical Mistakes that Architects & Engineers make, by filling out the form on the right hand side of the blog page. 

“Professional Best Efforts” part 2– Reservation of Rights for Engineers who agree to “best” efforts? (law note)

reservedRecently, a reader reached out to me to ask about case examples of an engineer losing his insurance coverage because he agreed to a “heightened” or “best” standard of care. The reader stated that he was an insurance adviser who handled various construction professional coverages, and that in his experience it was very unusual to deny or limit damages because of a heightened standard of care.

This comment led me to an informal survey of several insurance brokers that I deal with, and the general consensus is that instead of outright denying a claim, most E&O insurers will issue a “reservation of rights” letter. What that means is that the insurance company will defend the claim (i.e., pay for your lawyer to defend you and your Firm), but with the understanding that they are (potentially) denying any liability for any adverse money judgment against you.

Inevitably, most such cases settle, but if they do not, the question then is whether the heightened duty created part of the damages. The insurer may ask to intervene in the lawsuit to ask the jury that question, in an effort to limit its share of the damages.

The reader commented that he could see two related insurance limitations: (1) where the professional agreed to be liable, and (2) where the professional refused to consent to settle a claim. In such cases, many policies contain a “hammer clause” which limits the insurer’s liability and defense costs to that which would have resulted had the insured accepted the settlement.

While these are interesting fact situations to the insurance and/or law geeks among us, for those of you who would rather spend your days designing and engineering instead of in court,  the best practice still remains the same:  avoid agreeing to the highest professional standards. Being the “test case” for a novel legal issue is not in your best interest.

Thoughts? Comments? Experiences in such situations? Share in the comment section or drop me an email.

Understanding the Construction Bond Claims Process in North Carolina (guest post)

craneAs an architect, engineer, or other design professional, you may be called upon to assist the owner when a bond claim has been made, and a new contractor is being brought in to take over the project.    Therefore, it is important to understand how the surety handles bond claims and the bonding process, in general. 

With that in mind, today we have a guest post on the ins and outs of bond claims in North Carolina from a surety bond expert– founder and president of Lance Surety Bond Associates, Vic Lance. Vic is a graduate of Villanova University with a degree in Business Administration and holds an MBA from the University of Michigan’s Ross School of Business.  

Take it away, Vic…! 

As construction specialists in North Carolina are well aware, contract bonds are an indispensable requirement for bidding on public and private projects all across the U.S.   Unfortunately, even the most diligent contractors can get into trouble with construction bond claims. Claims are typically filed when project owners are not satisfied with the quality of the executed work, or if the contractor defaults or breaches contractual obligations.

While avoiding surety bond claims is the best option, sometimes claims are inevitable. Let’s take a look at the basics about surety bond claims and the specificities that North Carolina construction professionals should keep in mind.

The way contract bonds work

Construction contract bonds, including bid bonds, payment bonds and performance bonds, are often a requirement for bidding on public and private projects. Similarly to other surety bonds, they are a three-party agreement between the contractor who needs the bonding, the entity requiring the bond (usually the project owner) and the surety that underwrites the bond. Contractors cover a percentage of the bond amount, which is their actual bond cost, in order to get the backing.

For example, Federal construction projects above $100,000, as well as the majority state and local ones, require contractors to obtain both payment bonds and performance bonds. As for private projects such as commercial and residential buildings, project owners also prefer to include the bond requirement for bidders.

Payment bonds serve an important function in safeguarding subcontractors and suppliers. They guarantee that the main contractor will make all due payments on labor and materials. Performance bonds, on the other hand, directly protect project owners by allowing them to use the safety net of the bonds to hire another contractor to complete the work on time and with good quality.

signingThe basics about surety bond claims

There are different situations that can trigger a bond claim, but the most common ones include (1) defaults, (2) breaches of contractual agreements, and (3) non-payment to subcontractors or suppliers. Naturally, disputes can also occur that might not be directly linked to the actions of the contractor.

For North Carolina construction professionals, the most important thing to remember is that your surety is your best partner in such situations. It can provide legal and logistical help at all stages of the claim process. It’s up to the surety to carefully consider all facts about the case and to assess whether it stands a solid ground.

The typical resolution is to seek a settlement between the claimant and the contractor. Often this is the least problematic way to tackle the case, and sureties help their bonded clients in going through this process. As for the completion of the work, in the case of a performance bond claim, the surety either selects a contractor to finalize the project, or the project owner organizes a tender to choose a new contractor.  [Editor’s note: This is often also the time when the surety requests architect/engineer assistance in evaluating the project status and bringing a new contractor up to speed.]  For any compensation that the surety has given to affected parties, the contractor is fully responsible to reimburse it.

How construction bond claims are handled in North Carolina

While bond claims are generally handled in similar ways across the U.S., there are some specificities that North Carolina contractors should keep in mind. The legal basis for claims in the state are the Federal Miller Act, as well as the North Carolina Model Payment and Performance Bond Act. They set the rules for handling payment and performance bonds on public projects, but are not applicable to private ones.

These acts set the timeframe and notices requirements for payment bonds on public projects, but not for performance bonds on such projects. That’s why handling performance bond claims on both public and private projects is done via the language of the bond, the contract in question and the general legislation.

It’s important to note that on state projects, the bond protection covers only prime contractors, and the rules do not apply to subcontractors. The requirement for posting bonds in North Carolina public projects is for those projects above $300,000. As for payment claims, the North Carolina Act sets a 120-day notice requirement for subcontractors and suppliers to assert a claim against a contractor. Further details about the specifics can be found in the Surety’s Defenses to Construction Contract Termination document (pdf).

While surety bond claims are unpleasant for all parties involved, they are sometimes a fact in the construction industry. However, knowing the legal background is important for contractors, so that such cases can be minimized and solved in the best possible way.

What is your experience with construction bond claims? Please share your insights in the comments below.

Changes to your Scope of Services on the Construction Project (law note)

change!Our office is in the middle of a large renovation.  It’s been several months of drilling, sawing, painting, carpeting– you name it.  I’m proud to say that we have had not one change to the scope of work during that time.  <insert maniacal laughter here>.  Okay, that’s simply not true.  Change–like death, taxes, and bodily functions–happens.

In the same way that incoming wave will soon destroy that sand-written “change” sign in the picture that accompanies this post, change will happen in all parts of a construction project.

As the architect or engineer of record, you undoubtedly have a thoughtful, well-written contract or proposal.  Ideally, your contract states exactly what is, and is not, included.  But inevitably, something will slip through the cracks.  A likely scenario: the owner asks for “just a small change over here,” “one more quick site visit” over there, and hey, what’s a few extra months of contract administration among friends, right?

Whenever you experience such “scope creep”, document it.  Ask how compensation will be handled up front.  Even a quick email to the owner, stating that you’d be happy to make that extra site visit and will invoice per the contract, will make the owner aware that you expect compensation.   Have the discussion before the work is done.  When they are likely to say “great- how soon can you do it?”.  Or, if they don’t expect to pay you for your extra services, they’ll tell you that.  Either way, you’ll know what the expectations are for payment.  And, should you not get the payment later on, you have a nice piece of written evidence to show a judge or jury.

Your turn.  Have you experienced “scope creep” on a project?  How did you handle it?  Comment below, or drop me a line.  New readers: Check out the white paper on 7 Critical Mistakes that Design Professionals Make, available for free download on the right hand side of the page.


Photo “Change in the Sand” (c) Melissa Brumback. Creative Commons License

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