DAN BUELOW: Hello and welcome to Talk to Me About A&E. I'm Dan Buelow, managing director of Willis A&E. And our program today is part two of our review of the DPIC liability IQ. I'm joined by Laura Gallardo, managing director of design professional liability claims for travelers and Mark Blankenship director of risk management for Willis A&E. Both Laura and Mark were claim managers for DPIC back in 1997, when I was also at DPIC on their underwriting side of the house. If you haven't listened to part one of our review of the liability IQ, I suggest you do.
Now let's get back to my discussion with Laura and Mark. All right, next question. This is to Laura. The word install as used in specifications carries with it the understanding that the item to be installed will be supplied by the party performing the installation.
LAURA GALLARDO: Not necessarily.
DAN BUELOW: I think what they're looking for back when this question was created many moons ago was around the at risk exposure that a firm might find themselves if they're in their self performing or hiring trades or anything to that. I think is where that's going. But what are your thoughts.
LAURA GALLARDO: No. And I agree with you, Dan. I think that is where it comes from. I mean it, to a certain extent, it used to be a little easier to talk about who are the contractors and who are the design professionals and what they did. Those lines have, kind of, blurred through the evolution of the time that I've been in the industry.
And the concept of install is certainly something that is not that which a design professional would generally be doing, it is something that is viewed more as a contracting aspect. But the concept of install also has certain parameters of what it's meant to be. That it's simply that act of putting it in not necessarily deciding how it goes in, not necessarily deciding what's put in et cetera, et cetera.
Make sure the contract is basically saying what it is you intend to do. And if there is something that is there that is not part of what you're doing, don't take that on. I've certainly had many a design professional who's been asked to well you take on new contract with this entity, whether it's a geotech or whether it's perhaps a specific contracting entity.
Hey design professional, do me a favor, contract with this entity for me because I just don't want to have to go through the process of my requisition to get it. So hey, do me a favor. Take this on. Well that has awfully big implications because no matter what, you're then responsible for whatever it is that other entity is doing.
DAN BUELOW: Right.
LAURA GALLARDO: And that can become a very bad issue because you have then vicarious liability. You're going to be held responsible for whatever it is that entity does. And if that entity does not have adequate insurance, or for whatever reason their insurance is not applicable, guess who's holding on to it.
DAN BUELOW: Guess who may have a coverage issue--
LAURA GALLARDO: And yes who may have a coverage issue.
DAN BUELOW: --depending on what their policy reads. OK, Mark.
MARK BLANKENSHIP: Dan I think this question is most relevant to architects and engineers as specification writers. And the point being use language precisely. To say that the mechanical contractor will install the HVAC equipment leaves open the question, who's buying the equipment and who's furnishing it. So there are those who assume that the word install means to provide all labor and incidental materials to place the item of work in a completed and usable state.
DAN BUELOW: Right.
MARK BLANKENSHIP: But it's little less than crystal clear. And if I was working on a public project, I would look for every opportunity I could to submit change orders to pad my profit margin after my bid has been accepted. And one way the change order artists accomplish this is by looking for ambiguities in the specifications. So this is, I think, of the lesson in using precise writing.
DAN BUELOW: Yeah. Excellent points. And again, it depends on what the design professional scope of services is and what they are offering. As a professional firm, most design firms are not integrated firms offering at risk. Most firms are not doing CM at risk or EPCM but some do. And if you do, that's fine, but you better make sure that you have the right insurance, which may very well not be your professional with some of this exposure and risk you're taking on.
So again, another good point there. So Mark, owners should be able to feel secure that a competent design professionals estimates can be treated as a guaranteed maximum cost.
MARK BLANKENSHIP: Oh I love this one. Most people's experience with the word estimate relates to auto insurance. And they got in a fender bender and they went to the body shop and they got an estimate. And then the car got fixed for the amount of the estimate to the penny. What we as design professionals offer is opinions of probable construction cost. I think the more precise use of language operates to refine the expectations to a more accurate level.
DAN BUELOW: I would agree with that. Laura.
