By Michael C. Loulakis and Lauren P. McLaughlin
It is no secret that insurance premiums for architects and engineers are on the rise. While some may attribute higher professional liability insurance rates to inflation or a looming economic downturn, reliable industry barometers suggest there are more tangible factors at play affecting these demonstrable increases. Taking a closer look at those “micro” factors gives cause for concern that beyond mere hyperbole, the legal landscape for architects and engineers is indeed worsening. Two recent surveys bear this out.
Reasons surrounding rate increases
The American Institute of Architects Trust works annually with the American Council of Engineering Companies and National Society of Professional Engineers to conduct an insurance carrier review and interview of professional liability risk management issues. The AIA Trust recently conducted one of these reviews to identify trends. Interestingly, it is reported that the two factors affecting renewal and premium rate increases carriers cite most often are “social inflation” and “nuclear decisions.”
For those not familiar with these concepts, the term “social inflation” is coined from the societal perception that corporations and firms should pay more on claims if found liable. A corresponding theme concerns the mistaken assumption in jury verdicts and bench awards that the standard of care means without fault. “Nuclear decisions” go hand-in-hand with, and are considered direct results of, social inflation. These decisions refer primarily to jury verdicts that go far beyond what would typically be awarded for a given claim. In particular, many of these claims and decisions are being seen with horizontal infrastructure projects.
Other visible trends have emerged from these studies:
- Bodily injury claims and payouts are on the rise, especially those involving bicycle path plan projects.
- The highest claims were reported in California, Florida, Illinois, New York, and Pennsylvania.
A recent Ames & Gough survey confirmed some of the results in the AIA review with respect to rate increases — discovery costs in litigation are causing an increase in premium rates. As a result, insurers are increasingly seeking early action on claims, including pushing for mediation, conducting litigation analysis, and trying to resolve claims before they escalate.
Additionally, there is a trend toward greater claim severity, especially with respect to infrastructure projects in the disciplines of structural, geotechnical, and mechanical engineering. It is also no surprise that other areas of concern recently for insurers from an underwriting standpoint include fast-track and design-build project delivery, construction complexity with increased costs, and public-private partnerships.
More than half of insurers surveyed by Ames & Gough said renewing clients were opting for higher limits due to claim severity. While the average professional liability limit used to be approximately $1 million, Ames & Gough’s report finds that average has turned into $5 million or higher on some projects, fueling the rate increase as a measure to recoup that expanded risk for insurance carriers.
Interestingly, although not specific to recent rate increases, some of the largest insurance programs for architects report that client selection is the No. 1 greatest professional liability risk. This is hardly tongue in cheek: Given that architects’ clients are the source of most claims, insurers who underwrite the most architects in the country state that too often architects suffer from common mistakes in deciding who to partner with on a project. Among these are not performing enough due diligence to evaluate the client’s financial capacity to fund a project and not negotiating for termination rights due to nonpayment.
From a carrier perspective, it makes sense that the specific claim trends are driving rate increases. From a legal perspective, however, there is also cause for concern. Too often courts are providing more avenues (and leeway) to expand liability against design professionals.
Recent case law expanding liability against A/Es
Take, for example, the erosion of the common law requirement of privity of contract.
Contract privity has long protected design professionals from liability to third parties unrelated to contracts. Under the common law doctrine, a design professional could only be held liable to the person or entity with whom the design professional contracted. In recent years, however, courts in California, Arizona, and Florida have begun to rely upon new theories of liability that discard the common law privity requirement, exposing design professionals to claims by unrelated third parties.
Florida court rules against design professional
One recent case emanating from Florida underscores this concerning trend, as the court held that a contractual relationship was not necessary to impose liability on the designer. The facts surrounding the dispute arose when Broward County, Florida, entered into a contract with an architectural firm for construction phase services on a project at the Fort Lauderdale-Hollywood International Airport. The county also entered into a contract with a construction contractor. Both contracts contained routine provisions found in industry-standard contracts, such as those published by the Engineers Joint Contract Documents Committee, concerning the role and duties of the architect/engineer.
As the project neared completion, the county terminated the construction contract. The contractor filed lawsuits against the county for breach of contract and against the architect for professional negligence. The architect moved for summary judgment, contending that it did not owe the contractor a duty of care, and thus there could be no negligence claim. The trial court agreed, and the contractor appealed the summary judgment. On appeal, the appellate court reversed the trial court’s summary judgment favoring the architect. The appellate court determined that a contractor may maintain a negligence action against an A/E if the A/E had “supervisory” duties with respect to the contractor and if there was a “close nexus” between the A/E and contractor. According to Florida courts, the nexus is clearly close enough if the A/E has ultimate decision-making power but may be sufficiently close even if the A/E’s role falls short of complete control.
On the Fort Lauderdale airport project, the appellate court concluded that “the architect effectively controlled the project and the contractor’s fate.” The court noted that the architect had the right to recommend work stoppage. The court put substantial stock in the architect’s role in reviewing payment applications and recommending payment, holding that the “architect was given near absolute authority regarding payments to the contractor, demonstrating the architect’s influence over the contractor’s economic vitality.”
