McLaughlin Brunson - Professional Liability Insurance
A Risk Strategies Company

Berkley DP Appoints McLaughlin Brunson Insurance Agency, LLP As Exclusive Representative

February 16th, 2014
We are very proud to announce that Berkley Design Professional Underwriters (Berkley DP) has selected our agency as its exclusive agent in North Texas and Oklahoma. Berkley DP, a W. R. Berkley Company, is a newly formed underwriting management company specializing in professional liability for architects, engineers and consultants. Berkley DP provides its product only through specialist insurance brokers. Berkley DP was formed in 2013 by a team of individuals with deep roots in underwriting, loss prevention and claims handling for the design professional community. The company’s motto is “Better by Design.” The company’s objective is to work with its brokers and clients to improve their practice and effectively manage professional liability exposures. Its parent company, W.R. Berkley Company, was founded in 1967 and is rated “A+” (Superior) by A.M. Best Company. Berkley DP joins XLDP and ADI/Hudson as major “A” Rated Insurance companies specializing in the Design Profession that have chosen to work exclusively through McLaughlin Brunson Insurance Agency, LLP. This is a reflection of our expertise in this area and our commitment to the design community.

Pat McLaughlin’s Retirement Announcement

February 11th, 2013
After 43 years in the insurance industry, 24 of which were with McLaughlin Brunson, Pat McLaughlin is retiring effective February 28, 2013. I have very mixed emotions about this announcement. I have worked with Pat for more than 20 years. During that time he has been a great boss, an excellent mentor and most of all a tremendous friend. So of course I am happy for Pat, as he deserves a long and healthy retirement, but we will all miss our daily interactions with him. Pat’s accomplishments are too numerous to list, but a few highlights include two-time President of The Professional Liability Agents Network (PLAN), speaking and teaching with A/E groups for over 30 years, and founding and building the largest and best insurance agency around for A/E Risk Management Programs. Under Pat’s leadership, McLaughlin Brunson has grown to be one of the largest professional liability insurance agencies in the south and currently represents more than one thousand Design Professional firms in North Texas and Oklahoma. Please join me in congratulating Pat on his retirement. He will be missed! Thank you, Joe A. Bryant Managing Partner

