5 liability risks hiding within architect and engineering contracts

The modern economy is fueled by a process of continuous renewal. And just as gleaming new buildings reshape the skyline and transformative products are brought to market, it’s the responsibility of architect and engineering (A&E) firms to see these projects through to completion and beyond.

As project originators, these A&E firms assume a critical role, especially because developers, contractors, and manufacturers rely upon their oversight and expertise to produce great work. Before a finished project is safely delivered to the public, every phase of its development journey involves risk, which is why it’s an absolute necessity for A&E firms to purchase professional and general liability insurance.

But as any A&E principal will know, an insurance policy is only a starting point. If the contracts between your A&E firm and your contractors and suppliers are not carefully written, your firm can be exposed to liabilities. In the course of a typical project, five common gaps can occur; if you don’t close them, your company faces the risk of a lawsuit.

Not only can your own negligence bring legal action, the negligence of those contractors you relied upon in performing your obligations to your clients can also involve your A&E firm in litigation. To help prevent these claims from arising, and narrow your exposure to liabilities, your firm should review your standard contracts used with contractors and suppliers and close these five common holes. We’ll explore each of them in detail.

Before formally agreeing to take on a client’s project, your firm may find it necessary to bring in outside expertise or materials through a subcontract, vendor contract, or purchase order. Typically, these contracts will have an indemnification clause requiring a contractor or supplier to compensate your firm against damages arising out of their negligence.

Indemnification is a standard section in nearly every contract, but where many contracts fail is that they are silent on the need to defend your firm against these same allegations. Any lawsuit arising out of your subcontractor’s negligence will also name your firm as a defendant, and defending yourself in court can run into hundreds of thousands of dollars, leaving your firm exposed. For that reason, it’s imperative to review all contract language before engaging in working relationships with contractors and suppliers. Check to see that your standard contract requires your subcontractors and vendors provide both indemnification and defense for your firm as well.

If your contractor or supplier brings in another party to fulfill any part of the project, their error or negligence could come back around and entangle your firm in a lawsuit or judgment. In this scenario, it makes no difference whether you authorized the party to perform the work or not. You’ll still be on the hook for their wrongdoing.

Make certain your contracts require that all lower-tier subcontractors or suppliers must conform to all indemnification, defense, and insurance requirements that your primary contract mandates.

A $1 million liability limit is no longer sufficient to protect your firm. In fact, it may be woefully inadequate. In recent years, nuclear verdicts in excess of $20 million have ballooned, with more than 375 verdicts coming down in U.S. courts between 2016 and 2020.

While the pandemic and the necessity for court closures due to COVID-19 have temporarily slowed the nuclear verdict trend, there are indications that high-value court awards will resume.

Liability insurance policies typically cover claims from both ongoing operations and the work itself after the project is completed. Similarly, this type of policy coverage also applies to products that are in the process of being manufactured and ones that are in a finished state.

This “before and after” distinction is important. In the case of a building or a facility that has been completed, your firm may still bear responsibility for the structural integrity of the building going forward. The same holds true for any liability claims made against a product or piece of equipment once it has been introduced to the market.

Additional insured endorsements exist specific to operations or completed operations, but rarely both. Make sure your contract requires your firm to be named as an additional insured for both ongoing and also completed operations on your contractor’s or supplier’s liability policies.

Liability policies contain an “other insurance” clause that defines how they will apply if any other insurance is available. Make certain your contract requires that your contractors and suppliers provide additional insured status for your firm on a “primary and non-contributory” basis to keep your own policy in an excess position. To explain these contract terms further, the “primary” designation means that in the event of a claim, the contractor’s policy will pay for it first, while the “non-contributory” aspect states they will not seek contribution from any other policy, unless the claim goes beyond the limits of their insurance. As an A&E firm, you do not want your policy to pay for your contractor’s liability when their own insurance should serve that purpose.

Reviewing your standard contracts to address these five common gaps can help your firm avoid problems that can detract from your core objectives. We strongly recommend you obtain the services of a skilled contract and insurance lawyer as you negotiate the complex world of liability and insurance.

For additional insights on how the role of insurance applies to your industry, we encourage you to visit our professional services page online.