Risk Management Resources
Insurance for Starting a Design Office
Architects and engineers planning to start their own firms will ask me about insurance for the new venture. Typically, small firms start with one or more of these three types of policies:
1) Professional Liability Policy
This type of policy pays for legal fees and damage awards connected to an A/E’s design work. This coverage is important because an architect or engineer is personally liable for his or her professional services. There is no way to organize or incorporate to shield yourself from this responsibility. Fortunately, there are several programs geared toward small firms. Costs start at about $1,500 per year, and for new firms it is often wise to lock in a multi-year policy, if available, while billings or estimated billings are low and the firm is claim-free.
Thinking about Design/Build?
Just this afternoon I got my most recent call about design/build—an architect client of mine wanted to take on a design/build project and wanted my opinion. Now, there are many ways to structure a design/build project, but the scenario he described is the one I get calls on the most often: an architect or engineer (A/E) will design a building, then retain the trades directly. This way, the A/E has control over the full construction value of the project, not the 3%-12% they usually get for the design alone. When an A/E takes responsibility for construction and subs out 100% of the “work,” we call that A/E a “Paper GC” since the A/E won’t actually get out and swing hammers—their role as general contractor exists only in the paper contracts.
Top Five Risk Management Tips
Risk management, simply put, is the identification of threats to your well-being and the decision of how to respond. Risk management takes on an additional level of importance for professionals like architects since they are personally liable for the professional services they provide. Below are five areas vital to design professionals who want to reduce or transfer risk:
1) Client Selection:
Monitor your interaction with clients and potential clients and be aware of danger signs. Walking away from a project could be the best answer if the relationship starts off with confrontations, excuses and unreturned phone calls. Similarly, beware of the red flags that signal a dissatisfied—and possibly litigious—client: late payments, disputes with the contractor, breakdown in communication.
Winners and Losers in the Self-Certification Process
I get a little worried whenever I see a shift in the relationship between architect, owner and contractor because often, when the dust settles, the architect has come out of the process having given up some ground to the others. Change yields both winners and losers.
1) The Project Owner
If you self-certify a project the owner will spend no extra money and get the project completed sooner. If it is a commercial space, the owner will begin making money sooner. Self-certification clearly benefits the owner.
When Clients Ask to Be Added to Your Policy
What Status Do TheyWant?
Additional Named Insured: this status is never given to a client, nor would a client ever want this status if he or she realized the implications. A Named Insured under the policy receives the full scope of protection under the policy, so it is appropriate only for the design firm and any related companies. If a clients were Named Insureds, they could be held responsible for premiums, they could cancel the policy, and you could be forced to pay out under your policy for a loss experienced by that client that has nothing to do with your services.
When the Sheriff is at the Door
One of the most unnerving experiences a designer can have is being the recipient of a lawsuit or subpoena by a local marshal. Print out this article and keep it handy so that you can pull it out in case you ever need it.
I just had papers served to me. Does this mean that I am being sued?
Not necessarily. While the papers could be a summons and complaint bringing you into a lawsuit, they could also be a subpoena for documents (Subpoena Duces Tecum) or for your testimony (Subpoena Ad Testificandum), or both.
Here is a tip to help you lower your professional liability costs:
Let’s say you are an architect, and you routinely retain engineering consultants on projects. Let’s say that you pay out about 10% of your $1,000,000 annual fees to such firms.
When you complete your application for professional liability, you have to show these billings, and your firm will be rated including the $100,000 that you only passed through your books. The insurer will insist that if you retained an MEP, for instance, and the client makes a claim arising from the HVAC system design, your insurer will have to get involved, so there will at least be costs to your insurer for the attorney to defend you. Even if you use 100% insured engineering consultants you will still be charged for those fees.
It is difficult to imagine theft by employees in a small design firm. After all, the administrative folks are generally nice, competent people who tirelessly take care of the day-to-day functioning of the firm—ordering supplies, paying invoices and invoicing clients.
But it is easy to picture how the principal of a fast-paced firm could focus more on design documents than the Quickbooks program. This could prove to be a costly situation.
The Hammer Clause
Called by some insurance companies “The Cooperation Clause,” the hammer clause in a professional liability policy is something you should be aware of. The hammer clause is a provision included in many policies that gives the insurance company more control in a claim than you may be comfortable with.
It is best described by example:
Let’s say you are sued for negligent design services and the amount of the claim is $500,000 and let’s say that it is a frivolous claim against you
Now let’s say that after generating $50,000 of legal fees to defend yourself you receive an offer to settle from the plaintiff for $200,000. You want to reject this offer because you didn’t do anything wrong and it feels like extortion to you.
There are two sure-fire ways to get tagged with liability for site safety:
#1 – Assume site safety responsibility in your contract with the owner, or
#2 – Assume site safety responsibility by your behavior on the jobsite.
#1 is pretty clear cut, and is easy enough to avoid. But you and your employees should be on your guard against #2. If your contract specifically excludes site safety responsibility (as it should), and the owner-contractor contract specifically includes site safety responsibility (as it should), then you must leave this duty to the contactor. If you were to stalk through the jobsite insisting that this worker wear a hard hat, that this worker wear safety glasses and that netting be installed, a general contractor could well claim in court that you, an educated and licensed design professional, had taken charge of the safety component of the project.