Getting the Right PL Coverage at the Right Price

February 14th, 2012
A/E Risk Review: Getting the Right PL Coverage at the Right Price The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with a qualified professional who can provide guidance that considers your own unique circumstances. The professional liability insurance marketplace has continued to be soft. That is, there is significant capacity within the insurance industry and major carriers are in heated competition for your insurance dollars. Because of this intense competition, rates have remained relatively low. True, the 2011 ACEC Professional Liability Insurance Survey of Member Firms forecasts higher rates in the coming year, but that forecast is based on the assumption that economic conditions will stabilize. Unfortunately, there is little on the immediate horizon to indicate that the economy will pick up significantly any time soon. Regardless of whether rates remain low or begin inching up, design firms should not shop for insurance based solely on price. There can be significant differences in coverages among policies and, more important, differing quality in the claims, loss prevention and other services you receive from insurance carriers and agencies. Lately, some insurance companies have entered the A/E insurance market simply because they have excess capacity and are looking for an additional inflow of premiums. They seek income in this market even though they do not necessarily have expertise in the design industry or solid experience in defending A/E claims. Is Going Bare an Option? In tough times, some design firms have decided to forego professional liability insurance altogether. They take the chance that they haven’t made and won’t make errors or omissions in their professional services and, if they do have a project dispute, they can resolve the problem without an expensive claim. Some architects and engineers reason that without professional liability insurance, they don’t have “deep pockets” and therefore a claimant will look elsewhere to find remedy. “Going bare” without insurance is obviously fraught with risk. Facing a claim without adequate coverage not only puts a firm’s assets at risk, but the principals’ personal assets can also be in peril. The corporate veil cannot always protect a design professional’s personal savings, home and other valuables. Most design professionals recognize professional liability insurance as a necessary cost of doing business. They realize they need the financial protection that PL insurance provides. Equally important, they realize that most clients require the designers they hire to carry adequate insurance limits. Your best approach to managing professional liability risks is to work closely with a specialist insurance agent who knows the ins and outs of the A/E insurance market and who can help you manage your risks and your insurance premiums. An agency like ours can help select the appropriate insurance carrier and recommend the appropriate coverage limits and deductibles. These recommendations will be based on your exposure to claims, your appetite for risk, the types of design services you offer and the annual fees you earn. We can then quote you premiums from one or more insurance providers based on the current market conditions. You should begin planning today for your next professional liability insurance renewal. Don’t wait until 30-60 days before your current expiration date. Call us at any time to begin planning your strategy for keeping your insurance available and affordable. How do you get the best bang for your insurance dollars? How do you minimize the cost while retaining the coverage you need? Here are some tried and true tips for getting the right insurance at the right price. Take Advantage of Loss Prevention Education Programs Some insurance carriers offer substantial premium credits if you successfully complete their loss prevention education programs. These programs not only result in a sizable reduction in your premiums (typically 10%), they teach you valuable loss-prevention techniques that can avoid future losses and earn the professional continuing education credits you need to practice your profession. Obtain Contractual Risk Management Credits Some insurers also provide premium reductions or credits when design firms agree to use specific clauses in their contracts with clients. Clients are often willing to negotiate such clauses when they are educated on the risk-reward inequities that most design firms face when such clauses are absent. These clauses can include:
  • A Limitation of Liability (LoL) provision that contractually caps the amount of liability you have to your client, usually expressed as a set dollar limit or your available insurance limits.
  • A waiver of your liability for consequential damages.
  • A clause that specifies you will use mediation as your first method of dispute resolution.
Consider Alternatives to Higher Practice Policy Limits Suppose you currently carry $2 million in professional liability coverage, but your new client on a large project is asking for $5 million in limits. With claims severity on the rise, coupled with the ever-growing number of projects you have worked on over the years, higher insurance limits may indeed be in order. However, if increasing your aggregate practice policy limits is overkill for your situation, or the increase in premiums is simply too big of a hit on your pocketbook, you might consider a few less-expensive options that provide added protection for your demanding clients:
  1. 1. Specific-project excess. With specific-project excess coverage, you can maintain your current limits on your practice policy while purchasing an endorsement that provides a higher limit to cover a specific project. For example, you can maintain a $2 million practice policy and purchase a $5 million limit on one project for substantially less than raising your entire policy limit to $5 million.
  2. 2. Specific-client excess. Let’s take the previous example one step further. Suppose you find a new client who wants you to work on multiple projects, but demands higher insurance limits. Specific client excess is similar to specific project excess, except the higher limits apply to all projects performed for a particular client. Again, this increased coverage is more affordable than raising your entire limit.
  3. 3. Split limits. Instead of purchasing a $5 million practice policy you might purchase a $2 million/$5 million split-limits policy. Here, the policy limit on a single claim is capped at $2 million, but the total coverage for any one year is $5 million. This eliminates the chances that your policy would be wiped out by another claim and increases the chances that coverage will be there for all of your clients’ projects.
Investigate Project Insurance There is one coverage option that can provide a project owner the higher limits it demands, virtually guarantees that coverage will be there when needed – and may actually reduce your insurance premiums. This unique coverage option is called project insurance. With a project insurance policy, the owner realizes the following benefits: A single policy for a single project. All members of the design team can be covered under one policy, and the limits are dedicated to that project only. Full control over policy terms. The owner chooses the policy limits and the duration of coverage — often available up to five years after substantial completion. Secure coverage. Most project policies are noncancellable, as long as premiums are paid, policy conditions aren’t breached and no material misrepresentations or concealment have been made on the application. No premium rate surprises. The project policy premium is typically determined according to a guaranteed rate based on final construction cost. Single-point claims responsibility. Insuring the entire design team with one policy makes it easier to solve problems with less finger pointing and more cooperation. So what’s the catch? Why would an owner turn down the project policy option? Typically, project owners pay for the project policies, since they benefit most from the coverage. However, costs can be offset and shared with design firms through premium reimbursements or negotiated lower fees. (Since fees on the project likely won’t be counted to determine practice policy premiums, a design firm saves money on its annual insurance costs.) Unfortunately, insurance companies have had severe losses on project policies and have become quite selective in writing them. Some insurers do not issue project policies and, among those that do, the cost and the required deductibles can be high. Because we specialize in professional liability insurance for design firms, we can help you determine whether such coverage is available. We can also help explain the benefits and costs of the project policy to your client, coordinate implementation, and provide loss prevention assistance throughout the life of the project. Despite the advantages, owners may be unwilling to incur the cost of a project policy. A less expensive alternative may be owner protective insurance. Owner Protective Insurance An owner protective (OP) policy provides protection for the project owner in the form of excess coverage over and beyond the architects’ and engineers’ practice policies. The design team’s individual practice policies provide primary coverage and come into affect first. Then, if the responsible party’s practice policy limits are depleted, the OP policy covers some or all of the additional damages, depending on the policy conditions and limits. This enables the project owner to secure the policy limits they desire without you having to increase your practice limits. Because the OP policy comes into force only after the practice policy of the design firm has been exhausted or is otherwise unavailable, owner protective insurance is less expensive than a project policy. OP policies can be purchased annually or for the life of the project. Retroactive coverage can often be provided on projects already in the construction phase. Environmental engineering exposures can also be covered. “Blanket” OP policies may also be available for an owner’s multiple projects. In most cases, the design firms must maintain a minimum level of coverage (often $1 million to $2 million) on their practice policies. These limits may be higher for projects with substantial construction values. Also, any litigation costs incurred by the owner to bring the claim are not covered. Conversely, since the owner is the named insured on the project, OP limits will not be depleted by the legal defense fees incurred by the design firms. As an example of an OP policy in action, suppose there is a $1.5 million loss to an owner’s project that is determined to be the result of the negligence of the prime architect. The architect has $1 million in coverage through a practice policy. The architect’s primary policy would cover the first $1 million in damages and the OP policy would cover the balance of $500,000. However, if $50,000 of the losses were made up of the owner’s litigation expense, the policy would cover only $450,000. We Are Your Ally As we’ve shown, there are a number of practice management techniques and coverage options that design firms can consider to provide adequate PL insurance coverage while controlling costs. We are willing and able to help you evaluate your needs, discuss your options and help educate your clients on the various options available. We can even help you bring a client with unreasonable or uninsurable demands back to realistic coverage expectations. Can We Be of Assistance? We may be able to help you by providing referrals to consultants, and by providing guidance relative to insurance issues, and even to certain preventatives, from construction observation through the development and application of sound human resources management policies and procedures. Please call on us for assistance. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help. Melissa Pratt-McClintick 214-323-4607 Video: What People Thought About Our Past Seminars

