Inside this Issue

A1 - Standard of Care for Preliminary Design (Teaming Agreements)
A2 - Where Prime Failed to Require Indemnity from Its Sub and Failed to be Named as Additional Insured – its CGL Carrier Had No Coverage Responsibility
A3 - Moonlighters convicted of Forgery and Identity Theft for Unlawfully Using Engineering Seal and Signature of Employer
A4 - Engineer May be Liable for Injuries Suffered by Construction Worker who was Injured on Jobsite

Article 1

Standard of Care for Preliminary Design (Teaming Agreements)

See similar articles: Design-Build | GMP | Standard of Care | Teaming Agreement

Our law firm, ConstructionRisk Counsel, PLLC represents and assists design firms that are seeing increased claims being made against them by their contractor clients on design-build projects – based on alleged negligence in preparing preliminary designs on which the design-builder relied when preparing its Guaranteed Maximum Price (GMP) proposal to the project owner. We have defended engineers against several such claims. What we are finding is that as the contract terms and conditions between the project owner and the design-builder are getting increasingly onerous, the design-build contractors are incorporating those nasty terms and conditions down into the design subcontracts. When a design-builder gives up its right to rely upon information and documentation provided by the Owner, or when it gives away other rights normally provided to a contractor, that contractor is more likely to make a claim against its design subcontractors to attempt to recover its economic losses. We often see claims alleging that the designer should have provided more detailed and more accurate preliminary plans. What can be done to protect against such claims?

When we review design-build contracts and the designer’s proposed subcontract, we like to use DBIA documents, slightly modified to manage the risk in an insurable manner. Owner-generated design-build forms may create so much risk that it is not tenable for a designer to engage in design subcontracts under such contracts. What we do:

1) When negotiating the Teaming Agreement between the designer and the design-build contract, it is important to simultaneously negotiate the subcontract form terms and conditions and attach the proposed subcontract to the Teaming Agreement.

2) The Teaming Agreement should clearly state that only preliminary designs are being provided at this stage and that the standard of care is what applies to those limited types of designs. Here is a clause we routinely try to negotiate into the Teaming Agreement:

Standard of Care for Preliminary Design Services (Teaming Agreement).

“Designer will provide the services required in accordance with the skill and care which would be exercised by comparable qualified design professionals performing similar preliminary services at the time and place such services are performed. The Parties recognize that the bid quantity estimates for the construction of the Project will be based on preliminary design calculations and past designs prepared for similar projects. Actual quantities determined after final design are expected to vary from the bid quantities derived from the preliminary design. Contractor will compute the bid quantities as accurately as possible and will estimate the anticipated tolerance for each item. Contractor shall be ultimately responsible for the determination of quantities to be included in the proposal and shall determine the appropriate amount of contingency to be included in its proposal to cover variations in quantities and other risk factors. Designer makes no warranties, express or implied, under this Agreement or otherwise, in connection with Designer’s design services.”

(3) Include a limitation of liability clause in the Teaming Agreement specific to the preliminary services provided. This should be a much smaller LoL than what might be negotiated into the subsequent subcontract. Note that it is important that this LoL clause survive and be applied to eventual claims arising out of these preliminary services.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 4 (May 2022).

Article 2

Where Prime Failed to Require Indemnity from Its Sub and Failed to be Named as Additional Insured – its CGL Carrier Had No Coverage Responsibility

See similar articles: Additional Insured | CGL | Indemnification clause | Insurance Dispute

General contractor and its CGL carrier were sued by a subcontractor’s employee for injuries sustained when hit by truck driven by another subcontractor while working on site. The CGL moved for summary judgment on the basis that an exclusion in the policy barred coverage for injuries to employees, and also the Insured failed to meet a special condition of the policy requiring it to obtain additional insured coverage from independent contractors. Obtaining such additional insured endorsements from the subcontractor’s carriers was a condition precedent to CGL coverage. Appellate court affirmed the trial courts judgment dismissing the suit because the conditions for coverage “clearly were not met.” Baudoin v. American Glass and Mirror Works, Inc., et al., 2022 WL 303258 (La. App. 3 Cir. 2/2/22).

The plaintiff attempted to persuade the court that a state anti-indemnity statute must be applied to the situation and thereby prohibit the carrier from enforcing the conditions of the policy. The court noted that while the state code prohibits certain indemnity agreements, it states in pertinent part” Nothing in this Section shall be construed to prevent the Indemnitee from requiring the indemnitor to provide proof of insurance for obligations covered by the contract.” The insurance policy therefore contained a lawful condition requiring the Insured to obtain additional insured status on his subcontractors’ insurance policies.

Risk Management Comment

In my litigation defending design professionals, there have several occasions where we believed construction defects caused the problem for which the Owner/client was suing our design firm. When that happens we tender a claim to the contractors CGL carrier in which we have been duly made an additional insured. We have successfully had the CGL carrier pay half of our defense costs and half of the indemnity costs to settle the cases. Our advice is that if you are a design firm you should ask your client to make you an additional insured on the contractors’ CGL policies. Then if a claim is make against you alleging professional liability, seek evidence to demonstrate contractor fault and then make a claim under the CGL policy as an additional insured. This is important!

