For architects, engineers and other design professionals, the contract is one of the most important documents you’ll create. A contract communicates in writing the expectations and roles for each party in the project. If problems arise, a good contract will serve as a workable roadmap to solve them, while a bad contract could make matters worse. This is why design professionals have to be on the lookout for contract language and terms that could be problematic.
Your professional liability insurance allows you to stand behind your work, protecting your clients from a loss caused by negligence, errors or omissions in performance of your professional services. But some clients can ask for contractual terms that exceed the limits of your policy, require you to make impossible guarantees, or even include language that can expose the client to unnecessary risk. Some clients aren’t fully educated about what is appropriate for a design contract and others could just be repurposing a boilerplate template not suited for the job.
Contract risk management for architects and engineers is all about knowing what professional liability risks exist and what protections and resources you need to have in place to protect your business. Here are 7 common contract liability risks:
1. Additional Insured Naming Requirements
Some clients will mistakenly ask to be named as an additional insured on your professional liability policy in the contract. But in the event of a claim, this will be a problem. Clients cannot assume the risks your policy is designed to cover because they do not perform design services. Clients also can’t be named on this type of policy because claims can only be paid on behalf of the policyholder to a third party that is not named on the policy.
2. Broad Contractual Liability Requirements
Clients will sometimes ask for broad contractual liability similar to that provided by a general contractor contract, including express warranties and guarantees or representations about services being free of faults, defects and fit for the intended purpose. But as a design professional, your professional liability covers a much narrower contractual liability due specifically to professional negligence. Requiring you to take on these excessive risks may ultimately prove to be an added risk for the client.
3. Broad Contract Indemnity Obligations
Another common risk are contracts requiring broad contract indemnity obligations far beyond the coverages of your insurance policy. A design professional may be able to offer indemnity for claims, damages and losses caused by your negligence performing or furnishing professional services. But obligations not related to your own professional negligence will be uninsurable and risky for yourself and clients.
4. Client Insurance Purchase Clauses
Contract risks also exist around who obtains an insurance policy for a project and how they pay for it. Since professional liability policies pay on behalf of a named insured to another, unnamed party, you don’t want your client agreeing to purchase a policy for you in the contract as it would make filing a claim impossible. However, a contract can stipulate for you to purchase your own coverage and then be reimbursed for the premium for a specific project by a client.
5. Contract Insurance Term Errors
Design contracts are at risk for faulty language even when both parties are professionals. With insurance liability, the terminology matters. Clients sometimes insist your professional liability coverage for the project be “primary” coverage, meaning payment at the first dollar of loss, a redundant concept for this kind of policy. Worse are clients who stipulate you provide “per-occurrence” liability coverage, which may leave the client exposed to excess risk, as professional liability policies are underwritten on an opposing “claims-made” basis.
6. Contract Liability Cancellation Notices
Clients will sometimes request advanced notice of cancelation, modification or reduction of professional liability coverage on a policy covering a project. But problems can arise if these noteworthy “material” changes and the process for making them known is poorly defined in the contract. A claim of negligence can be avoided by defining exactly what policy changes require a notification, and who does the notifying with what timeframe and method for notification.
7. Future Liability Coverage Stipulations
Some clients will try to use the contract to stipulate detailed liability insurance requirements that you must maintain for a period of years after the project. However, policies are issued on an annual basis, with no guarantee that an exact or equivalent coverage will be available or affordable years down the road. If a long-term coverage stipulation is desired by a client, it should be flexible enough to allow you to obtain current and prior-acts coverage that will be acceptable to the client and affordable for your business.
Resources and Coverage for Architects and Engineers
It can be a challenge negotiating design contract specifics with your clients. You need to give clients the confidence that you can stand behind your professional work, but you also need manage your contract risks. It’s risky to your career and reputation to go ahead with contract terms that exceed the limits of your policy, require impossible guarantees, or expose you and clients to excess risk.
At Lockton Affinity Architect and Engineer, we understand the needs of design professionals like you. It’s why we offer free professional contract reviews to policyholders, to help ensure you enter contracts with the appropriate language, contractual risks and indemnity obligations for your professional services. Plus, with Lockton Affinity, you’ll benefit from competitive coverage and prices and best-in-class customer service.
Receive an indication of what our coverage will look like for your business today by visiting LocktonAffinityA-E.com or call (888) 425-7011.