a short clip that got me thinking…

June 22nd, 2011
Interesting perspective: Your website = your best employee. Let’s call your website “Bill” and think of it/him as one of your professional employees. Although the author’s point is about cost, Melissa’s thoughts, as with most things, turn to loss prevention and risk management for the A/E/E. When you designed your website, did you consider the Standard of Care? My guess is that your answer is no, and that your website was designed to assist prospective clients in making the right decision – HIRING YOU! The unfortunate news and what we are seeing more and more, is that attorneys are turning to websites, brochures, and other promotional materials in professional liability claims against A/E/E professionals. They can and will use your website against you, but it is one of your best marketing tools, right? What can you do to protect yourself? You need to evaluate and supervise Bill’s performance. Visit your website today. Ask your trusted risk management advisor to take a look (your insurance agent should offer this consulting service for FREE). Does Bill elevate the normal standard of care? Look for that fine line between promising “everything for nothing” and sounding “mediocre”. Look, I’m in sales too. I believe MBI offers service far superior to any other agent in Texas and Oklahoma. So I understand you must set and sell yourself above and apart from your peers. But honestly, does your website make promises you (or your go-to manufacturer) can’t always keep? Does it basically guarantee results? On the extreme side, I’ve come across a few A/E/E websites (MEPs and firms specializing in LEED design come to mind) that will state a ___% of construction, energy, etc cost savings! This is extremely dangerous and will kill the design professional’s defense in a claim (regardless of how protective the contract appears to be). While this may be obvious, the is a greater use of subtle language that can be construed as guarantees as well. Look for these. Remember your E&O policy covers your negligence which is failing to meet the normal standard of care of practicing professionals in the same geographical location under same or similar circumstances. You aren’t in the “guarantee business” and your policy excludes your promises and contractual obligations unless you are liable for such in absence of the contract or promise. Hence, we circle back around to the normal Standard of Care. Perhaps you and your advisory team have worked hard to develop and maintain solid business and loss prevention practices. You’ve got an iron-clad contract and keep your employees well educated about the importance of risk management. Now it is time to evaluate Bill’s performance and get him in line with your Risk Management Program. - Melissa Pratt, p.s. the short clip introducting “Bill” can be found here:

How much does a website cost? Why $30,000 is a bargain.

One of the most common questions we’re asked as web developers is, “How much does a website cost?” Oddly enough, it’s never this initial question that’s hard to answer,…

A New Wrinkle in the Health Care Reform Legislation That Might Catch You Off Guard

February 18th, 2011
We are often asked if a company can keep an employee on the insurance after the employee is let go. In Texas, their insurance is still in effect until the end of the month you notify the insurance company. So, you can legally keep the former employee on your insurance plan until the end of the month in most cases. Then, depending on your size, the former employee can continue benefits in either State Continuation or COBRA. So, as part of an executive’s severance pay agreement, could your company promise to pay part or all of the executive’s COBRA premiums (Or state continuation) under the employer’s insured group health plan after his or her termination? The new answer is, NO! Why? Such payments, by the employer, would be a violation of the new Code Section 105(h) nondiscrimination rules. If such arrangement is only made for executives and not at the termination of other employees, it is a violation of the nondiscrimination rules under Code Section 105(h). This is due to the fact that it is made for a group that likely contains a concentration of highly compensated individuals. If the group receiving this payment included a cross-section of employees, then there would be no violation. These new nondiscrimination rules will only be effective for the plan year beginning after any new guidance is released by the IRS. We suggest that employers review their severance pay policies and all employment and severance pay agreements of employees and renegotiate them before the effective date of these rules. If you decide to wait until after the effective date of these new nondiscrimination rules and any of the arrangements are found to be in violation, the employer could face a penalty of $100 per day for each employee that was discriminated against. How much is that? Let’s say you have 25 employees. If you let the VP of Sales go. You still have 24 employees. Let’s say that the former VP stays on COBRA for 18 months…or 547 days. 24 (number of employees) times 547 (number of days the proposed discriminated employees were discriminated against) = 13,140. 13,140 times $100 = $131,400. It could be that bad…potentially. Better to be safe, than sorry. This is not a legal opinion or tax advice. Please seek competent legal and tax counsel to confirm. This is just a friendly “Did you Know” from McLaughlin Brunson Insurance Agency.

Federal Court in Florida Finds the Patient Protection and Affordable Care Act Unconstitutional

