BUYER BEWARE: ONEROUS GENERAL CONDITIONS MANY ENGINEERS ARE ATTACHING TO THEIR AGREEMENTS, AND NOT WARNING YOU ABOUT

Florida engineering firms servicing condos, and connected townhome and duplex buildings under HOA control, before the tragic Surfside condo collapse were already paying very high premiums for professional liability insurance. Plus, the per claim deductibles under these policies were very high, sometimes up to $100,000 per claim.

After the Surfside condo collapse, professional liability insurers have tightened the screws on Florida engineers even more. As one method of reducing their risk in order to offer more modest premiums, professional liability insurers have supplied the engineers with standard general conditions to attach to their agreements, many of which conditions unfortunately represent a trap for Boards and management.

Some engineering firms are up front about the onerous general conditions that seek to impose. They indicate in bold letters on the cover page of their agreements that the fees quoted are based upon the engineer severely limiting their liability contractually, and that if the client desires the engineering firm's liability to be expanded then the engineering fees can be further negotiated to compensate for greater liability exposure. Unfortunately, this is the exception to the rule. Most engineering firms passing on the onerous general conditions supplied by the professional liability insurance companies don't mention word one about them when presenting their proposals. Management agents and Board Presidents don't know better, and these agreements are signed daily binding condo associations and HOAs to terrible terms.

Understand that not all the onerous general conditions are the product of the professional liability insurance industry. Some originate with engineering trade associations and groups. Others are based upon input from counsel retained by the engineering firm. In any case, here are examples of the traps for the unwary contained in attached general conditions:

LIMITATION OF LIABILITY

Many associations take solace in the fact that an engineering firm provides them with a Certificate of Insurance reflecting professional liability limits of a million dollars or more. Unfortunately, the general conditions attached to the engineer's agreement may contain a provision limiting the engineer's liability to the amount of fees paid or some low dollar amount such as $25,000 or $50,000 .If the engineer screws up the remedial design, and the association suffers major damage, the professional liability insurer will tender that $25,000 or $50,000 and call it a day. That million dollars of coverage recited in the Certificate of Insurance, of course, was merely an illusion.

INDEMNIFICATION

Indemnification refers to when another party is contractually bound to pay your defense costs and any judgment entered against you. Indemnification in the construction context has historically been a contractual benefit to an owner in relation to the general contractor. Basically, if the contractor screwed up and the owner was sued, the contractor was bound to pay the defense costs for the owner, and any judgment entered against the owner. As between the owner and the engineer or architect, there was generally no indemnification protection mandated by contract.

In a break from the past, engineers now try to impose indemnification obligations on associations in their general conditions. Some of the more onerous indemnification provisions impose full indemnification obligation on the association if the association or contractor are even partially responsible for the loss. This means in theory that if there is an issue with the completed project which a jury determines is 95% caused by the engineer's negligence and 5% caused by the contractor, the association will arguably have to indemnify the engineer for the whole of the damage and defense costs, including the engineer's 95% share.

Who would bear the burden of such an indemnification obligation? Arguably not the association's liability carrier (check with your agent). More likely it will be the association membership.

That would be a bitter pill for something which was primarily caused by the engineer's negligence.

WAIVER OF CONSEQUENTIAL DAMAGES

"Consequential damages" in the broadest sense of the term in relation to engineering design flaws are damages which flow as a consequence of the design flaw. If an engineer designs a balcony repair improperly and the balcony collapses, the cost of replacing the balcony is the direct damage, whereby the damage caused to balconies and automobiles below would represent "consequential damage. "In that particular example, the "consequential damage" in dollar terms may be significantly greater than the "direct damage."

The general conditions attached to the engineering agreement handed to you may contain a full waiver of consequential damage. There is no reason for this except to erase a large potential exposure for the engineer and their liability insurance carrier.

ASSUMPTION OF ALL RISKS

There were a set of general conditions recently reviewed by the author which included the sentence: "Client assumes the entire risk as to the use of the deliverable, and any results generated thereby. "This could be interpreted to mean that the association assumes all risk of flaws in the engineer's design. Yeah, that's fair and reasonable

FULL PAYMENT DUE EVEN IF ENGINEER IS TERMINATED FOR CAUSE

If the engineer is six months late in producing design documents, and the association terminates the engineer because of nonperformance, there may be a clause in the general conditions providing that the engineer is still entitled to full payment for whatever work had been accomplished with the design as of termination.

COLLECTION COSTS AND REMEDIES

Often in the general conditions, if the association does not pay the engineer, even if the engineer screwed up, interest of up to 18% is imposed on any on past due balance, and the engineer is entitled to attorney's fees and costs for pursuing the balance due.

DEADLINE FOR PURSUING CLAIMS AGAINST THE ENGINEER

In Florida, an association has four years from the date a consequence of an engineering design defect is discovered to file suit (but no more than ten years from the date of project completion for a latent defect). Sometimes in the general conditions there is a provision limiting the time period for filing suit to, for instance, two years. Again, there is no justification for this other than to artificially cut off claims for which the engineer and its carrier would otherwise be responsible.

DISPUTE RESOLUTION

General conditions attached to engineering agreements often call for the arbitration of professional liability claims with no attorney's fees or costs being awardable by the arbitrator. Lawyers representing associations generally recommend that disputes be resolved in the state court in the judicial circuit in which the property is located, with the prevailing party being entitled to an award of attorney's fees and costs. The main reasons associations should want to be in state court are (1) the right to have the case heard by a jury; (2) all parties and claims involved in the dispute are brought together in one forum; (3) full discovery rights are available; and (4) full right of appeal.

REJECTING THE GENERAL CONDITIONS BEFORE THE AGREEMENT IS SIGNED

This is the key. Look for the general conditions when the engineering agreement is first presented and send the agreement over to construction counsel to review before signing. Most of the time when engineers are called on the onerous general conditions they have presented, they will agree to grudgingly modify them. Modification after the agreement is executed, especially where the design has already been performed, brings with it complications, primarily the fact that the professional liability insurance carrier may not sign off on the retroactive modification of the engineering agreement.

WHAT'S THE ULTIMATE SOLUTION FAIR TO ALL PARTIES?

In the wake of the Surfside tragedy, associations across Florida are having their buildings investigated by engineers, and the engineers are finding problems which often require major repairs. The professional liability insurance underwriters are understandably concerned about the exposure this wave of repair designs will bring as the insurers of the engineers' work product. The professional liability insurance carriers, knowing that there is a limit to what they can charge in premiums to the engineers, opt instead to transfer the risk to associations through onerous general conditions which they have their insureds include in their agreements.

The solution may lie in project-specific professional liability coverage. Let's say an engineer is asked to design a $3,000,000 condo repair project. The engineering firm goes to its professional liability carrier and gets a quote for how much additional premium over the engineer's standard premium the carrier would charge for providing professional liability coverage of a million dollars for the design. Say the carrier quotes $7,500.00. The cost of that project-specific premium is quoted to the condo association in the engineering agreement as an optional cost if the condo association wants full professional liability coverage. The engineer is not burdened by the additional premium, the design is appropriately insured, and the risk absorbed by the carrier is accounted for through the enhanced premium.

Professional liability underwriters, can you meet this challenge?

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