Professional liability, PL, insurance is directly aligned to the design professionals standard of care. A design firm's PL policy, if properly drafted, is very broad and should cover a design professional for their professional negligence for essentially everything the firm does as a design professional. That's the good news.
Every A&E policy, in fact, will include a definition of professional services. And these can vary from carrier to carrier. So it's very important that the design firm review this definition carefully to ensure the definition clearly covers the professional services they provide and matches up with the firm's PL application.
It is sometimes necessary to endorse a PL policy in order to broaden or clarify this definition of professional services, depending on a given carrier's coverage form and the specific firm's risk profile.
One of my special guests today is with Beazley And Beazley has a very good A&E PL policy form that includes a broad definition of professional services. It states, quote, "Professional services means those services perform for others by or on behalf of the named insured in the capacity as an architect, engineer, land surveyor, landscape architect, interior designer, agency construction manager, project manager, forensic consultant, environmental consultant, sustainability consultant, or design, construction, or project consultant or planner."
So again, very broad definition of professional services that should essentially cover everything a firm does. And again, that's the good news. The bad news, or the challenge rather, that every firm needs to address is that a design professional can take themselves over and above the standard of care by contract or by their actions and potentially assume liability that is over and above the professional liability insurance coverage and create potentially uninsurable risk. So we need to be careful about that.
What was the applicable standard of care? And was it met? These are the first questions asked when a design professional is accused of negligence. There are a lot of important considerations in all of this for the design professional.
And to help me dig into this important topic, I have with me not one, but two very special guests, both of which have been guests of mine on past Talk to Me About A&E podcasts, Colleen Palmer, risk manager for Beazley's A&E program, and Lou Gale, general counsel for the Chicago-based architecture firm SCB. Hello, Colleen and Lou.
COLLEEN PALMER: Hello, Dan. And hey, Lou. Nice to be back with you both.
LOU GALE: Hi, Dan. Hi, Colleen. Yeah, it's great to see both of you guys.
DANIEL BUELOW: So we've got Lou back. And let me tell you a little bit about Lou here. Lou Gale joined SCB in 2014 and serves as the firm's general counsel. In addition to his breadth of experience in construction and commercial law, litigation, and government practice, Lou worked as a structural engineer before becoming a lawyer.
As general counsel, Lou provides legal advice and manages nearly every aspect of the firm's legal needs. Lou is our guest on a recent Talk to Me About A&E podcast on the subject of emerging contract issues. So if you haven't heard that, definitely check it out. So welcome back, Lou.
LOU GALE: Thanks glad to be here, Dan.
DANIEL BUELOW: And Colleen Palmer, Colleen Palmer is an A&E risk manager for Beazley, joining in 2007. Before joining Beazley, Colleen was a practicing attorney in Boston, where she focused on assisting architects and engineers. She specialized in providing risk management services to design professionals on a nationwide basis.
Colleen was a guest of mine on a couple of our Talk to Me About A&E podcast, one on negotiating limitation of liability and another on negotiating contracts, the dreaded defend obligation. Welcome back, Colleen.
COLLEEN PALMER: Thank you for having me back, Dan. We're slowly working our way through the big provisions in contracts.
DANIEL BUELOW: We are. We're getting through it, aren't we? So, Colleen, let's start with you on this. As I had mentioned, the first question when asked, when a design professional is accused of negligence or finds himself in trouble on the professional liability side is often, what was the applicable standard of care, and was it met? This begs the question, what is. Is the applicable standard of care of a design professional?
COLLEEN PALMER: So the standard of care is the standard by which design professionals are judged. And it's guided by what a reasonable practicing professional would do under similar circumstances at the same time and in the same locality when they're performing the same services. So you're essentially guided and judged by what your peers would do under similar circumstances.
The question about whether you met the standard of care or did not meet the standard of care is one that is a question decided by a judge or jury. And it often comes down to what we refer to as a "battle of experts," where both plaintiff and defendant retain experts on their behalf to argue their side of the position.
The claimant, making a claim against the design professional, of course, is going to have an expert that would opine that you, as a design professional, breached the standard of care and explain the reasons for that opinion.