February 3rd, 2011
On January 31, 2011, Federal Court Judge Roger Vinson in the U.S. District Court for the Northern District of Florida declared the Patient Protection and Affordable Care Act (the “Act”) to be unconstitutional. The case, Florida v. HHS, N.D. Fla., No. 10-91, brought by 26 different states and a few interest groups and individuals, is the latest of the leading cases to be decided. While there have been conflicting decisions regarding the constitutionality of the Act’s individual mandate (the part of the Act that will require all U.S. citizens to pay a penalty if they do not obtain health care insurance by 2014), this is the first case to find the entire Act unconstitutional. In short, Judge Vinson held that Congress exceeded its authority under the Commerce Clause of the U.S. Constitution in enacting the individual mandate. Further, and more importantly, because the individual mandate is “inextricably bound” to the remainder of the Act, he ruled it cannot be severed. In fact, for political reasons, the Senate did not include a “severability clause” in the Act. (A severability clause is often included in legislation and provides that if a court finds any part of a law to be invalid, the remainder of the law will remain in place.) Therefore, the judge found the entire health care reform law to be unconstitutional. Notably, Judge Vinson’s conclusion is not shared by the other federal judge, Henry Hudson of Richmond, Virginia, who determined the individual mandate to be unconstitutional. Judge Hudson held that most of the Act could stand even if the individual mandate was held unconstitutional. Interestingly, before finding the Act unconstitutional, Judge Vinson analyzed the Act’s expansion of the Medicaid program and state requirements under that program and found these consistent with the U.S. Constitution’s Spending Clause. CONSTITUTIONALITY OF THE INDIVIDUAL MANDATE The main issue in this case is whether the federal government has the authority to require individuals to purchase insurance. Among other things, the federal government argues that its authority to impose individual mandates to purchase insurance is found in the Commerce Clause of the U.S. Constitution. The Commerce Clause grants to Congress the power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” Over the many years of Commerce Clause jurisprudence, the U.S. Supreme Court has found that Congress could properly act to regulate individual activity, even if not directly involved with interstate commerce, if the activity may have an impact on interstate commerce. In this case, however, the judge found that the individual mandate is unconstitutional because the concept of mandating individuals to buy a private product exceeds the limits of the authority granted to Congress under the Commerce Clause. The federal government’s argument on this point was that inactivity (that is, not buying insurance) was the same as activity, thereby allowing for government regulation under the Commerce Clause. However, Judge Vinson rejected this argument. Instead, the Court found that the Administration’s “economic inactivity” argument can only be said to have a substantial effect on interstate commerce if uninsured individuals are still uninsured at the time they need care and are unable to make arrangements to pay after receiving care, thus shifting the cost to others. In rejecting this argument, the Court found that the assumption that an uninsured individual will receive uncompensated care in the future would require it “to pile inference upon inference,” an approach rejected by other courts and considered to be inconsistent with the Constitution’s enumeration of powers. While the judge’s decision declared the Act unconstitutional in its entirety, it does not enjoin or restrict the government from enforcing the Act. Rather, Judge Vinson simply declared that he expects the Obama Administration to “follow the law,” and not enforce the Act. FUTURE OF HEALTH CARE REFORM Here is where it gets tricky: Judge Vinson’s decision is law only in this particular case and is not binding on other federal judges, just as the decisions of federal judges finding the law to be constitutional were not binding in his case. Thus, it is unclear exactly what the judge’s ruling means and how the Obama Administration will react. It is a virtual certainty that the Administration will appeal the decision, but whether the government will attempt to seek an immediate stay of the decision or expedited review is as yet unclear. Until one or more federal appeals courts rule on the Act, most observers anticipate that the legal landscape will not be clarified, and if those courts reach conflicting results, the issue may well be before the Supreme Court some time in 2012 or 2013. However, despite the “hoopla” of the media, what it likely does not mean is that the law is unenforceable now; in other words, for now, we believe that nothing changes for employers or providers. They should continue to implement the Act’s rules and continue to prepare for the changes required by it. This case, though significant (and fascinating from a historical and jurisprudence perspective), is somewhat meaningless to the U.S. business community for the time being. Thus, given the uncertainty as to how the Vinson decision will affect health care reform in the future, employers should consult with qualified benefits counsel before making any changes to group health plans based on the judge’s decision. We will continue to monitor this situation and will provide you with timely updates as they develop. In the end, the decision of the U.S. Supreme Court will likely be the only one that matters.