LAURA GALLARDO: I would agree wholeheartedly. Mark's comment on the expectation. We're right back to that concept of managing the expectation.
DAN BUELOW: And words are important, yeah.
LAURA GALLARDO: And the words are important.
DAN BUELOW: Also I would say that this question when it was probably at the time wasn't written to consider this but in this day and age we've seen a real influx in design build infrastructure claims, right. And a big problem with design build is when they are setting these guaranteed maximum prices or these firm budgets around incomplete set of drawings. And so we're starting to see in fact, most design build infrastructure claims reportedly are coming in before the start of construction. Pretty much says it all, right.
LAURA GALLARDO: Oh, without question. I mean, we'll just look at the last few years and the supply chain issues we've had.
DAN BUELOW: Yeah.
LAURA GALLARDO: I mean the concept with the supply chain issues. I mean, how is someone a design professional who is not the construction procurement group. How are they aware of what the heck is going on with the prices of drywall, concrete, steel. You can have ideas, but you're not going to have your finger on the pulse of it because it's not your day-to-day.
DAN BUELOW: OK. Next question. This is for both Mark and Laura here. You should strive to get a prevailing party clause in your agreement.
MARK BLANKENSHIP: Well Dan I think you mean prevailing party gets attorney's fees, right?
DAN BUELOW: Right. Yes.
MARK BLANKENSHIP: I would say no because this is a contractual liability in the event that it is used against you. Well either way, it's a contractual liability. Because here in America, we follow the American rule, which is everybody pays their own lawyer. In England, they follow the English rule, surprisingly. And the prevailing party there can collect back their attorney's fees from the party who's unsuccessful and guess that's there to encourage dispute resolution.
But in America, everybody pays their own. And this can be a hammer used against you in a claim. And let me propose a scenario to you. You are sued for $1 million, you think the claim is only worth 10,000. You offer $10,000, it's not accepted. They go to verdict, they get $10,000. Are they now entitled to their prevailing party attorney's fees, which were by the way $350,000 based on that contractual clause?
MARK BLANKENSHIP: And if you think I'm making this up, I'm not.
DAN BUELOW: I know. Because they prevailed.
MARK BLANKENSHIP: They prevailed. So A, strike the clause. B, if you can't strike it, define prevailing party. Something like the party who comes within 75% of the actual verdict or something.
DAN BUELOW: And I'm-- Laura I know you've seen this over.
LAURA GALLARDO: Oh, yeah. My favorite story is the 106 discrete issues of which the developer owner won three, that totaled about $80,000. But somehow or another managed to-- they quote unquote prevailed on three.
DAN BUELOW: Right.
LAURA GALLARDO: OK.
DAN BUELOW: So it's interesting-- yeah. So to that point, what's the definition of prevailing? And it's interesting when this question was originally written 30 plus years ago, the advice was yes you want this in there with the concept of usually it's not the design professional going to raise frivolous claims. But now that we've gotten into it, you have this contractual liability concern, you have this definition of prevailing concern so I think it's good advice that we're getting here. OK.
Next one here. You should strive to negotiate a limitation liability clause in every professional service agreement. I'm going to ask Mark to feel this. I know this is near and dear to your heart.
MARK BLANKENSHIP: Well I think we should try. And it has to do with balancing the risks and rewards of the project. If you think about the project compared to the construction costs, the owner has this building they can derive economic benefit from. And when they get tired of it, they can sell it. They get an enormous benefit from doing the project.
The contractor his profit was probably more than the design professionals entire fee. So I think it's appropriate that the design professional's liability should be limited in contract. And Laura, I don't know if you have any other good arguments that you might add other than the fairness argument.
LAURA GALLARDO: No I think fairness is a definite strong argument there. The concept of the limitation of liability, though. And if you're going to put them in, and I do encourage you put them in, you have to keep a couple things in mind. One is that the limitation of liability, depending on the state you're in has to follow certain requirements in order to be enforced by the courts. So you really need to make sure that you're going back and finding that trusted attorney in the area to be able to give you the information that you need to make sure that you're meeting those requirements so that it's enforced.
