3.  Uninsurable Losses Resulting from State Architectural Contract

By Kim Fricke, Professional Concepts Insurance Agency, Inc.

Members of the profession that work with the State of Michigan Professional Services Contract, or similar municipal or university contracts that are derived from it, may be facing potential claims that are not insurable.

The State’s contract now consists of two basic forms, the PSC Architectural/Engineering “Contract for Professional Services” (PSC), and the Lump Sum Architectural/Engineering “Contract for Professional Services – For Minor Projects Only” (Lump Sum). The last revision for each is dated 7/8/03.

Each contract places significant risk upon the design professional that is not typically assumed in the performance of services. Both contracts contain clauses requiring significant services that are usually uninsurable for architects. Both contracts also contain clauses that far exceed the normal standard of care normally required of architects. Professionals should be aware that if they decide to accept these conditions, they may be held to a higher standard of care, and expose themselves to financial losses that may not be covered by professional liability policies.

While there are many offensive provisions contained in the State of Michigan’s agreements, the “Top Ten List” of things to watch out for follows:

1. The Lump Sum contract requires the architect to provide “on-site construction inspectors” and inspection services without any limitation on the frequency or number required. In accord with the State’s agreements, the professional is responsible for ensuring compliance of work with contract documents as well as site safety. The professional is obligated to direct the project contractor to take whatever action is necessary to immediately relieve dangers to human life or property.

   This responsibility for construction site safety applies to “observed and suspected cases” of danger and requires the architect to immediately report the actions taken by the architect to the State in writing and then certify the cost impact of such action to the project.

   These duties for job site safety are potentially uninsurable and far exceed the normal duties of architects. The potential for claims is substantial.

   Construction safety has always been the responsibility of the contractor and should remain with the contractor. Courts across the country have regularly held design professionals not liable for construction site accident claims where appropriate contractual protections are in place negating or limiting the design professional’s responsibility for construction site safety. However, the provisions in the State’s agreements could be construed as imposing direct safety responsibility on the design professional, who could be found legally liable for job site accidents. The financial exposure to the design professional could be substantial.

2. The architect must agree to indemnify the State against all claims unless the State is solely responsible. The State could be found to be 99% responsible and the Architect 1% responsible, and contractually the architect would be required to pay 100% of the claim. This high standard is not insurable under professional liability policies.

3. The PSC contract requires the architect to determine the appropriate construction schedule and assist the State in “taking all practical steps necessary to address and complete the project in event of delays or default by the Construction Contractor.” The architect must “monitor, evaluate, and provide timely administrative action, as necessary” to determine if the Contractor’s work will result in completion on schedule, and if not, then immediately advise the contractor in writing of the actions necessary for the contractor to complete the project on schedule!

   Obviously the architect is assuming responsibility for scheduling all construction operations and could possibly lead to allegations of responsibility for ways, means, sequences and techniques of construction and possible responsibility for injuries should they occur. Needless to say, this high level of services is potentially uninsurable under normal professional liability policies.

4. Both contracts require the State to survey for existing hazardous materials – but only after the architect provides a scaled drawing indicating where hazardous materials may exist. All data provided by the state, including the report prepared by the hazardous materials professional, must then be reviewed and verified for accuracy and completeness by the architect.

   The architect is not entitled to rely on any information provided by the state to be accurate. The hazardous material professionals cannot verify with absolute certainty the existence of hazardous materials without extensive site testing. Why should or would the architect want to verify for accuracy what another trained professional has been hired to provide? This requirement is simply another opportunity to expose the architect’s professional liability coverage and deductible.

   Both contracts also require the architect to prepare plans and specifications for the repair of any areas where hazardous materials are removed, at no increase in cost, even though the scope of work was unknown at the time the architect was required to quote the lump sum fee.

5. The architect is required to retain surveyors and geotechnical consultants to “identify and confirm all project site underground conditions sufficiently to accurately specify [construction] contractual requirements.” Since it is virtually impossible to accurately identify all underground conditions, architects should be aware that they must also indemnify the State if they fail to discover all underground problems and it results in a claim.