Why You Should Choose Mediation

January 31st, 2011
This material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, confer with a qualified professional who can provide guidance that considers your own unique circumstances. Imagine a confidential dispute resolution technique based on finding common ground and resolving disputes quickly and inexpensively while preserving business relationships and reputations. That technique is mediation. Mediation is a confidential, nonbinding, conciliatory process by which parties to a dispute agree to sit down and seriously attempt to reach a mutually acceptable resolution. Mediation offers a structured negotiation procedure guided by a trained and experienced neutral. It is designed to resolve problems in a manner that is agreeable to both parties – win/win rather than win/lose. The mediator is a trier of fact, typically familiar with the design and construction industry and the specific issues in dispute. This creates a fast, flexible forum with the potential to resolve problems at greatly reduced time and costs. Better Than Litigation or Arbitration In litigation, it’s you versus your adversary – strictly win/lose. A layperson jury unable to fully understand and evaluate the technical issues at stake could very likely decide your fate. For that reason, each side presents “expert witnesses” to explain technical matters in lay terms. Inevitably, the experts from each side disagree – since they are both biased to the case of their client – and it will be left for the inexpert jury to decide which witnesses to believe. With mediation, on the other hand, the unbiased mediator hearing the dispute can be chosen based upon the technical knowledge required to assist the parties in reaching an equitable agreement. Why mediation over arbitration? Mediation is voluntary and designed to be conciliatory to both sides. Arbitration is compulsory and sometimes adversarial. Even when an arbitrated dispute is resolved quickly, the disputants’ business relationship may be mortally wounded. Typically, somebody wins and somebody loses. Nonbinding mediation requires agreement by both sides of the dispute. Arbitration decisions are binding and typically afford no appeal of decisions absent a clear showing that the arbitrator was biased or acted outside the scope of the arbitration agreement. Mediation needs no appeals process because neither party is bound to settle. Only when both parties voluntarily sign a negotiated agreement does mediation become binding. Both litigation and arbitration follow strict procedural rules. In addition, litigation may be bound by past court cases, limiting the range of creative options available for parties to resolve their dispute. Mediation has its rules, but they are relatively simple and flexible: You present your side of the story; the other party presents its side. Interrogatories and mandatory depositions are not used, and in the event witnesses are called upon, the process is voluntary and informal. The goal of mediation is to get agreement on problem resolution and keep the project rolling. As a result of procedural simplicity and mediator knowledge, mediation can be pursued even while work on the project continues, eliminating costly delays and damages. Additionally, the time savings and lack of need for teams of attorneys and professional expert witnesses make the mediation process much less costly than litigation. But your greatest value may be the saved business relationship between you and your client – and your saved reputation as a high-quality, low-risk firm. Mediation is private and confidential. Best of all, mediation works. Many mediated disputes are settled in one day, and mediation has proven highly successful in the design-construction arena. How Mediation Works There are various types and hybrids of mediation. But in general terms, the process works as follows: During your initial negotiations with a client, before a project upset arises, one party requests that mediation be the initial dispute resolution method to any project upset and the other agrees. This agreement to mediate is often included in the client-designer contract (more on that later). Note that the parties have retained their rights to later use arbitration, litigation or some other dispute resolution technique should mediation not result in a mutually acceptable settlement. When a dispute arises, the parties try to reach a negotiated settlement. If agreement cannot be reached between the two parties, they agree to enter mediation. A qualified mediator familiar with the design and construction industries is agreed to. The neutral mediator arranges for a joint session with representatives from each of the two parties. These representatives, which may include firm principals, key project designers and/or legal counsel, should have decision-making authority to reach agreement on the dispute. The mediator explains the voluntary mediation process, how it differs from arbitration and litigation, and the specific rules that he or she will apply. Once these ground rules are agreed to, each party explains its position regarding the dispute likely including a chronological history of the pertinent events. This joint session gives the mediator the chance to gather facts, evaluate the relationships and dynamics between the parties, and identify areas of agreement and areas of discord. In some cases, the mediator can get the two parties to reach a settlement during this initial joint session. Typically, however, the joint session ends without agreement. When it becomes apparent that the parties have stalled in their search for an agreement, the mediator typically begins holding separate private meetings, or “caucuses,” with each of the parties. These caucuses may involve pertinent witnesses or outside experts to help establish the party’s position. Limited discovery may consist of voluntary depositions and a review of basic project documents. The mediator evaluates the party’s case, asks probing questions – sometimes acting as a devil’s advocate – and brainstorms alternative solutions for reaching a settlement. Anything said to the mediator in these caucuses is held strictly confidential and cannot be disclosed to the other party except when agreed to by the disclosing party. Sometimes, a mediator will request permission to disclose information to the other party when he or she believes it will expedite an agreement. The mediator also may comment as to what a reasonable settlement may include, or whether one party’s offer is likely to be accepted. Following the caucuses, the parties are brought back together in an attempt to reach an agreement. The mediator seeks to summarize the areas of agreement and narrow the points of contention, pointing out the benefits of compromise and the consequences of not reaching agreement. Often the parties negotiate the final settlement in this second joint session. The mediator verifies the specifics of the agreement and makes certain its terms are clear. Both parties sign the negotiated agreement, which becomes a binding contract. If either party fails to accept an agreement at this point, additional caucuses and joint sessions are held to iron out continuing points of contention. Typically, the mediator eventually reaches a final proposed resolution. This resolution is nonbinding unless both parties agree to it in writing. If no resolution is agreed to, the parties are free to seek resolution elsewhere, including in arbitration or litigation. Because the mediation process is typically “without prejudice,” any information voluntarily revealed by one party during negotiations cannot be used or referred to as evidence by the other party during any future litigation. A Mediation Clause in Your Contract You and your client do not have to be contractually bound in order to agree to mediate. Either party can suggest mediation at any time. Getting both parties to agree to mediation after a dispute arises, however, can be difficult due to the emotions involved. At least one party feels wronged and, in many cases, is unwilling to give an inch to reach a compromise. That’s why mediation is most successful when parties have agreed to it by contract before a dispute arises. Most professional associations (AIA, EJCDC, ASFE and CASE included) have standard contract forms that call for mediation. Some of these forms require mediation prior to arbitration or litigation; others simply recommend it. Regardless, by including a mediation clause in your contract with your client, you both have an available means by which to inexpensively settle disputes and emerge from the process with your business relationship intact. You and your attorney can consider the standard language used by your professional associations or develop your own language. Regardless, the language should state something to the effect that in an effort to resolve conflicts that arise during or after the design and construction of the project, you and your client agree that all disputes shall be submitted to nonbinding mediation unless the parties mutually agree otherwise. You and your client should further agree to include a similar mediation provision in all agreements with contractors, subcontractors and subconsultants retained for the project. If possible, go one step further and require those third parties to include a mediation provision in their agreements with suppliers, fabricators and other pertinent parties to the project, thereby providing for mediation as the primary method for dispute resolution for the project. Choosing the Mediator When and how do you choose your mediator? It is generally preferable that you and your client agree to a mediation service and mediator after a dispute arises, rather than having a mediator predetermined in your contract. That way, you can choose a mediator with knowledge applicable to the specific dispute in question. There are several local and national organizations that provide mediation services for design and construction industry disputes. Generally, these organizations each have their own set of rules and procedures. Consider these as part of your selection process. When selecting a mediator, look for someone who is not only knowledgeable of the design and construction field, but someone trained in negotiation and facilitation techniques. Check with your attorney for the names of recommended mediation services in your area. As your professional liability specialist agency, we may be able to provide a list of qualified mediators as well. Paying the Costs The cost of mediation services vary greatly depending on the complexity of the dispute, the number of parties involved, and the amount of time required. Typically, mediators are paid on an hourly or daily basis or on a percentage of the dollar amount in controversy, much the same as with lawyers. Costs can be split equally by the two parties or paid as agreed to as part of the settlement. These costs are almost always insurable under your professional liability policy. Some professional liability insurers offer a deductible reimbursement program to encourage participation in mediation. Under such a program, policyholders successfully concluding a dispute through formal mediation have a percentage of their deductible returned, up to a preset limit. Ask us for details on current deductible-reimbursement programs available. Not all disputes are suitable for settlement via mediation, but a vast majority are. It makes perfect sense for parties to a design project to choose mediation as their preferred dispute resolution technique. Getting and giving that commitment upfront in writing signals that your primary goal is to have a litigation-free project where problems are handled quickly and fairly with minimal impact on time and money. Can We Be of Assistance? We may be able to help you by providing referrals to consultants, and by providing guidance relative to insurance issues, and even to certain preventives, from construction observation through the development and application of sound human resources management policies and procedures. Please call on us for assistance. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help.

