Professional Liability Update – Safeguards When Specifying Materials

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January 2001

Safeguards when specifying materials

Design firms often find themselves as a matter of course specifying materials to be used to execute their designs. In some cases, these specifications may be general in nature, recommending a particular material or technology. In other cases, they may call for a specific brand name or product model.

Regardless, each time architects or engineers specify a particular material they are accepting at least a partial degree of liability. They are accepting responsibility that the material will perform its intended function in an acceptable manner and that it will not be harmful to the health or welfare of those who work on or occupy the facility.

The liability related to specifying materials is long term and may jump up and bite a designer years into the future. What’s more, it’s a liability that can put a design firm in a precarious position even if the firm followed the prevailing standard of care when specifying a material.

Some products that were widely used in the construction industry just a few decades ago – lead-based paints and asbestos, for example – were eventually determined to be hazardous. Like everyone else, architects and engineers were unaware of any serious risks and commonly specified these materials for their projects. (Who knows if today’s new and untested synthetic products might eventually be found to be harmful to health – or simply fail to live up to the designers’ and project owners’ expectations?)

After products are ultimately deemed hazardous or ineffective, claimants and their attorneys will often try to hold consultants at least partially responsible for damages or injuries caused by these materials, even though they were considered safe, effective and standards of the industry at the time they were used.

These claims are tantamount to insisting that architects and engineers practice to a higher standard of care and have information unknown to medical science and current industry leaders in technology. They also discourage architects and engineers from specifying new products in their search for more effective and economical materials.

When specifying materials, design firms cannot simply rely upon word-of-mouth recommendations or manufacturer claims of quality and effectiveness. The prevailing standard of care calls for designers to have personal experience with a recommended material or knowledge that it will perform its intended function successfully under prevailing conditions. A recent court case demonstrates how relying on second-hand information can prove expensive.

An architect was hired by a school district for a renovation project. Part of the project called for the architect to replace windows with insulation panels to help improve the school’s energy efficiency. The architect specified a particular brand of insulation panel and the project was completed. Within two years, the panels began to warp, bow and deteriorate, allowed water and cold air to penetrate the building, and resulted in $300,000 in damages.

In a 1998 appellate court ruling, the architect was found liable for specifying the unproven type of insulation panel. During the trial, the plaintiff presented the testimony of a licensed engineer who stated that the panels were inappropriate because of their “dimensional instability” when exposed to the extreme weather conditions of upstate New York. The expert witness also testified that the architect deviated from the applicable standard of care by relying almost exclusively on the manufacturer’s product literature.

Affirming an earlier court finding, the court of appeals found that the panels were indeed defective and the architect was held liable for failing to meet the prevailing standard of care. The court noted that the architect did not have personal experience with the product, nor had it conducted or requested laboratory tests to prove the new product’s effectiveness. (Brushton-Miora School District v. Fred H. Thomas Associates, 692 N.Y.S. 2d 551).

You put your reputation on the line every time you specify materials to be used in executing your design. But what if the contractor, a subcontractor or other party to the construction suggests a substitution for your original recommendation?

Much has been written about the dangers of accepting substitutions. On the one hand, you do not want a job negatively impacted or your own costs or liabilities significantly increased by accepting and processing inappropriate or numerous substitution requests. On the other hand, you do not want to discourage innovation or eliminate competition. How can your costs and exposures to claims be minimized?

Here are some tips for minimizing and, when necessary, handling requests for substitutions for your specified materials:

Develop specifications that clearly define per- formance characteristics and other project requirements.

Regularly review and update your list of common specifications. Make sure that your specified materials are reasonably available and are indeed still being manufactured.

Include as part of the specification a “Substitute Request Form” that must accompany any proposed substitution. This form should set forth the criteria that will be used in reviewing the acceptability of a substitution.

Be responsive to any requests received. Should a dispute arise, courts do not look kindly upon designers who fail to respond to or arbitrarily reject reasonable requests for substitutions.

Address the issues of specifications and substitutions in a pre-construction review of the construction documents. Include the design professionals, owners, contractors and major subcontractors. This will help identify those specified materials that may cause concerns among one or more parties. Calls for substitutions can then be addressed before construction begins.

Don’t allow shop drawings to become quasi-substitution forms. Such attempted uses of shop drawings should be rejected and returned as not in compliance with the contract.

 

Another Dilemma

Another scenario presents a difficult dilemma. Your client suggests or even insists that you specify a product that you feel may not be safe or reliable. Perhaps it’s a product that, while allowable under current building codes, contains material that is hazardous in other forms or quantities. Or it might be new material or equipment that, in your opinion, has yet to undergo the test of time for the application you are using it for. If, against your better judgment, you agree to specify a product that later proves to be flawed or dangerous, you can be liable for damages.

Avoiding Liabilities

Fortunately, there are a few effective measures you can take to help avoid specification claims. First, make it a practice to specify only those products and technologies that you know will do the job, that are time-tested and proven in a particular application. Ask yourself: what would other reasonable design professionals do in these circumstances? That sets the basis for the current definition of “standard of care.” You might also ask yourself: how would justifying my decision to specify the material play out in a deposition or on the witness stand?