And the design professionals counsel would retain an expert on the design professional's behalf to opine exactly the opposite that the design professional did meet the standard of care and explain the reasons behind that opinion.
DANIEL BUELOW: That's a very good definition. In overview, I'm looking right now at the EJCDC's definition. And again, the AIA for architects is really the same as it is for engineers, isn't it?
And the EJCDC E-500 agreement between the owner and engineer, in that contract, it states that "the standard of care for all professional engineering and related services performed or furnished by engineer under this agreement will be the care and skill ordinarily used by members of the subject profession practicing under similar circumstances at the same time and at the same locality."
Engineer makes no warranties, express or implied under this agreement or otherwise in connection with any services performed or furnished by the engineer." And that last point is important and something we're going to be hitting pretty good here as we go through this.
When we talk about design professionals, there's a couple of things in there. One of them is there was a judgment in Minnesota. I think it was Mounds View versus I don't know. But the judge basically said that the standard of care of a design professional is closer aligned to a lawyer and a doctor than it is a contractor.
And he goes on to say, just as a doctor won't guarantee they're going to cure every ill, nor will a lawyer ever going to guarantee they're going to win every case, a design professional essentially shouldn't be guaranteeing a warrantying anything or is not expected to, not held to a standard of perfection, so to speak.
So I think that's a very important here, the definition of a standard care. It's interesting when we talk about standard care, as we'll get into this too, is the standard of care of a plaintiff attorney is what? To sue everyone in the nearest railroad. I think it's something like that. But it's not too far off. So we run into that as we get into this as well.
So, Lou, SCB is an architecture planning, interior, and urban design firm. SCB provides design services throughout much of the country and works on a wide range of project types from schools, office science and technology, and high rise, mixed use residential projects.
Managing expectations is so important when it comes to managing professional liability risk. And this must be a real challenge for a firm that works with so many different types of clients. How do you go about managing expectations specific to the standard of care?
LOU GALE: Well, it is a challenge. And it starts with me with the contracts. There are a variety of different other ways to touch on it. But as SCB's general counsel, I lead a lot of the contract negotiations. And that's one of the places we start.
And so I use the contract negotiation as a vehicle in order to explain the standard of care. You do that not only by editing the language that you get provided, which often is not industry standard of care language. It's usually got words like "best" and "highest," and we'll talk about those, I think, a little bit later.
So it's about editing that language, and then using any negotiation conversation to explain why you've done so. Often, it's to say, look, we need to align this with our insurance. Here you have Mr. Client gone to all this trouble to require us to carry a certain amount of insurance.
Wouldn't it be good that we'd be able to use that insurance? Should there be a claim, as opposed to having us have a contractual obligation that exceeds what the insurance would cover? So that's usually one of the first places we start.
And then in that conversation, it's also the opportunity to explain that the standard of care is not perfection, like what you were just talking about earlier, Dan, in which we don't want to make warranties or promises.
The idea is we are going to try to perform consistent with other professionals in the same or similar circumstance in that same or similar location. It's not perfection. We will make mistakes. We will have omissions.
Also, included in that is to include and explain to clients that errors and omissions are OK. It's that you just cannot expect perfection. Everything we do is a prototype. We are not building 50 buildings exactly the same.
Each one is unique with a unique set of circumstances. And that's why we have to have a standard of care as opposed to some sort of guarantee or promise that everything will be just right.
DANIEL BUELOW: Great overview on that. And some of our programs will ask the question, true or false, a design professional standard of care is perfection. And when I ask a group of design professionals, they invariably all chuckle and get that one right. Yeah, of course, that's false. We're not held to a standard of perfection.
However, I would push back and say, well, what if we asked that same question to a room full of your prospective clients? Would they all get that right?
And Colleen, what's your experience in that as far as-- Lou, of course, is an exception, I think exceptional when it comes to the knowledge of how all this works. But are design professionals doing a great job when it comes to educating their clients as to the standard of care, in your opinion?