Tight Budgets, Limited Credit Lead to Underfunded Projects

January 13th, 2011
The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with a qualified professional who can provide guidance that considers your own unique circumstances. Today’s stagnant economy and the resulting credit crunch have put a double whammy on design firms. Not only are new projects scarce, but project owners may not have the access to capital to which they are accustomed. That may mean projects are not sufficiently funded to ensure a high quality outcome or to withstand surprises that result in added costs and slimmer margins. In times like today, underfunded projects can be a major cause of professional liability claims and losses for architects and engineers. When clients are strapped for capital, they look for ways to reduce costs. They may ask their designers and contractors to take shortcuts and skimp on details and quality control. In such cases, errors and omissions become more prevalent, leading to an increase in disputes and legal wrangling. Capital-strapped projects can also result in slow payment for design and construction services. Desperate clients may even file trumped-up negligence claims as a ploy to avoid paying their designers and contractors altogether. Should the funding problem reach crisis stage, project completion comes into jeopardy. Delays, work stoppages and project termination can add to the legal quagmire for everyone involved. Fortunately, there are preventive steps you can take to avoid or at least minimize the headaches and heartbreaks of an underfunded project. Conduct a Financial Check of Your Client Because inadequate funding can play a significant role in professional liability losses, design professionals should take appropriate steps to determine the financial wherewithal of a client, particularly a new client. But architects and engineers are often reluctant to perform financial background checks on their clients for fear of losing the project. They feel such an inquiry will insult, embarrass or otherwise alienate a current or potential client. Yet the fact of the matter is most clients have already provided their financial and credit information to a number of other parties in order to obtain credit and project approval. In most cases, they are not reluctant to provide the same information to their prospective design firms or contractors. And if a prospective client is reluctant to share its financial records, maybe that’s just the type of client you might choose to avoid. Assume your background check shows that a potential client has a less than perfect credit history. Does that mean you should automatically reject this project? Of course not. The financial check is simply one of many important pieces of information to consider. If the firm or individual has an otherwise clean record as a reasonable, non-litigious client, you can move forward with the project while taking necessary precautions in the form of solid contractual language. But combine that spotty credit record with a trail of litigation and you might make the best business decision of your life by avoiding this firm. Secure an Adequate Scope of Services Should your investigation reveal the potential for project underfunding, an adequate scope of services becomes critical. Your services should include pre- and post-design activity designed to enhance quality control and lower your risk exposures. Services you should attempt to negotiate in your scope of services include:
  • Pre-qualification of contractors. Help your client assure that all contractors invited to bid are reputable, experienced, bondable and otherwise qualified to perform the work.
  • Pre-selection conference. Encourage your client to co-host a conference where pre-qualified contractors are invited to address any questions they may have about the project and to learn the project ground rules from you and the client’s representatives.
  • Plan and specification review. As part of the selection process, have pre-qualified contractors review the constructability of plans and identify potential errors, omissions, ambiguities or inconsistencies.
  • Pre-construction meeting. Meet with the selected contractor and client representative to review schedules, establish lines of communication and otherwise solidify understandings regarding key project components.
  • Full construction observation services. The lack of construction observation services may be a deal-breaker for any financially questionable project that must be completed on a tight budget.
Getting a cash-strapped client to agree to have you perform these services for a fee may be difficult. Nonetheless, the need to perform them should be addressed. If the client summarily dismisses your proposed services and demonstrates a desire to proceed with the project in the least expensive way possible, you will be given a clear insight into the client’s priorities. The question you then must ask yourself is: Do I really want to work for this client under these conditions? Should you decide to accept an assignment from a financially-challenged client, it is prudent for you and your attorney to draft contract language that provides you an “out” should the project turn sour. This includes language that gives you the right to temporarily suspend services or permanently terminate the agreement if the client reneges on its contractual obligations and financial commitments. Discuss the following clauses with your attorney. Suspension of Services Failure by a client to adhere to the terms of your contract, including payment terms, may be considered a cause for termination of the agreement. However, you may not want to use the ultimate hammer of termination as your first action in the event of a breach of contractual terms. Rather, you may want to use a “Suspension of Services” contract clause that gives you the right to temporarily withhold your services in hopes of forcing the client to fix the breach while keeping the contract in force. Granted, if the contractual breach continues for a sufficient time, you may ultimately wish to terminate the agreement. But in the meantime, you at least want to avoid increasing your receivables while you seek payment for services you have already rendered. Specifically, seek the right to suspend your services without liability in the event of nonpayment of your fees (or for any other breach of contract terms you consider critical to the progress of your services). Stipulate that if the breach of contract is corrected within a short period of time (e.g., up to30 days) you will resume services without financial penalty to either party. For a longer suspension (e.g., 30-60 days), stipulate that you will be compensated for the expenses of interrupting and resuming your services. And, for an excessive period of suspension (e.g., 90 days or more), you need to retain the option to terminate the agreement. The Suspension of Services clause should similarly outline your rights in the event the client suspends your services. For example, stipulate that if your services are suspended by the client, you will be immediately compensated for all services performed to date as well as any reimbursable expenses you have incurred. In addition, should you be compensated for the past amounts due and your services are resumed, the contract should require your client to compensate you for any expenses incurred as a result of the suspension and resumption of your services. The clause should also state that your schedule and fees will be equitably adjusted to reflect the current status of the project. The Suspension of Services clause should further specify that in the event the project or your services are suspended for a long period (for example, more than 90 days), or if the client has materially breached payment terms or other conditions of the contract, you have the right to terminate the agreement without penalty upon giving five days’ written notice to the client. The clause should state that the client agrees to make no claim against you for any delay or damage as a result of you suspending or terminating services due to any client breach of your agreement. The contract may also specify that upon receipt of payment in full of all outstanding sums due from the client, or upon correcting the contract breach that caused you to suspend your services, you will resume services with an equitable adjustment made to the remaining project schedule and fees as a result of the suspension. Be sure to coordinate your Suspension of Services clause with your Billing and Payment, Retainers, Changed Conditions and Termination provisions in your agreement. Termination Clause Unfortunately, a client in serious financial trouble may have no option but to terminate your services or even put a halt to the entire project. Obviously, you cannot contractually require a client not to terminate a project. However, through a “Termination” clause you can hold the client responsible for any costs you incur associated with stopping your work on the project. What’s more, a Termination clause can provide you the right to put an end to your agreement with your client for specified causes and offer you protection should you quit for justifiable cause. A typical Termination clause states that in the event either party terminates the client-designer contract, the client has a certain number of days (typically 15 – 30) to pay the designer for all services rendered and all reimbursable costs incurred up to the date of termination, in accordance with the payment provisions of the contract. Most termination clauses state that the client may terminate the agreement for the client’s convenience and without cause upon giving the design consultant not less than seven to ten days’ written notice. They also typically state that either party may terminate the agreement for cause upon giving the other party the same amount of written notice for a list of specified reasons. These reasons may include:
  • Substantial failure by the other party to perform in accordance with the terms of contract through no fault of the terminating party
  • Assignment of the contract or transfer of the project to any other entity without prior written consent
  • Suspension of the project or consulting services for a given period of time (e.g., 90 consecutive or aggregate days)
  • Material changes in the conditions under which the contract was entered into, the scope of design services or the nature of the project, and the failure to reach agreement on the compensation and schedule adjustments necessitated by such changes.
If possible, have the Termination clause state that in the event of any termination that is not the fault of the design consultant, the client agrees to also pay the consultant for all expenses reasonably incurred in connection with the orderly termination of this agreement. These termination expenses may include the cost of demobilization, reassignment of personnel and associated overhead costs. Finally you may want to include strict contract provisions concerning ownership of instruments of service in the event of project termination. This can help prevent clients from taking ownership of your complete or near-complete construction documents while cancelling your agreed-to scope of construction administration services. Discuss these issues with your attorney. We can help you analyze the insurance and risk management issues involved. Can We Be of Assistance? We may be able to help you by providing referrals to consultants, and by providing guidance relative to insurance issues, and even to certain preventives, from construction observation through the development and application of sound human resources management policies and procedures. Please call on us for assistance. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help.

