Minimize Liability, Maximize Success

In today’s market, homeowners are electing to build custom homes that are tailored to their personal tastes and needs. These consumers often have high expectations of the architects and contractors with whom they work. In light of these high expectations and more sophisticated clients, coupled with the fact that the entire contractor market has changed in the past several years in terms of insurance, dispute resolution laws, and newer risks such as mold, architects and contractors must now more than ever take steps to protect themselves against liability. 

Preventing liability starts before an architect or contractor ever meets the client. There are different types of entities an architect or contractor can form to protect their personal assets. For example, in some jurisdictions a professional corporation or limited liability partnership can be utilized to shield an architect from personal liability. 

Additionally, contractors may form a corporation, or limited liability partnership, to protect their personal assets. Where there is a corporation, professional corporation or the limited liability partnership, it is the entity that contracts with the client in its own name. Because of this, the architect or contractor generally is not personally liable for claims brought by the client for damage due to the contract or services performed.

Obtain insurance
In addition to determining the appropriate type of business entity, architects and contractors should obtain insurance. It is important to work with an insurance broker who can appreciate the needs of your business and the type of work performed. In fact, very few brokers and agents truly understand the intricacies and restrictions with respect to the insurance market for contractors and design professionals. Therefore, careful selection of the right broker is essential. Many insurance policies contain provisions such as a deductible or a self-insured retention (also referred to as a self-retained limit). It is important to understand how these provisions work in order to minimize personal liability. 

Generally, a self-insured retention requires that the architect or contractor pay a set amount out of pocket before insurance will hire an attorney, defend against or settle a claim. If an architect or contractor is contemplating retirement or winding down their business within a few years, a self-insured retention may not be the most beneficial option. If there is a claim or lawsuit after the business is no longer operating, the architect or contractor will still need to satisfy the amount of the self-insured retention either by hiring an attorney, or by paying that amount to settle the homeowner’s claim. In the case of a self-insured retention regardless of the amount of the claim or liability, the architect or contractor will always have to pay the full amount of the self-insured retention on the front end of the claim.

A deductible, however, typically is paid at the conclusion of a suit. Therefore, if a suit is brought, the insurance company will at the outset provide for an attorney, and can settle a claim. The deductible amount then will be paid by the architect or contractor to the insurance company at the end of the suit.

In addition to obtaining insurance, it is imperative that every contract entered into with subcontractors, subdesigners or consultants has a written indemnity provision. The indemnity provision should clearly state the intention of the contracting parties. Most states focus only on the written words of the contract when interpreting the obligations of the parties to that contract. In light of this it is important that the indemnity provision expressly state that the subcontractor, subdesigner or consultant will defend, hold harmless and indemnify the contractor or architect against all claims for damages. The purpose of the indemnity provision is to ensure that the person who does the work ultimately will be responsible to protect and shield the contractor or architect against any claims. 

In addition to requiring that the contractor and/or architect is protected by the subcontractor, subdesigner or consultant, the owner of the property should be protected by them as well. The owner should be included in the indemnity provision not only to protect against a future claim by the owner or subsequent owner, but also to protect the owner should an employee of one of the tradesmen on the jobsite become injured during the construction process. 

All subcontractors, subdesigners or consultants should name the owner, contractor and architect as an additional insured on their insurance policies. The subcontractors, subdesigners or consultants should provide the contractor and architect with a copy of an additional insured endorsement containing language indicating that the terms of the insurance policy have changed to include the contractor, architect and owner as an additional insured. Often the insurance brokers for the subcontractors, subdesigners or consultants will provide a document called a certificate of insurance. Although this document provides insurance policy information on its face, it states that it does not change or alter the provisions of the insurance policy. Therefore, a copy of an endorsement also should be provided.

Finally, the subcontractors, subdesigners or consultants should advise in writing if their insurance policies contain a self-insured retention or deductible provision. If there is such a provision, the contractor and architect should be told the amount of those provisions. If there is a self-insured retention, the contractor and architect also should find out if the policy requires that only the subcontractor, subdesigner or consultant can satisfy the amount. If this is the case, the contractor or architect should request that the policy be modified so that the additional insured can satisfy the self-insured retention if this is necessary.

