Besides placing an undue and inappropriate burden on architects and engineers, warranties are expressly excluded in their professional liability insurance policies.
A troublesome red flag that’s now becoming more prevalent in design firm contracts involves efforts by owners and their attorneys to insert onerous warranty language. Besides placing an undue and inappropriate burden on architects and engineers, warranties are expressly excluded in their professional liability insurance policies.
In fact, the exclusion for express warranties or guarantees is widely considered among the most specific and tightly worded of all the coverage restrictions in professional liability policies. Consider how it reads: “Insurer will not defend or pay under this Policy for any claim arising out of the Insured’s actual or alleged liability under any oral or written contract or agreement, including but not limited to express warranties or guarantees.”
Stretching the standard of care for AEC firms. Certainly, design professionals – just like those in any other profession – are required to meet the standard of care. By definition, the standard refers to the ordinary level of skill and care that would be provided by another similar firm (or professional) in a similar location. It is established and affirmed by expert testimony. The concept of the standard of care also applies to – and imposes potential liability upon – medical doctors, lawyers, accountants, and other professionals.
To put the misapplication of the standard of care in context, can anyone imagine a doctor guaranteeing a result? Even more remote is the possibility of an attorney doing so; in some legal actions if an attorney states they have a 50 percent chance of prevailing, that might be considered fairly favorable odds.
So then why do lawyers working on behalf of owners deem it appropriate to insert warranty and guarantee language in a design contract? Perhaps, one reason may be that there already are numerous types of warranties rightfully in typical construction contracts. In applying them to design contracts, however, they either may not understand (or simply don’t want to understand) the difference between providing construction work and design services.
Design is a professional practice. It’s generally subject to interpretation and nuance and is by no means an exact science. Thus, the application of standard of care is the appropriate cause of action should mistakes arise.
Construction work, on the other hand, involves the use of materials and equipment, installation, and other measures, all of which are either correctly implemented and operating – or not.
Another critical distinction between design professionals and construction contractors can be found in the vast differences in the types of insurance available to them, their contractual relationships, and ability to pass along to other project participants the risk of warranties and guarantees. In effect, contractors can take into consideration the knowledge that they are providing warranties when setting their profit margins, as can their subcontractors.
On the other hand, design professionals have no insurance protection that responds to warranties. At the same time, their consultants and subs will have a similar policy exclusion, so there effectively is no one to whom the risk might be passed along.
Furthermore, it is not in the client’s interest to include a provision in a contract that automatically puts the design professional’s coverage at risk should a problem arise. The reason owners and project managers require design firms to obtain insurance in the first place is so that it will respond should there be a breach of the standard of care.
Significantly, a breach of warranty is a much easier claim to successfully make against a design professional, as proof of negligence is not required. Keep in mind that while design professionals are required to provide their services in a non-negligent manner, they are not required by law to be perfect.
Make your case! When negotiating a contract, a design firm’s talking points might include pointing out the owner’s express desire to have any insurance coverage they contractually require design firms to purchase available to respond should a problem arise. If the negotiation also involves the owner’s attorney, a relevant question might be to inquire if the attorney provides guarantees with respect to their professional services.
Lauren Rhodes Martin is a risk manager and claims specialist at Ames & Gough. She can be reached at lmartin@amesgough.com.