Project Evaluation: More Important Than Ever

December 30th, 2010
Project Evaluation More Important Than Ever The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with a qualified professional who can provide guidance that considers your own unique circumstances. When design and construction projects are scarce, struggling design firms can feel compelled to compete for virtually every opportunity. These architects and engineers feel they can’t afford to be picky with the projects they pursue and aggressively go after work that they would ignore during better economic times. The survival of their firms or the jobs of their faithful employees may be at stake. They’ll try to get anything and everything to keep the shop doors open and generate the revenues needed to survive. In such an environment, project evaluation often takes a back seat. Design firms are less concerned about project risks. Their number one priority is getting the work. Yet it is in tough times such as these that project evaluation becomes more critical than ever. A design firm that decides to take on a risky or unfamiliar project needs to know the potential perils and how to best mitigate them. When you say “yes” to a project you would typically say “no” to, you’d better proceed with your eyes wide open and your risk management toolkit fully stocked and ready for application. Let’s look at several factors that must be weighed when evaluating potentially risky projects. Type of Project Some types of projects are so litigation-prone that only the most qualified – or most desperate – architect or engineer would accept them. Condominiums, for example, have historically been so high-risk that professional liability insurance companies are hesitant to insure firms that design them. Historic renovations are also high risk due to the chance of hidden problems such as asbestos, lead paint and other hazardous materials and conditions. According to insurance industry studies, other project types that can present higher than average risks include wastewater/sewage plants, residential custom homes, schools (k-12), high rises, hotels, residential subdivisions, airports and bridges/trestles. Lower-risk projects include malls/retail and commercial industrial buildings of nine or fewer stories. This is not to say that design firms should not take on condos, historic restorations or other types of higher-risk projects. They should, however, approach these types of projects cautiously, making sure they have qualified individuals to design them, set their fees to reflect the higher risk and are persistent in negotiating protective contract language. Project Delivery Method More and more projects vary from the traditional design-bid-build delivery method. In addition to the growth in sign-build and fast-track projects, project delivery methods incorporating BIM, IPD and other hi-tech techniques are in increasing use. It is important to realize that each alternative project delivery method involves specific skills and risks and requires a different allocation of responsibilities for those risks. Your risk on a design-build project varies depending on the role and contractual relationships you undertake. If you lead a design-build project, you become responsible for risks traditionally associated with contractors and not normally assumed by engineers and architects. On the other hand, with a contractor-led design-build project, your risk may be little different from that of the traditional design-bid-build delivery method. The same holds true for design firms that provide construction management services. Your risk as a construction manager depends on which role you play on a project and what contractual obligations and relationships you undertake. The “ready, shoot, aim” nature of fast-track projects often involve substantial modifications to plans and thus big change-order expenses. Unsophisticated clients won’t expect change orders and, most likely, will not understand the need to have sufficient contingency reserves set aside in their project budgets. BIM and IPD projects not only require a unique set of technology skills, they involve shared and often blurred roles and responsibilities. This is no time for on-the-job learning for lead designers. Other Parties Involved Even the most plain-vanilla type of project can be high risk if the other parties involved in the project are litigious or prone to errors and omissions. A client with a history of litigation against design firms, contractors and others should be a huge red flag when evaluating a project. Indeed, when budgets are extremely tight and profit margins thin, the client may be the greatest risk factor associated with a project. An underfunded project is a high-risk project. Clients with insufficient capital will look to skimp on quality and will encourage their design firm and contractor to do the same. They may try to save money by eliminating a design firm’s construction-phase services. Should financing begin to dry up, they may delay payment for services or file trumped-up claims as a ploy to avoid payment altogether. If a project appears to be underfunded, be sure to conduct a financial check of your client. Don’t let the client reduce your scope of services to the point you can’t adequately control your risks. Also make sure you have a suspension of services clause in your contract that gives you a way to pull out of the project in the event funding problems result in project delays, slow payment or other breaches of your contract. Likewise, the contractor assigned to a project is a significant risk factor. This is particularly the case when a contractor has been selected on a low-bid basis. It is always wise to investigate the history of the contractor as part of the project selection process. Are they experienced in this type of project? Do they have a history of litigation? Subcontractors and subconsultants (or the prime if you are a subconsultant) should be looked at as well. Level of Experience and Knowledge Take a hard look at the capabilities of your firm when evaluating projects. How much experience do you have with this type of project? Who on your staff has the necessary expertise? Have you worked with the owner or contractor before? Consider your projected workload and the mix of other projects you will be working on concurrently. If you have reduced your staff down to the bare bones, will you need additional personnel to take on this new project? Chances are there is a substantial pool of available designers that you can hire or subcontract to. Taking on a