The other thing, use it as a conversation tool with your client. Talk about it with the client. This is why. This is why I'm asking for it. This is where I think it comes into play. And understand that this is-- and negotiate that number, whatever it's going to be.
DAN BUELOW: I think that's important. And in fact, how much insurance do you want? If you need more I'll go get some more but I want to limit it to the liability at least to the proceeds. I mean, ideally it's to dollar amount that's reasonable, but at the very least, to the proceeds of available insurance right at the time of settlement so that you're not sitting out there potentially exposing your business any more than over and above your insurance.
LAURA GALLARDO: That is true.
DAN BUELOW: OK.
LAURA GALLARDO: Though I'm sorry. Let me add just one more thing, Dan.
DAN BUELOW: No, please.
LAURA GALLARDO: I just do want to reinforce though to folks that a limitation of liability is not a get out of jail free card.
DAN BUELOW: Right.
LAURA GALLARDO: It is only applicable to the contracting parties.
DAN BUELOW: Good point.
LAURA GALLARDO: And so if you are being pursued by some third party, such as someone who's been injured or otherwise, the limitation of liability is likely not to help you there.
DAN BUELOW: Excellent.
LAURA GALLARDO: And so although they are certainly something that helps out and is worth considering and worth discussing with your client, you just can't look at it as a get out of jail free card.
DAN BUELOW: Next question. Very good points. It is illegal for a design professional to stamp drawings for an out of state unlicensed design firm unless a thorough review is performed.
MARK BLANKENSHIP: Trick question, Dan.
MARK BLANKENSHIP: The answer is-- Laura can I borrow your lawyer's hat because I'd like to give the lawyer's answer.
LAURA GALLARDO: Of course.
MARK BLANKENSHIP: It depends.
DAN BUELOW: It depends.
MARK BLANKENSHIP: It depends on what state you're in.
DAN BUELOW: And what are you an architect or an engineer for that matter?
MARK BLANKENSHIP: That's right. Generally it is illegal to stamp somebody else's plans because you're not complying with the statute, the licensing statute that says you will only seal plans that are prepared under your direct supervision. However certain states, let's take Illinois, for example, do allow it under certain circumstances. Illinois, unlike most states, has a separate structural engineering license.
And therefore it is permissible for an Illinois structural engineer to seal the plans of an out-of-state unlicensed engineer provided that the Illinois license engineer does all the math, all the calculations necessary to create the documents in the first place. And save evidence that they did so, and then it is actually legal. But that's the exception rather than the rule.
DAN BUELOW: And I think, again, we touched on this earlier. It really is important to know where you're doing business and what the laws in that state. Because again, Practice Acts, economic loss doctrine, anti indemnity statutes, statute of limitation repose, will and can vary from state to state. Right Laura?
LAURA GALLARDO: That is so true, Dan. And to be honest, that's the challenge. And we talked about the dabbling in the areas of different project types and how dabbling becomes a problem. Dabbling in a new state--
DAN BUELOW: Is, yeah.
LAURA GALLARDO: --it's almost as bad.
DAN BUELOW: And something we have recommended and helped our clients with quite a bit in the area is to identify counsel. If you're going into a state you haven't worked in before, it's our advice to identify counsel in that state that really understands the nuances of professional liability law and liability insurance because it's a finite number of folks out there. So not only would you like to identify them on the front end and even maybe get them added to your policy if they're not on the panel and negotiate that so they're not conflicted, but to also get good advice regarding what the nuances of that state are--
MARK BLANKENSHIP: Yeah.
DAN BUELOW: --when it comes to these laws.
DAN BUELOW: Dan there's one other situation, I'd like to tag on to this discussion, which is a situation that comes up fairly frequently, which is there's a breakdown in relationship between an owner and their design firm. Design firm A is fired design firm B is hired to complete the design. And I have-- I'm mindful of a case that happened here in Illinois where the design professional got indemnification from the client. That if there was ever any kind of claim from design firm A, they would be indemnified as part of their effort.