Article 3

Moonlighters convicted of Forgery and Identity Theft for Unlawfully Using Engineering Seal and Signature of Employer

See similar articles: forgery | identity theft | Moonlighting

An unlicensed architect worked as an architectural designer for an engineering firm for eight years. Another individual worked an engineering draftsman for the firm for almost 20 years. He had a civil engineering degree but never passes the professional engineering test to become a licensed engineer. His work for the firm therefore had to be overseen by a licensed engineer. He became so proficient at his job that he earned the title “Project Engineer” and was allowed to bring in his own clients to the firm. At some point these two individuals began moonlighting – in this case bringing in clients, performing engineering services and stamping the plans with seal of the engineer that owned the firm. They did about 20 projects that way and eventually were found out, prosecuted, convicted and sentenced to serve time in jail and pay restitution. People v. Rodriquez, 71 Cal. App. 5th 921 (2021).

One defendant was convicted of 238 counts and the other was convicted of 193 counts for forgery and identify theft that occurred over a six year period. At trial it was determined that the firm’s employer never gave permission to the individuals to use his engineering stamp. It as also determined that the employer didn’t discover the crime until so late that the defendants argued the four year statute of limitations period had run out and the case must be dismissed.

The trail court and appellate court concluded that the statute of limitations had no expired. This is because of the “discovery rule.” The employer (victim) did not discover the crime until late, and through reasonable diligence he had no reason to have discovered it earlier. The courts concluded that the Limitations period was not triggered until the actual discovery of the crime in 2014 and the defendants were properly charged with the crimes.

The defendants argued that instead of being charged with a separate crime for each and every page of plans that they stamped over the years, they should have been charged with at most only 20 counts because that was the total number of projects involved. They argued that an entire set of plans even though stamped on each page was only a single document for which they could be charged. The courts rejected that argument and held that each individual page of the plans constituted a separate “document” which under the state statute could be charged with a separate count of forgery and identity theft.

Risk Management Comment:

Moonlighting can create significant potentially uninsurable risk for a company. All employees should be advised against engaging in such practice, even if the individuals are license professionals and have their own engineering stamps.

Article 4

Engineer May be Liable for Injuries Suffered by Construction Worker who was Injured on Jobsite

See similar articles: Site Safety | Standard of Care

A construction laborer was injured when part of a floor collapsed on him when he was removing concrete “topping.” The individual sued the engineer arguing negligence in failing to disclose the dangerous unstable condition and failing to specify that the floor should be supported with shoring during demolition. Appellate court affirmed the denial of the engineer’s motion for summary judgment. In doing so the court rejected the engineer’s argument that it had n duty for site safety because the contract documents expressly stated that the contractor was solely responsible. Two expert engineers provided reports stating that an engineer has a duty to disclose known unsafe conditions, even if the contract states the contractor has sole site safety responsibility, and failed its duty when it failed to adequately disclose the unsafe condition. The court found the engineer here had a duty “to exercise such care, skill, and diligence as men in that profession ordinarily exercise under like circumstances.” Dieter v. Gardner Builders Minneapolis, LLC, 2022 WL 748468 (2022).

Here the “expert reports, indicate that, under the prevailing standard of care applicable to engineers, LHB’s role in preparing plans and specifications for the [ ] project encompassed a duty to fully disclose the condition of the floor. In other words, the expert reports are not being used to create a duty; they are instead being used to explain what LHB was required to do to fulfill it undisputed duty … in preparing plans and specifications….”

The engineer conceded at oral argument that if an engineer has actual knowledge of a dangerous condition he or she may have a duty to take action to prevent injury. In this case, said the court, “there is sufficient evidence from which a jury could find that LHB had such knowledge. In particular, there is evidence that LHB engineers [ ] were onsite on the day of the accident and were aware that workers were using heavy machinery to remove part of the drill-hall floor…. The evidence in the record would allow a jury to find that the LHB engineers knew or should have known that the workers were in danger and thus had a duty to take action to protect them.”

May 25, 2022

As we previously reported, the Virginia General Assembly recently passed a bill banning the use of “pay-if-paid” clauses on construction projects within the Commonwealth, making Virginia the latest state to officially ban “pay-if-paid” clauses.

SB 550, as the bill is known, changes the law governing construction contracts in Virginia in two important respects. First, it will prohibit contractors and subcontractors on both public and private construction projects from including provisions in their subcontracts that condition payment on the receipt of funds from the owner or higher-tier contractor. Second, it establishes fixed deadlines for the payment of invoices on private projects. Specifically, SB 550 provides that owners on private projects must pay their contractors within 60 days after receiving an invoice, and contractors and subcontractors on private projects must pay their subcontractors by the earlier of 60 days after receiving an invoice or 7 days after receiving payment from the owner or higher-tier contractor for the subcontractor’s work. Owners, contractors, and subcontractors will still be entitled to withhold payment for nonconforming work, but SB 550 requires written notice articulating the specific reasons for the withholding. There are interest penalties associated with the non-payment, and contract clauses contrary to this new law will be unenforceable. This bill goes into effect on January 1, 2023 and will apply to construction contracts executed on or after that date.

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