   Most architectural firms would be uninsured for geotechnical work and indeed most geotechnical firms would not be insured if they contractually agree to these unusually high standards. These contractual obligations could be construed as a “warranty” or “guarantee” of the results of professional services. Liability arising from contractual warranties and guarantees is always excluded from coverage under professional liability insurance policies.

6. The PSC contract makes the architect responsible for determining and specifying the means and methods to be used by the construction contractor for bracing and shoring, dewatering, site access, traffic control on the project site, etc.

   Determining means and methods has historically been the sole responsibility of the contractors performing the work and is potentially uninsurable under professional liability policies. Undertaking such responsibilities by the design professional could be construed as engaging in “construction activity,” liability that is typically excluded from coverage under professional liability insurance policies.

7. At the completion of the project, the architect must “incorporate and render” the contractor’s as-built drawings into original documents that are “of such clarity, detail and completeness that reference to other documents” is unnecessary. The architect is not permitted, however, to rely on the drawings furnished by the contractor as being accurate or complete, and yet must still certify in writing that he has verified their accuracy.

   The architect is not permitted any additional cost to verify and field check the accuracy of the supplied documents even if they are of poor quality. Providing “certification” that drawings are “accurate” could be construed as an uninsurable warranty or guarantee under most professional liability insurance policies.

8. If the State decides to terminate the architect, the architect is required to turn over ALL “data, drawings, specifications, reports, estimates, summaries, and such other information and materials as may have been accumulated by the architect in performing this contract, whether completed or in process.”

   Turning over all documents, even such items as incomplete engineering calculations or partially complete diagrams could easily result in misuse or incorrect interpretations of the materials and result in substantial claims. The architect is then still held contractually “liable to the state for any additional cost occasioned to the state thereby” as well as indemnifying the state for any claims for which the state is not solely responsible.

9. At substantial completion of the project, the architect must certify that ALL construction work complies with the contract documents rather than the normal work being “generally consistent with the contract documents” that is the normal standard of care for the industry. Since the contract also requires the architect to provide whatever on-site personnel is required for the project, up to and including full-time personnel, claims would normally not be insurable due to the contractual requirement to “certify” excluded under professional liability policies.

10. The state contracts give ownership of all documents to the state, rather than defining them as “Instruments of Service.” The concerns are unauthorized re-use or changes to the original designs that could result in a claim being filed years later against the architect.

    Another problem may also arise. If the design professional transfers ownership of intellectual property rights in drawings and other work product prepared by the design professional to the state, without reserving any right of reuse, then the design professional could arguably be precluded from reusing its own standard design details, standard drawing notes, and the like, on other projects for other clients. The state could become the “owner” of the design professional’s own “intellectual property” embodied in the drawings prepared by the design professional.

The difficulty in agreeing to problematic contractual obligations such as those discussed above is that multiple litigation can result if claims are made that arise from potentially uninsurable contract provisions. While the design professional’s insurance carrier may not necessarily deny coverage at the outset of the claim or litigation process, the carrier will almost certainly assume the defense of the insured design professional under a strong “reservation of rights.” This generally means that the carrier reserves the right to deny coverage and withdraw its legal defense of the insured at a later date, if it becomes apparent that the claim or liability involved is excluded from coverage under the policy. This can result in separate litigation between the insurer and the insured, in which the court is called upon to construe the policy and determine if coverage is available.

The existence of multiple litigation leads to uncertainty and added legal expense. A judicial determination that the design professional’s liability is excluded from insurance coverage could be financially devastating to the professional, depending upon the severity of the claim. The unavailability of insurance to the design professional to cover losses or liabilities that may arise under the state’s agreements cannot possibly benefit the state.

There are many other provisions contained in the state’s agreements that create significant, atypical risk exposure for the design professional. If contracting with the State of Michigan, or other related entity, you should review the entire agreement with extra care in order to be come familiar with your exposures and responsibilities.

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