Communicating with the client 
The types of claims often asserted against architects or contractors fall into three distinct categories. These categories include: misrepresentations; failure to perform the contract and provide the services that were agreed upon; and the work performed was improper. 

The first two categories often stem from miscommunication and misunderstandings. The single most important action an architect or contractor can take to protect themselves against claims for misrepresentations or failures to perform the contract is to clearly communicate with the client/owner. Client progress meetings should be scheduled at regular intervals at the outset of the project. Absent unforeseen circumstances, these meetings should be conducted as scheduled. 

Notes should be taken at these meetings regarding the topics that are discussed and copies should be given to all persons in attendance at the meeting. It is noteworthy that lack of communication or miscommunication often is the No. 1 reason why disputes and issues during construction lead to lawsuits. In other words, good communication from the start will reduce the risk of litigation if a problem arises down the road with the construction itself. 

In addition to site meetings, any request for information by and between the contractors (including subcontractors) and architect should be in writing. All changes to costs, completion times or the scope of work, whether initiated by the architect, client, contractor or subcontractor should be in writing signed by the client and contractor. Upon progress payments by the client or contractor to a subcontractor, written confirmation of payment should be provided by use of a conditional waiver or other means recognized by the state within which the work is performed. Finally, photographs should be taken and dated at the different milestones of construction to document the progress and site conditions.

Upon delivery of the home to the client, a final walk-through inspection should be performed with the client. Photographs should be taken at the walk-through inspection to document the conditions of the home. A punch list should be prepared, dated and signed by the contractor and client. After the walk-through inspection, and upon completion of the work outlined in the punch list, photographs should be taken to document completion of the work. Additionally, the client should sign and date the punch list indicating that all the items are complete. 

Finally, all warranty materials, manuals and instructions for appliances, etc., should be provided to the client upon delivery of the home. The client should sign and date a document itemizing all the materials received. It is strongly recommended that rather than simply providing a warranty manual and/or instructions for maintenance to the homeowner that the contractor and design professionals take the time to walk the home with the homeowner and provide detailed, careful instruction as to basic warranty and maintenance items (i.e., caulking of tubs, grade and slope of exterior landscape, etc.).

Customer service is the key to avoiding claims or lawsuits for improperly performed work. Should the client contact the contractor to request warranty repairs, the contractor should promptly schedule an inspection to respond to the request. Additionally, a written record should be kept documenting the date of the request, and the date of the response to the request. 

In the event that customer service is delayed by the homeowner, or for any reason, this delay should be documented in writing by the contractor. During the inspection, photographs should be taken of the area that is the subject of the request. Finally, the client should be asked to sign and date a document showing that the repair has been completed. Photographs also should be taken of the repaired item. 

Lastly, even if the request is made outside the warranty period, it is important to at least schedule an inspection so the damage can be assessed. It is always a good practice to document and repair water damaged items caused by a plumbing line leak, roof leak or window leak if the statute of limitations has not yet expired. Some states allow homeowners up to 10 years after the completion of construction to bring suit against a builder or architect for damages due to defects in construction. Ultimately, in almost all cases, it is less costly and more efficient to repair the damage than to wait for the client to file a lawsuit. 

Careful planning and clear communication are the best tools to employ to avoid lawsuits and claims against you or your company. As long as the architect and contractor have the client’s best interest in mind and are willing to work with the client, that client will continue to work with the architect and contractor to resolve complaints without filing a lawsuit.

Dan Berman is a founding partner of Wood, Smith, Henning & Berman and is widely recognized for his representation of real estate developers, Fortune 500 companies, major U.S. and foreign insurers and pre-eminent members of the entertainment field. Berman’s expertise includes the litigation of complex claims involving real estate, intellectual property, entertainment and commercial disputes. In addition to being a court-appointed arbitrator and mediator, he serves on the legal board of directors for DARE America. Stacey Blank is a partner of Wood, Smith, Henning & Berman, whose litigation practice includes construction law, real estate law and product liability. Blank’s transactional practice includes drafting contracts and insurance policy endorsements. Additionally, Blank performs risk management services for a number of clients focusing on transfer and elimination of risk as well as the negotiation of insurance policy provisions. Blank also has argued before the California Court of Appeals and has many published opinions.