COLLEEN PALMER: I think they're trying. I think that design professionals as a group are under enormous pressure because they receive contracts that are onerously drafted by the client. And often clients may have an attitude of, hey, if you don't want to accept this contract as written, move aside because the next person in line will accept it.
So I think that it's difficult. It's a difficult task for design professionals to stand by their guns, so to speak, and stand by their convictions that the contract needs to reflect what the appropriate standard of care is because clients often want to include language that inappropriately elevates the standard of care.
DANIEL BUELOW: Yeah. And really the importance of holding your ground, it's so important when it comes to that. I think, Lou, that's a very good point is advice using that contract as a vehicle to establish expectations and then documentation to manage those expectations.
If you find that you have an unreasonable prospect at that juncture of your relationship, it's not going to probably get much better, is it, down the road if you sign the dotted line? So, you need to really go back and forth.
And I'd rather have-- a design firm, in my opinion, have a lot of back and forth and have a meeting of the minds and sign an agreement that is maybe not exactly perfect, so to speak. Then sign an association agreement with no dialogue, no discussion. I think they may arguably miss an opportunity to really talk to and manage and establish expectations.
I think that's a very important point. So I think it's their responsibility to do so. But as you say, Colleen, it's difficult, especially, like in Lou's own practice, on one end of the spectrum, you're dealing with a homeowner. You have an institutional client, a developer client. You have different types of clients at various levels of sophistication. That's a challenge for firms to manage all those different types of clients.
LOU GALE: Dan, I wanted to add. One of the things we also do is we try to make certain that in both our proposals and in our marketing materials as well, to the extent we can, we're talking about the standard of care as well.
We don't try to put in words like "errors" or "omissions" in proposals because we do want to make use of the legal concept of puffery in which you're allowed to be a little more robust in your performance as opposed to what ends up in the contract. But that's another way we try to educate clients.
And it's a thing we can point to when a client says, oh, but we would like this language in the contract. We can say, well, let's go look at the proposal we sent you and to show you exactly what we were promising we would do.
And so when your contract wants more than what we've said in the proposal, you're asking us to have an elevated standard of care, while in the proposal, we provided a normal one, or an ordinary one, if you will. We can try to use that as a mechanism for educating them as well.
And sometimes this takes time. Not just in that particular contract, but maybe when SCB is saying this and a different client-- or a different architect is saying it, or a third architect is saying it, slowly, it may dawn on these clients over time that perhaps their standard of care is outside of the norm and that they may want to adjust it. So it's worth having those conversations.
DANIEL BUELOW: Excellent. So in 2014, a white paper was released titled Managing Uncertainty and Expectations in Design and Construction. This was an AIA Autodesk AIA Large Firm Roundtable white paper, if you will. That is very good. I can't believe it's been 10 years since this came out.
But this is an actual, really a good useful tool because it's a document where it's something in writing regarding the standard of care, where in this case, it states in this report that most owners, 80%-- this is based, again, on a very extensive surveying of the construction and owners out there.
But say that 80% of owners expect to face added costs from design errors and omissions on their future projects. And on average, they feel that a 3% to 4% range is reasonable for non-negligent mistakes.
I want to talk a little bit about that. Again, if you haven't seen that report, let us know, and we'll get you a copy of it. But a couple of things on this, this 3% to 4% is the norm that would be traditional design/bid/build. What is it for renovation and/or fast track and/or design/build, I think is something to think about in all of this.
But the bottom line here is that if you don't have a contingency in place and your owner is not able to cover and you haven't qualified that owner to cover that 3% to 4%-plus, which is the norm, where's that money going to come from? Well, it's going to come most likely from your professional liability insurance, or they'll certainly maybe make a claim.
But having this conversation around a contingency fund, I think, is very important because you can't have the conversation on that, can you, without a conversation about the standard of care?
And so where I was going with this is, Lou, what's your success been in this area of around contingency funds? And Colleen, that same question to you. You're, in a broader perspective, working with a lot of different design firms.
LOU GALE: So I've been pleasantly surprised that I've been able to get contingency funds in agreements. But I've been surprised because my expectations were so very low with respect to this particular issue.