Well, the claim happened. They went. They completed the plans. Design firm A was watching because they were owed money and they saw somebody else finish the plans and they sued design firm B for copyright infringement. Well we turned to the client and said, would you please indemnify us like you promised, and they said sorry that restaurant went under. We're bankrupt now so no.
Then the design firm A also filed a disciplinary action against the design firm B, which there was no insurance for that against losing your license. So don't know Laura if you have any other thoughts on what to do when asked to take over a project from somebody else?
LAURA GALLARDO: Be very careful.
MARK BLANKENSHIP: Right.
LAURA GALLARDO: That's the key. Get some advice, get some good advice, talk to people. Find out what you need to do to protect yourself. Because you're right, Mark. An indemnity is only as good as the entity that's supposed to indemnify you.
MARK BLANKENSHIP: Right.
LAURA GALLARDO: And most developing entities are created for the specific aspects of a project and then disappear.
MARK BLANKENSHIP: A single purpose LLC.
LAURA GALLARDO: Make sure how protected you are right.
DAN BUELOW: So Laura, this one's for you. A design professional and his or her client can agree, by contract, that the period during which either can initiate a claim is shorter than otherwise required by applicable statutes of repose or limitation.
LAURA GALLARDO: I'm pulling out my hat. Maybe. It depends. Odds are, yes. Because yes, you're not doing something illegal by doing this, you can agree to a lesser statute of limitations or repos.
DAN BUELOW: So that's the answer, but I would say the points though we want to be wary of in all this, right, is that first of all, if there's anything in your contract that rhymes with statute of limitation repos, get an attorney to review to figure out exactly what they're trying to do to you. Because I'm pretty sure they're not going to shorten it. And the other point here is that there is a risk of voiding coverage potentially under the liability assumed under contract, right, if you went ahead and unilaterally did that.
LAURA GALLARDO: Depending. The potential is definitely there. But again, as you said, I would encourage you to make sure if somebody is messing around with statute of limitation or statute of repose, talk to someone who can explain to you exactly--
DAN BUELOW: Get legal advice.
LAURA GALLARDO: What it is you're getting yourself into.
DAN BUELOW: Right. OK. So here we go, Mark. Time is of the essence. That's in quotes. I know it's one of your favorite lines. Clauses are simply the client's expression that attention should be paid to doing the work as expeditiously as possible.
MARK BLANKENSHIP: Wish that it were so Dan. Time is of the essence. My understanding is this comes from real estate law. Where basically if somebody didn't perform timely, come up with the down stroke or whatever, then the contract was cancelable immediately because somebody has failed to perform.
And so this is-- like indemnification, this has morphed into the architect and engineer and construction setting. And now what it means is if you're one day late with your deliverables, you're in breach of contract. That's all that it means. So this is a contractual liability standard. I would contrast this with the professional association language that says you'll perform services as expeditiously as is consistent with the orderly progress of the work and sound professional practices, which is obviously our preferred language.
DAN BUELOW: Laura you agree with that?
LAURA GALLARDO: Oh, yeah. Oh, yeah. Time is of the essence is a very dangerous situation. Again, tying it to your professional standard of care. When it really comes down to it, that's what you're obligated to meet. And so whether it's time, whether it's efforts, whatever it is, it is bound by that professional standard of care of what a reasonable professional does in same or similar circumstances.
MARK BLANKENSHIP: Right.
DAN BUELOW: And as I say this when they start the contract off referring to the design professional as a contractor. Read on. It's only going to get worse, right. Same with this. If you see this time is the essence, there's other stuff in there that you're probably not going to want to have in your agreement.
MARK BLANKENSHIP: Right. This time is of the essence has become a term of art that has meaning based on court decisions. And there are other phrases like it. Position of trust and confidence, which means fiduciary duty. Arising out of, which means you're responsible for yours and anybody else's fault in the context of an indemnity.
And similarly time is of the essence. It has a legal meaning now. I would-- if I can't get any other change, I would like to say time is of utmost importance. At least I'm avoiding that term of art.
