Do Not Pass Go! Duty to Defend in a Professional Services Agreement (law note)

sword to defendRecently a client asked me to review a contract for his Firm.  The Owner, who had prepared the draft, had inserted a rather stringent “duty to defend” clause.

As I told my client, a duty to defend clause is not a good idea for a couple of reasons.  First, if you agree to provide a defense, what that means is that you are footing the bill for the Owner if the Owner is sued by another party.  Think about that for a minute.  You are paying legal fees for someone else’s legal defense.  You may or may not be able to direct the litigation or have a say in who is hired.  Can you say open check book?

Secondly, and more importantly, the duty to defend is almost never insurable.  What that means is that your professional liability carrier will not be footing the bill—your Firm will be doing it.  This is not a case of adding the Owner as an additional insured, so do not confuse the two.  Agreeing to a duty to defend is an extremely burdensome, and potentially costly, mistake.

What do you do if your Owner is insisting on such a clause?  Try to get the clause written out of the contract, period.  Point out to your Owner that it is not covered by your professional errors  & omissions policy.  That alone is often enough to get Owners to agree.  You might also contact your insurance carrier/agent to add weight to your statement.  They can point to the provisions in the policy that will likely exclude coverage.

If the Owner will not strike the provision, then what?  Seriously think about whether this is a risk you can afford to take.   What type of project is it?   Do you know the contractor and other parties—are they reputable and qualified?  And most importantly, is the profit to your Firm such to justify the potential risk.  Usually, the answer to the last question is no.

Have you seen a “duty to defend” in an Owner contract?  Did you agree to it?  Share in the comments below, or drop me an email.

Photo: (c) MatthiasKabel via Creative Commons Attribution-Share Alike license.

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.

Agree to use your “professional best” ? You may lose insurance coverage! (law note)

mistakesYesterday, I was part of a panel at the NC Bar Association Construction Law Winter Meeting, discussing insurance issues for design professionals.

One topic we touched on was how to avoid invalidating your insurance.  As most of you know, Errors & Omissions insurance (“E&O” coverage)  is meant to provide coverage for mistakes you may make in performing your professional architecture or engineering services.  E&O coverage is important to protect you in the event of a lawsuit because, as you know, no set of plans is perfect (nor is perfection the standard of care).

Be careful, though.  Do not promise to provide a higher standard of care than the “professional standard“.

If you are asked to sign a contract that states you will use your “professional best,” “best efforts”, “highest care” or similar, you are being asked to sign something that could cost you your E&O coverage.

Examples of such language:

[Architect] [Engineer] shall perform the Services in accordance with the highest standards of professional competence in the industry.

[Architect] [Engineer] shall exercise a high degree of care and diligence in providing the professional services.

Architect’s] [Engineer’s] services shall be of first class quality and free from defects.

E&O policies cover you for failing to meet professional standards, but not in cases where you agree by contract to provide a higher/better/best standard. 

Explain the risks in such language to your owner clients.  No owner will want to put your insurance policy in jeopardy, and they should be willing to strike or modify that language to ensure that your work on the construction project is fully protected and covered by your E&O policy.

Some examples of coverable standards:

All services to be performed shall be performed in a manner consistent with that level of care and skill ordinarily exercised by members of Designer’s profession.

All services shall be performed in a manner consistent with that level of care and skill ordinarily exercised by members of Designer’s profession currently practicing in the location of the project for which the services are rendered, or similar locations.

Remember this, and make sure your future construction contracts contain favorable language that will actually be insurable.  You know– the whole reason you have professional liability insurance in the first place!

Have you ever been asked to agree to provide your best efforts?  How did you handle the situation?  Share in the space below.

They threatened to sue! What do I do? (Law note on construction disputes)

dont panicI just spent some time answering emails from folks worried because they’ve been threatened with a lawsuit over a construction project gone bad.   They want to know:

Can they do that?

What can they get?

But what if I have a good defense?

These are all good questions.  The short answer is that anyone can sue anyone else in America for anything, at almost any time.  HOWEVER, the law is not (generally) a fool.   If someone sues you, but you have a defense or their claim is not well-founded, they almost certainly will not prevail.

Does this mean you can relax?  No, it doesn’t.  You still must take any lawsuit (no matter how ill-conceived) seriously.   Here is what you do:

1. Report any lawsuits, or threats of lawsuits, to your insurance carrier if it involves your errors & omissions professional liability insurance.  Even if you are not sure if it involves E&O claims, report it anyhow.  Early reporting costs nothing but a few minutes of your time. Late reporting could mean you are denied insurance coverage.

2.File an Answer to any lawsuit within the time frame provided.  In North Carolina state court, that is generally 30 days from the date you were “served”, although if you follow certain procedures you can get that extended to day 60.  In North Carolina Federal Court (it will say on the Summons whether it is state or federal, and almost but not all construction disputes are state court), you have 20 days to respond (with extensions allowed if you follow certain other procedures).

Questions?  Leave a comment or shoot me an email.

 

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