Also deemed significant by the appellate court was a statement by one of the architects in a deposition that the firm’s role was to be the county’s “eyes and ears” on the project. From this and other evidence, the court concluded that the architect had “supervisory control, both de facto and de jure (factually and legally)” and allowed the contractor to continue the claim against the architect. Notably, the architect raised the defense that its contract contained a clause stating that it had no duty to third parties, thus eliminating any duty of care between architect and contractor. The appellate court held this clause to be “inconsequential.”
Louisiana court holds architect may be liable
Another sampling of expanded design liability involves exposure to claims for job site safety/inspection duties. In a recent decision, an architect’s possible awareness that demolition work was being undertaken in a dangerous manner was enough to keep the architect in the case despite efforts otherwise. In the Louisiana case, a demolition subcontractor’s employee was employed on a project to renovate a multiservice center owned by the city of New Orleans. The city separately hired general contractor Tuna Construction LLC and architectural group collectively referred to as VRA and including VergesRome Architects, APAC, and Steve Hannah Rome. VRA hired engineering firm Morphy Makofsky, Inc. to perform engineering services on specified work areas.
The employee was instructed by his employer, Meza Services, Inc., to demolish a vault located on the second floor of the center. The vault was a square cinder-block room with a concrete ceiling. After demolishing one side and part of another, the employee was instructed to stand on top of the vault’s ceiling and demolish it with a hydraulic jackhammer. Soon after beginning this task, the entire vault collapsed. The employee was wearing a harness tied to a pipe above the vault but suffered neck and back injuries.
The employee sued VRA and MMI, alleging negligent failure to specify in the design the required supports for the area to be demolished and failure to monitor and supervise the construction to ensure it was carried out in a safe manner. The trial court granted the designers’ motions for summary judgment, and the employee appealed both rulings. The Louisiana Court of Appeals kept the architect in the case but allowed the engineer to get out by affirming the ruling in favor of MMI.
The court of appeals examined a design professional’s duty of care generally toward an injured construction worker and found that the duty owed by an engineer (or architect) on a construction project is dictated by the contracts. In the present case, the contracts provided that the contractor was responsible for the means and methods of construction and for safety.
The court, however, reversed the summary judgment in favor of VRA, finding that a factual question existed as to VRA’s awareness of the unsafe demolition procedure prior to the accident. The design contract provided that VRA “will visit the site periodically to familiarize himself with the progress and quality of the work … (and) will keep the Owner informed of the progress of the work,.” However, the architect was not responsible for the manner in which the work was carried out: “The Consultant (VRA) will not be responsible for nor control the construction means, methods, safety precautions and programs. The Consultant will not be responsible for the Contractor to carry out the work in accordance with the Contract Documents, or the Contractor’s acts or omissions or the acts or omissions of his Subcontractors or employees.”
Regarding VRA’s inspection duties, a principal of VRA agreed that one of his duties was to make sure the work was being performed in accordance with the design. VRA’s plans called for the demolition of the vault. VRA’s project manual (included in the design contract with the city) provided that, when cutting or patching, the contractor would “provide temporary support of work to be cut.” VRA’s principal stated that the project manual specified that during demolition, the contractor was required to use methods least likely to cause damage to the elements retained or adjoining construction. He also provided that, in general, the contractor was to “use hand or small power tools designed for sawing and grinding, not hammering and chopping.” Importantly, VRA’s principal had taken 10 photographs on a site visit the day of the accident but before it happened; the accident occurred when VRA was no longer on-site. The court found that because there were no temporary supports in place on the vault at the time VRA took the photographs and because VRA did not point out the lack of temporary shoring to anyone at the time, VRA was not entitled to summary judgment.
Interestingly, the court ruled in favor of the engineer, MMI. In doing so, the court found the evidence clearly established that: MMI’s role on the project was limited to acting as a consultant for VRA; the engineer’s drawings and specifications did not include demolition of the vault; and MMI was unaware of the demolition procedure, as its first inspection of the project occurred a month after the accident. The court also extended to MMI, but not to VRA, that the contracts placed safety responsibility on the general contractor, not the design team. Any safety concerns evidenced in the photographs were not imputed to MMI. Moreover, the prime contract placed upon the contractor sole decision-making regarding the means and methods of construction, expressly including the obligation to “provide competent engineering services to execute the work in accordance with the Contract requirements.” Under this evidence, the court found MMI owed no duty of care to the plaintiff.
What does the future hold?
The two case summaries above illustrate where courts have been willing to find paths to keep design professionals in cases. In so doing, the courts shut off easy proverbial exit ramps for A/Es to rely on contract provisions, or lack of privity, to avoid exposure and litigation costs. While the design professionals in both actions may ultimately avoid judgments against their firms, and payment by their carriers, the important piece is that what once were considered sound contract defenses and doctrines are now facing increased scrutiny by courts across the country. None of this bodes well, of course, for the liability of the design professional community as a whole.
The good news is that even with market factors pushing professional liability insurance rates higher and even with courts going astray at times, with reliable design professional legal defenses, there are countless ways to measure, mitigate, and minimize risk for your company.
This article is published by Civil Engineering Online.