I expected in almost every context to have it immediately removed out of draft agreements, that having the conversation would result in a lot of angst by clients. But I've been pleased that I would say maybe about 10% of contracts that we execute, we have some version of a contingency fund inserted.
Now, at its most watered-down, we sometimes are only able to get the clients to agree to the concept that they will have one. They will not tell us what the amount is. They like to keep that secret and close to the vest, which I appreciate that. Their argument tends to be something along the lines of, we don't want you to know how many mistakes you can make before there's a potential claim.
I get that. But we tend to use that very same number you were talking about with respect to that white paper where we say, look, 3% to 5% is what's going to be standard and customary on just about any project.
And so let's agree that we're going to set that aside, and we're going to then work through issues up until we hit that threshold. And then we'll have to talk about having a more serious conversation.
Fortunately or unfortunately, depending on your perspective, when we've had this in the contract, I've yet to actually have to implement it. It's only in my other projects where we have been unsuccessful in getting that where then there's a subsequent claim and you say, oh, gosh, this would be perfect to be able to use that contingency fund, and talk about it, and work through it.
It would help resolve issues on projects where you-- especially where issues are ongoing, the project is still not quite finished, and you've got a client that's saying, hey, look, we've got issues. I'd like to know how you're going to essentially make that up to us.
If you have a contingency fund already in place, you've got the ability to start working through that and get the project done and not get bogged down in all the finger-pointing that inevitably happens.
DANIEL BUELOW: And I think, again, you having those conversations with your clients and prospective clients goes a long way. Most of these claims, as we've talked about in past episodes against design professionals, are rooted in expectations.
And here you are having that dialogue, that discussion around contingencies, around errors and omissions or negligence, or potential issues around. Having that conversation on the standard of care, I think, is very important.
LOU GALE: Truly, it is that expectation and meeting it. And that's where the standard of care and your client have to connect. Because when they are thinking, why is that conflict arising? Why is that duct and that structural element conflicting? Didn't you coordinate? Why was that missed? It's the ability to say we're not perfect.
Again, this is a prototype. There are hundreds of details, thousands of shop drawings, the notion that one duct in one location is somehow beyond what is appropriate is just an expectation issue that you have to tackle.
DANIEL BUELOW: Colleen, how about you? You've got anything to add to that?
COLLEEN PALMER: I do. As a preliminary matter, I'd say that I do not see contingency fund provisions that frequently in professional services agreements. And when I do, the main question, I think, has to be addressed is whether this provision actually helps or potentially harms the design professional.
And what I mean by that is, often you'll see a provision, you'd think, oh, great, it's a contingency fund. This is going to be great for the design professional. And as you read through it, when you really analyze it, you realize, well, actually, no, this might not help. And in fact, it might be harmful.
And the reason for that is because the provision will say, OK, we're going to set aside whatever the percentage is. And again, I agree with both of you that anything below 3% really is meaningless. It really needs to at least be that 3%, preferably closer to 5%.
But owners will often have language saying, OK, we're going to set aside this 3% to 5%, but design professional agrees that any costs above that constitute a breach of the standard of care, and design professional will be responsible for any and all excess costs. And at that point, everyone should be shouting, oh, my goodness, this is not good for us.
And so in that instance, that provision that in your mind you think-- you've been trained to think-- oh, this is going to be helpful to us, in fact, may be hugely detrimental.
So when you see those provisions, you have to make sure that they're worded in such a way that says you will be responsible for excess direct costs above that amount, but only to the extent those costs are caused by your negligent performance, tying it back to the standard of care again because otherwise, you're just leaving yourself open to have to write a check.
DANIEL BUELOW: Yeah, you don't want to lay out some threshold there that anything over and above, you're on the hook for.
COLLEEN PALMER: Yeah.
DANIEL BUELOW: That's a very good point. I did a podcast with Sue Yoakum on this very topic of negotiating a contingency funds. And this was raised in that. And you raise a very good point there to make sure that wording, then, is drafted and make sure you're articulating the intent of this clause and how it works. Very good points.