DAN BUELOW: OK. Next question. Laura performance of construction observation on your own projects reduces your exposure to claims.
LAURA GALLARDO: I think you can go either way with this. But I think generally, the answer is yes. Because you are there and you are then able to address issues as they come up.
DAN BUELOW: Yeah. And I think that's definitely the book answer as well. And I think that the important word there is observation, right. That you're out there observing that things are progressing in general conformance with your plans and specs. And as we say, if you're not out there, you know guess who they're all talking about, right.
And there is the fact, from an underwriting standpoint right, Mark, when you would be looking at and assessing risk, you're asking in your application, aren't you, what percentage of your work are you observing. So as an underwriter, you must have some good actuarial data that's going to somehow illustrate why that's an important question.
MARK BLANKENSHIP: Well you're right. And the data suggests that the answer I want to hear is 100% of the time. Now to Laura's credit I'll say the sophisticated answer is it depends. So for instance, if you're only getting paid to go out to the site once or maybe once a month, maybe that's not enough, and that's actually an increase in your risk. But generally speaking, no we find that firms performing construction contract administration services reduce errors in the construction and they therefore reduce their exposure to claims.
DAN BUELOW: And if your client, for whatever reason, wants to skimp on this or not have you there at all or bring in the dreaded third party CM, wouldn't we want some additional language in our contract to clarify that-- what's-- that you're not responsible then.
MARK BLANKENSHIP: That would be nice. Some limiting language would be nice. Scenario I see play out far too often is that design professionals elect to do things on the cheap to benefit the owner, but the owner does not share in the risk and that, to me, is just unfair.
DAN BUELOW: All right. This one is for both of you here. Laura, let's start with you. A design professional can amend the contract after it is signed simply by virtue of his or her conduct. And I know being a lawyer, it's hard for you just to answer this true or false. But let's see what would you think?
LAURA GALLARDO: This is true. Don't even have to say it depends. This is true.
DAN BUELOW: I've had attorneys push back on me and saying not really amending it but OK.
LAURA GALLARDO: You're creating more obligati-- you're creating your own obligation. I mean, that's the problem here. Is that if you alter this what you're doing with regard to the scope, you have a set scope of services, and you keep letting that scope creep, and that scope change, and that scope expand, you are taking on more responsibility, and you may or may not be getting paid for that.
DAN BUELOW: And there's the big point isn't there Mark and Laura that we want every design professionals agreement to contain in there that they are not responsible for job site safety. That it is, in fact, the sole responsibility of the general contractor, right.
However if they go out there or construction means or methods-- however, if they go out there or any staff member goes out there and takes control of that job site, even what's in that written contract, their actions could take precedent over whatever they have in that agreement, and they could be liable, right. I mean that's a concern in this.
LAURA GALLARDO: That is the truth. If you take on an obligation, you're supposed to perform it reasonably. And if there is an assertion that you didn't perform it reasonably, even if you weren't contractually obligated to do it but you took on the obligation if you don't perform it reasonably, you've now set yourself up.
DAN BUELOW: Or in another example would be if the design professionals stopped the work out on the site even though they had no responsibility. It doesn't matter they are actions, right. OSHA could certainly come in and has. There's precedent out there where they have come in and work has been stopped, and they've come after the design professional.
LAURA GALLARDO: They've demonstrated control of the site. They've taken control of the site, whether they have it or not, they've established and made themselves out to have control of the site. And if you have control of the site, get ready. You're ready for safety, you're ready for just about anything.
MARK BLANKENSHIP: Unfortunately this is almost always a one way street. In fact, I'm going to go so far as to say it's always a one way street. You can expand your scope of responsibilities by what you do on the site. I've never seen anybody successfully limit or restrict their responsibilities by virtue of what they said or did after the contract was signed.
