Read the Contract!
Alleged Error of Omission:
The Architect’s client alleges that
the Architect is in breach of contract for failing to design an office building
that met the fire safety code.
Resume of the claim:
The Architect is contacted by a prominent businessman in the community and is
asked to design an office building. The Architect has never worked for this
businessman before and is excited at the opportunity for future business from
this client. The client sends the
Architect a long contract for design services, which the Architect quickly
reviews and executes. The contract
provides, in part, that if there is a dispute between the owner and Architect,
the prevailing party will be entitled have its fees and expenses paid by the
losing party.
After construction is completed, the client maintains that certain sections of
the office building do not meet the fire code. The client files a lawsuit
against the Architect and claims that the cost to bring the office building up
to code is $150,000. In addition to the damages the client is entitled to under
the common law, the lawsuit seeks the client’s attorney fees and expenses
pursuant to the contract.
The Architect reports the
claim to his professional liability carrier and the carrier retains counsel to
defend the Architect. An expert is retained and the Architect’s attorney
evaluates the matter. The attorney believes that the case is highly defensible
except for one minor code violation that will cost $10,000 to repair.
The Architect’s professional
liability policy contains the following provision.
This policy does not apply
to:
Liability of others assumed by the
Insured under any contract or agreement. ….
The parties agree to mediate
the case. At the mediation, the client demands $85,000 to settle the case. The
client is able to establish $10,000 in damages for fire code violations and
$75,000 for attorney fees and expenses. The carriers’ representative
authorizes $10,000 to settle the established damages, but will not agree to pay
the $75,000 for attorney’s fees and expenses pursuant to the policy exclusion.
How the Problem Could Have
Been Avoided:
This problem could have been completely avoided if the Architect had
carefully reviewed the contract prior to signing it and sent it to his carrier
and/or attorney for review. The
carrier or attorney would have explained how the prevailing parties clause would
impact the Architect’s professional liability coverage. The attorney would
have explained how provisions in the contract may impact the Architect’s
liability. The Architect could then
have attempted to negotiate out the prevailing parties’ provision and/or make
an educated business decision on whether to agree to execute the contract.
Kathy
Solomon, CPCU
Vice
President
C.R.
Vince & Associates
| 