LOU GALE: So to dovetail off of Colleen's point, so I've seen contracts from institutional clients where they say, if you've made an error, you'll be responsible for 100% of the costs related to that error, or you'll be responsible for up to 30% of an omission, with the idea being that it's a betterment and that they would have to do it anyway, but now there's an added cost.
And of course, that's not tied to the standard of care at all. It's almost a liquidated damage. It would almost certainly not be covered by professional liability insurance. And so you have to be thoughtful when you see something-- just like Colleen said.
You're thinking, oh, this is great. They've sort of given me a contingency. It's like, no, it's the opposite. It's actually very bad. And so always, you've got to have that language, like Colleen said, that ties it to the standard of care.
DANIEL BUELOW: Yeah. And another good reason, as we always suggest, is run this past council, these wording, these contracts, and get some input obviously from your broker and/or carrier. But definitely, you want a legal opinion when you make, certainly if you're looking at unfamiliar language so that you're not getting-- there's no hooks in there, so to speak.
So as I had mentioned, the standard of care and the coverage afforded under a design professionals PL policy are closely aligned, and that a design firm's policy is very broad. However, a firm can find itself in potentially uninsurable position if they assume liability over and above the standard of care.
And that's because every A&E policy has an exclusion for contractual liability and Beazley's exclusion, for example, for contractual liability, which is consistent really with every A&E design professionals PL policy, is as follows.
Quote, "The insurance company will not be liable for any loss in connection with or resulting from any claim arising out of, based upon, or attributable to any or in any way involving any liability of others assumed by the insured under any contract or agreement, either oral or written, including any hold, harmless, or indemnity agreements."
And then it goes on. And this is the important part. "This exclusion will not apply to the extent the insured would have been liable in the absence of such contract or agreement." So Colleen, explains then what this exclusion really means and why this is so very important for the design professional to understand when it comes to contract formation?
COLLEEN PALMER: It really is an important concept to understand. And that's a lot of words in the policy. But it boils down to the fact that if you are not required under applicable law to take on an obligation and you do so in your contract, that would likely fall under that liability assumed by contract.
So an example-- two examples actually that come to mind are attorney's fee, shifting provisions, or prevailing party provisions where we know that the American law states that each party is responsible to pay their own attorney's fees.
And these types of prevailing party or attorney fee-shifting provisions say that four times fast, say essentially that the loser is going to pay the winner's attorney's fees. Well, the American law says that everybody pays their own fees. So if you agree to those types of fee-shifting provisions in your contract, that would fall under that liability assumed under contract exclusion.
Another example that comes up all the time is the duty to defend. And it's kind of referenced in the policy language. This is another obligation that we see constantly in contracts whereby a client wants the professional to assume a duty to defend in an indemnity provision.
But that's not an obligation that you would ordinarily have under applicable law. And therefore, if you agree to take on that duty to defend, it's something that would be excluded under the policy, again, based on that liability assumed under contract exclusion.
DANIEL BUELOW: Very good points. The defend obligation, as you say, comes up all the time. And if you think about it, too, from an underwriter standpoint, if I'm going to assess and underwrite a risk and then you contractually alter that risk over and above of what I've contemplated or agreed to, you can't expect coverage.
So if you start broadening coverage, you're going to take responsibility for job site safety, You're going to, worst-case scenario, stop work authority, and other things, liquidated damages-- there's a whole host of examples, aren't there? But you hit a couple of the key ones there, certainly, on this. And it's something to be very much aware of.
Well, I think this is a good place to conclude what is part one of our two-part series on the standard of care? I want to thank my special guest, Colleen Palmer, risk manager for Beazley, and Lou Gale, general counsel for the Chicago architecture firm SCB, for all their insight into this important topic.
Be sure to check out part 2 as I continue my discussion with Colleen and Lou as we review some examples of where contract language can elevate the standard of care and how best to negotiate this potentially uninsurable language out of a design professional's agreements.
Thanks again for joining me for another episode of Talk to Me About A&E. For a full listing of all of our WTW A&E podcasts, webinars, on-demand, education programs, and technical briefs, check out the Education Center in our website at www.wtwae.com. I'm Dan Buelow, and I will talk to you soon.
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