If you decide to specify a new or unproven material, or if your client wants you to specify a product with which you are unfamiliar, do your research. Your goal is to be able to demonstrate that you made a reasonable, professional effort to explore the suitability and reliability of the product. For instance:

Collect brochures, product specification sheets, test results, warranties and guarantees from the manufacturer and keep them for your records.

Read all label warnings carefully.

Look for evidence to corroborate the manufacturer’s claims, such as test results of an independent laboratory.

Document your conversations with the suppliers and your client regarding the product and its application in the specific circumstances, including any reservations you might have raised.

Require the manufacturers, suppliers and installers to give assurances that the product is suitable for the intended application.

Don’t hesitate to ask manufacturers’ field representatives to be represent during the installation to ensure that their product is installed properly and according to manufacturers’ specifications. If feasible, ask the field rep to test the product under appropriate conditions.

If your client insists on your specifying an item that, although not life-threatening, is a product with which you are not comfortable – a question of quality, durability or ease of maintenance, for instance – put your objections in writing to your client. If the client overrules you, protect yourself by having this confirmed in writing. Ask for an inde mnity. At a minimum, document these discussions and decisions well.

If the item in question involves health or safety issues, however, that is another matter altogether. If you cannot convince your client of the possible risks, you must look to the termination provisions of your contract rather than endanger the life or health of anyone.

You could also address these issues in your contract agreement with a provision that spells out and limits your responsibility. Here’s a sample clause:

Specification of Materials

The Client understands and agrees that products or building materials that are permissible under current building codes and ordinances may, at some future date, be banned or limited in use in the construction industry because of presently unknown hazardous and/or defective characteristics. The Client agrees that if any such product or material specified for this project by the Consultant shall, at any future date be suspected or discovered to be defective or a health or safety hazard, then the Client shall waive all claims as a result thereof against the Consultant.

The Client further agrees that if the Client directs the Consultant to specify any product or material after the Consultant has informed the Client that such product or material may not be suitable or may embody characteristics that are suspected of causing or may cause the product or material to be considered a hazardous substance in the future, the Client waives all claims as a result thereof against the Consultant, and the Client agrees, to the fullest extent permitted by law, to indemnify and hold harmless the Consultant from any damages, liabilities or costs, including reasonable attorneys’ fees and defense costs, arising in any way from the specifications or use of any products or materials which, at any future date, become known or suspected health and safety hazards.

While you would ideally want this clause in all of your contracts, some clients may balk at including such blanket language. In such cases, you could forego such a clause in the original contract and then add it as an addendum in the event that a questionable product specification from the client or other party becomes evident.

Regardless, make sure you coordinate any such provisions with your Code Compliance clause, as well as with provisions you have concerning toxic substances.

Conclusion

It’s one thing to be held liable for specifying a new material that can’t perform as required. It’s quite another to be held accountable for specifying materials widely used and considered to be safe and later discovered to be hazardous. While a consultant may, in time, be absolved of liability, thousands of dollars and a great deal of time will be wasted in defending such claims. It is, after all, very easy to get dragged into litigation – and very, very tough to get out.

Contractual protection is a recommended safeguard for shielding you from liability for specifying materials that later prove ineffective or dangerous. The best protection, however, is taking every rea- sonable step possible to make sure the products you specify will perform their intended function in a safe and effective manner. There is no substitute for experience, research and common sense when specifying materials.

 

Professional Liability Insurance: The State of the Market

ACEC (American Consulting Engineers Council) conducts an annual professional liability survey. Among other things, it measures what percentage of gross income design firms are paying for their professional liability insurance.

In 1990, this percentage was 4.6%. Today, it’s about 1.87%, a decrease of nearly 60%. (Bear in mind that this is an average. A given design firm may pay more or less, depending on its size, discipline, loss experience, product mix and a number of other factors.) Although losses have come down during that time frame as well, they have not come down nearly that far. As such, many underwriters over the past ten years have priced their product less than what it was costing them to sell it.

The combined ratio (the ratio of what insurance companies pay in losses and expense compared to what they collect in premium) of property and casualty firms in general has increased from 105.6 in 1998 to 107.7 in 1999. It is estimated that this ratio will rise to 111.7 in the year 2000, and potentially in excess of 135% by 2005. Insurance companies can break even with a combined ratio of about 110% (they make up the difference with investment income), but anything over that means they’re losing money.

This is one of the reasons insurance company failures were up nearly 60% in 1999. During that same year, net income for the industry plunged 28%. That income has continued its downward trend in 2000.

Insurance companies are also finding it tougher to achieve favorable ratings from A. M. Best (one of the premier rating agencies for the in- surance industry). In 1988, 34% of the property/ casualty firms rated were in the “Superior” (A++ or A+) category. In 1999, it was 12%, and it’s ex- pected to drop to 11% in 2000.

What does that Mean to You?

Insurance companies are trying to return to profitability. Many underwriters are seeking 10% to 20% increases (workers compensation is another story, in which many underwriters are seeking 25% to 100% increases). The insurance market for professional liability is no exception. After 12 years of soft market pricing, most underwriters are now trying to achieve at least a 5% rate increase. For those AE firms that have poor loss experience, or are practicing in difficult areas, this percentage could be higher.