project that severely stretches your staff and skill set can be a recipe for disaster. Scope of Services and Fees Even when overall project funding seems adequate, be wary of projects for which you are offered a severely limited scope of services and/or inadequate fees. Projects that omit your construction observation services, for example, are more prone to errors since you are not available to provide guidance in the execution of your plans. Contractual Provisions Beware of the “contractually hazardous” projects that “take-it-or-leave-it” owners may present during hard economic times. This could be any type of project – even a simple, single-story commercial building – for which the client issues a contract containing such unfair or onerous provisions that you could wind up accepting most or all of the client’s liability. Sometimes, an unsophisticated client with a small project may attempt to issue a purchase order or similar contract form, which is thoroughly inappropriate for engaging a design professional’s services. Some might argue that such a project is among the riskiest of all because you have none of the standard contractual provisions professionals need for protection. Alternately, strong contractual language can make an otherwise risky project palatable. Contractual limitations on your liabilities can offset a lot of project sins. You can often negotiate additional contract protection in exchange for a smaller design fee. A Project Evaluation Checklist Project selection is rarely a cut-and-dried, yes-or-no decision. Projects usually contain a number of risk factors that, considered separately, might be acceptable. But together, these risks could add up to a big liability headache. Your best course during project evaluation is to strive to identify all of the potential risks of a prospective project and then make a calculated decision based on a combination of factors, including the current economic climate. Some architects and engineers use a Project Evaluation Checklist to evaluate projects before submitting a proposal or negotiating an agreement. This checklist should cover issues such as:
  • Is the project type one that is inherently risky, such as condominiums, amusement rides or renovations?
  • Does the project team, including the owner, the prime consultant, subconsultants and the contractor, have experience with this type of project?
  • Does your firm have the necessary skills and staffing for the project? If not, can you acquire it?
  • Is the project adequately financed?
  • Does the project owner or contractor have a litigious history?
  • Does the project include an adequate scope of services?
  • Are you receiving an adequate fee?
  • Is the project schedule realistic?
  • Are there any unusual features, such as unfamiliar code requirements, new technologies or unstable geological conditions?
  • Can mitigating factors be offset with contractual protection, such as a limitation of liability clause or indemnity provisions?
Add your own checklist items based on the unique characteristics of your firm. Once you’ve analyzed the risks of a potential project, determine how the risks you’ve identified might be managed. You can minimize some risk by educating your clients, providing more comprehensive services and assisting the owner with a qualification-based selection of a competent contractor. You can also reduce your risk by developing a contract that is fair and precise – and that includes reasonable mutual indemnities and a limitation of liability clause. And, of course, you can limit your financial risks by purchasing adequate professional liability insurance. It is in everyone’s best interest for you and your client to take a good, hard look at the risks you cannot prevent or control. Understand that on a high-risk project, the risk should be borne by the party best able to control it. If no one can control the risk, then it rightly remains with the project owner, who has the most to gain from the project. The risks that remain on your plate – those that rightly belong to you and cannot be otherwise transferred or managed – will require a hard-nosed business decision. Is the fee or other incentive so attractive or necessary that you can accept the risk? In the end, project evaluation and selection requires a business decision that only you can make. In tough economic times you may feel compelled to accept any and all project offers. Before accepting risky business, however, make sure you are well armed and educated to proceed in the safest way possible. Can We Be of Assistance? We may be able to help you by providing referrals to consultants, and by providing guidance relative to insurance issues, and even to certain preventives, from construction observation through the development and application of sound human resources management policies and procedures. Please call on us for assistance. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help.

Additional Insured Endorsement Owners or Sub-Consultants

June 15th, 2010

The subject of adding someone else as additional insured to a professional liability policy comes up from time to time, and the result is always the same. We can’t do it! It really would not matter which insurance company you were insured with for professional liability insurance, the answer would be the same. It is not available.

Not only can an owner not perform a covered act (negligence in the business of architecture and/or engineering is the only thing your policy covers), the insurance company doesn’t have the opportunity to underwrite the expertise and qualifications of anyone including a sub-consultant. Also, the sub-consultant is by definition an independent decision maker and is not under the direct control and supervision of the insured. In the event of a claim, there may also be a conflict between insureds on the policy as to the professional responsibility. Most importantly, there is an “Insured versus Insured” exclusion on the policy that would eliminate coverage when an owner sued another insured, the design professional if both were named on the policy.

The owner may be seeking to gain defense protection in the unlikely event they are involved a claim surrounding your professional services. Please assure them that their damages, including reasonable defense protection, would be paid by your insurance company if the damages are a result of your firm’s professional negligence. No contractual language or changes in the insurance policy are necessary to gain that protection.

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