And I'd like to go on and offer one example of how this has happened and ask Laura for a story too. But as a for instance, there was an excavator who was having trouble balancing a site. And the frustrated civil engineer grabbed a can of spray paint and walked up and sprayed a line 8 inches above the dirt and on the side of a building, and said fill to there. And then he was deemed to have assumed responsibility for means or methods when a later problem arose. Laura, I don't know if you have an example or two of how innocuous or well-intended actions have resulted in an expansion of liability exposure.
LAURA GALLARDO: Yeah. Sketch on a napkin about a connection.
MARK BLANKENSHIP: Literally. OK.
LAURA GALLARDO: Yeah. A sketch on a napkin about a connection.
DAN BUELOW: Right.
LAURA GALLARDO: And all of a sudden--
DAN BUELOW: You've crossed that line. That gets into the drawings. And there you are, you've crossed that line and you tried to help or be helpful but you have to, again, know what your responsibilities are and the standard of care. OK last question, OK, for both of you. To help keep legal fees down, it is important to wait as long as possible before reporting a problem to your professional liability insurance company. I'm going with Laura on this one. Yeah.
LAURA GALLARDO: Dan you're killing me here. No. Do not wait. Do not, do not, do not.
DAN BUELOW: It doesn't get better with time, does it?
LAURA GALLARDO: No. It doesn't.
DAN BUELOW: It's not auto insurance. This is-- we got to nip this in the bud right.
LAURA GALLARDO: You have professional liability policy and your policy says that you will report a claim. So if somebody makes a demand against you, you better be reporting that or you're running into potential issues if you hold off and there are things that develop that arguably prejudice rights. You run into problems there.
Now the other thing to think about is, OK it's not a claim, but something just doesn't feel right. You feel like you're being set up, you're sitting at meetings, you're reading minutes that have been prepared from a meeting and you're like, that's not what I said. Well, maybe it, sort of, what I said. Get some help. All--
DAN BUELOW: Trust your gut.
LAURA GALLARDO: Most of the Professional Liability policies out there have what is called pre-claim assistance. You get to report things into the carrier. The carrier will provide a claims professional who has been doing this for a very long time and will help you through the process. Potentially a hiring an attorney to assist you at the insurance company's cost. Because we are so dedicated to the concept of getting in early and providing help so that things don't go South. Companies put-- are putting their money where their mouth is.
DAN BUELOW: That's such an important policy feature, pre-claim assistance. And I will say this, to your point here, we did this again this survey of 14 carriers in the industry. And if there was one thing they all agreed on was the answer to this question, essentially, is that the number one reason they would deny a claim is failure to timely report. And that's the hard line.
So if you do not report a claim, which is generally defined as a demand for money or service, you could very well void coverage. So our advice is to tender anything that certainly is a demand for money or service, even if you think it's going to go away or under your deductible, you want to preserve the coverage you bought and paid for.
LAURA GALLARDO: If nothing else, bring it to your broker, bring it to your agent. Let them help you through the morass of insurance and figure it out.
DAN BUELOW: Right.
LAURA GALLARDO: We're here ready to help, and you guys will help direct them where they need to go.
DAN BUELOW: Right. Partner up with them. Well, that is the last DPIC liability question I'm going to ask. And I want to thank my very special guest Laura Gallardo and Mark Blankenship for joining me today. Thank you, Laura.
LAURA GALLARDO: Dan, this was such a pleasure to speak with you.
DAN BUELOW: It's always great to spend some time with you, Laura. And it's been a while. So this is great. And Mark, you're just down the hall from me in the virtual Hall, but we-- I see all the time but it was great to have you as well.
MARK BLANKENSHIP: It's great to be speaking to Lana again. I feel like we're getting the band back together.
DAN BUELOW: Yeah. It's very nice. More DPICers. Well thank you very much. And thanks again for you for joining us for another episode of Talk to Me About A&E. I'm Dan Buelow and I will talk to you soon.
NARRATOR: Thank you for joining us for this WTW podcast featuring the latest thinking on the intersection of people, capital, and risk. For more information on Willis A&E and our educational programs, visit willisae.com. WTW hopes you found the general information provided in this podcast informative and helpful.
The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast Incorporated in the United States and Willis Canada Incorporated in Canada.