For those of you who have been in the industry long enough to experience the last hard market (a period of increased pricing) which took place in the mid- to late 1980’s, you will recall that rates doubled or tripled. Although it is not anticipated that rates for architects and engineers will go up that dramatically, it is certain that they will go up.

The key to keeping rate increases low is to control your underlying losses, and to actively manage your firm’s practice from a risk management perspective. We have tools to help you do this. If you are interested in implementing an active risk management program, please give us a call.

 

 

Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.

 

 

You might find it worthwhile to take the following true or false quiz to test your “Contract IQ.” Answers are given in the following section.

1. Design professionals perform about 10-20% of their smaller projects without a contract.

2. The purchase orders some clients use to retain architects or engineers are not suited for the procurement of professional services. As a result, serious problems could arise were you to receive a client purchase order three or four weeks after the client orally authorized you to proceed based upon an agreement-formatted proposal you submitted earlier. Because the client did not sign and return your proposal, and because the owner’s conditions conflict with those in the purchase order, the most appropriate course of action in such situations usually would be to stop providing services and meet with the client to correct the situation.

3. Neither professional liability insurance nor commercial general liability insurance protects you from any type of indemnity claims. Accordingly, any agreement you enter into with the client should not include an indemnity whose enforcement would require you to compensate the client for any injuries or damages.

4. Those who perform professional services are held to different legal standards than those who provide nonprofessional services. Accordingly, professionals may not suspend their services, refuse to sign and/or seal instruments of service, etc., simply because they have not been paid.

5. While a written contract can be effec- tive, it offers little or no protection from third- party claims.

Answers

1. FALSE Every project performed by every consulting engineer, architect, surveyor, landscape archi- tect, etc. has a contract. The question is, is the contract written or oral?

Oral agreements are particularly dangerous because any and every element of them could, or — in some cases, must — be construed by a trier of fact; i.e., a judge or jury.

To make matters worse, because oral agreements cannot be referred to with any degree of speci- ficity, any contract-related confusion is more likely than otherwise to lead to a dispute. For this reason, among others, the smallest projects tend to give rise to the largest claims.

While many firms state that the time required to develop a written agreement for every small project is too expensive, the opposite is true: design professionals simply cannot afford to go without a written agreement for every project they perform.

2. FALSE In nearly all cases of which we are aware, the client’s authorization to proceed is legally taken to mean acceptance of the proposal you submit. If you know that to be the case relative to your situation, you have two choices when you receive the client’s purchase order: ignore it (and hope that contract-related problems do not arise), or work with the client to help ensure a full understanding of the issues involved and to agree on appropriate terms.

When it comes to the issue of terms, you feasibly have the right to be inflexible. Taking that approach can cause obvious problems, however, in that the client would be in the position to terminate the agreement (which is unlikely) or to simply never rely on your firm again. Diplomacy is usually the better choice. Always document an oral authorization to proceed with written correspondence.

3. FALSE Whether or not your agreement includes an indemnity, common law requires you to compensate the client for injuries or damage caused by your negligence. Here is an example of what is known as a “limited-form” or comparative indemnity:

Consultant agrees to hold harmless and indemnify Client from and against liability to the extent caused by the Consultant’s negligent performance of the services.

In other words, if your negligence is responsible for 40% of a loss that cost the client $100,000, you would be required to pay the client $40,000.

Be cautious! Certain “intermediate-form” indemnities sound similar to limited-form indemnities, but are far more onerous. The could require you to compensate the client for 100% of a $100,000 loss caused by 1% by you and 99% by the client.

4. FALSE While professional service providers are in some respects held to different legal standards, they seldom, if ever, are required to provide services without being paid for them. Because so many negligence claims are filed against design professionals as retaliatory measures on the part of clients whom the design professionals have sued for nonpayment, receiving payment can be considered an important element of loss prevention.

Recognize that the larger a bill becomes, the more valuable and tempting nonpayment becomes from the client’s viewpoint. Keep billings current and do your best to keep payment current. Remember: those who delay payment often do so because you allow them to. They don’t skip payments to lenders, dry cleaners, or utility companies. If you don’t allow ill-advised leniency the first time, you won’t be expected to do it every subsequent time.

5. FALSE A wide array of provisions can be used to reduce exposure to third-party claims, and your client would probably be interested in many of these because the client would be afforded protection as well.

As examples, full-time construction observation helps reduce opportunities for claims by contractors based on misconceptions of changed conditions. If contractor pre-qualification, pre-bid and pre- construction conferences are included in the contract’s scope of services, you can help ensure that qualified contractors are selected and that they have an effective understanding of what the work entails.

Contract provisions requiring developers to include maintenance requirements in condominium documents helps prevent homeowner associations from suing developers and/or their design professionals for damage caused by alleged design or construction defects that are nothing more than inadequate maintenance problems. Provisions about third-party reliance and third-party exclusions can also be of great value. Many other such provisions are available.

If routine use of such techniques over a 25-year period results in the prevention of only one claim, then routine use will have been more than worthwhile.