Communiqué. Design Professional. Understanding Time Bars to Legal Action. XL Group Insurance. A Practice Management Newsletter

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1 Communiqué A Practice Management Newsletter XL Group Insurance September 2012 In this issue: Understanding Time Bars to Legal Action Building a Better Contract, Pt. 2 Design Professional Understanding Time Bars to Legal Action One difficult aspect of the design professions is the specter of lawsuits and liability for projects completed long ago. Statutes of limitation and repose seek to address the issue of long tail professional liability. Understanding them and knowing how to maximize their protection and even how to set your own rules can help you face the future more confidently. Every state has a statute of limitation, and most have a statute of repose. Both limit a plaintiff s time for making a claim, although they differ on when the time period begins. So when does the clock start? Statutes of Limitation A statute of limitation requires a plaintiff to file a legal action within a certain time period, which generally begins at the date of injury/damage or breach of the contract. This period can be tolled (paused) by certain factors, e.g., if the defendant conceals evidence of responsibility or the injured party is a minor. Statutes of Repose While the time period on statutes of limitation is triggered by the date of injury, the time period on statutes of repose is triggered by the completion of a particular act. Continued

2 Communiqué September New Jersey Statute of Repose* No action, whether in contract, in tort, or otherwise, to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property, or for any injury to property, real or personal, or for an injury to the person, or for bodily injury or wrongful death, arising out of the defective and unsafe condition of an improvement to real property, nor any action for contribution or indemnity for damages sustained on account of such injury, shall be brought against any person performing or furnishing the design, planning, surveying, supervision of construction or construction of such improvement to real property, more than 10 years after the performance or furnishing of such services and construction. This limitation shall serve as a bar to all such actions, both governmental and private, but shall not apply to actions against any person in actual possession and control as owner, tenant, or otherwise, of the improvement at the time the defective and unsafe condition of such improvement constitutes the proximate cause of the injury or damage for which the action is brought. *2A: Damages for injury from unsafe condition of improvement to real property; statute of limitations; exceptions; terms defined Most state legislatures have sought to prevent liability for life by enacting statutes of repose, which cut off recovery if a claim has not been made by a certain date, even if the injury or damage has not yet been discovered. In other words, once the period of the statute of repose expires, all causes of action are extinguished. Of longer duration than statutes of limitation but stricter, these statutes put a final cap on the time during which the A/E is exposed to liability, not only from claims filed by the owner, but also from claims by third parties. (See the sidebar, New Jersey Statute of Repose for an example.) For A/Es, the period of time under the statute of repose depends on the jurisdiction. The period begins at the time of the completion of an act, such as the date of substantial completion of the project, or the completion of all of the contractor s tasks. In some jurisdictions, the legislatures have not enacted statutes of repose. The Discovery Rule Nancy Rigassio, Executive Claims Counsel and Assistant Vice President for XL Group s Design Professional unit, explains that courts have tempered statutes of limitation by giving plaintiffs a discovery rule. Courts interpret the date of accrual, or trigger date, of a cause of action as the date on which a reasonable plaintiff discovers the injury and the causal connection between the injury and the defendant s conduct, Rigassio says. She continues, Under this rule, the statute of limitations doesn t start to run until the plaintiff discovers or should have discovered that a wrong has been inflicted. This means that the clock may not start for a very long time, exposing design professionals to potential liability that could last indefinitely. Because the plaintiff s discovery of his or her cause of action is a factual issue, trial courts are reluctant to grant a motion to dismiss based on the statute of limitation. The courts tend to defer to the juries to make this factual determination. Statutes of Repose put a final cap on the time during which the A/E is exposed to liability. Unlike statutes of limitation, statutes of repose don t provide any equitable remedy under a discovery rule. Plaintiffs can t argue for a postponement of the accrual of the cause of action, because the absolute bar of the statute of repose means that there is no cause of action. Nevertheless, plaintiffs often try to postpone the date that triggers the running of the statute of repose period, arguing that it doesn t start until the issuance of the certificate of occupancy, not the date of substantial completion. Rigassio adds that design professionals can t always rely on an absolute time bar, or cap, with the statute of repose, especially if the design contract includes multiple phases of a project. Think of an architect who provides only design services and no administration of the construction contract, or an electrical engineer who designs a system for only a distinct aspect of the project, she says. In those scenarios, a reasonable interpretation of the statute of repose should make the completion of the services or the contract evidenced by the design professional s submission of its final invoice on the project the triggering event. Continued

3 Communiqué September A Better Idea: Establish Your Own Rules Given the absence of hard-and-fast rules, and the uncertainty about a court s willingness to grant an early dismissal based on the statute of limitations, how can you ever know when a claim is time barred? Fortunately, most states allow you and your client to set your own ground rules for resolving claims against each other and to establish in your agreement both the period of time in which the claim can be made and when that period begins. The EJCDC and the AIA standard form agreements both have such clauses. (See the sidebar, Parsing Standard Form Agreements ) Select an appropriate length of time and a date on which the time period begins (when a cause of action accrues), such as the date of Substantial Completion of the Work or another objective event. (For two sample clauses and more information, see the Statutes of Repose and Liability chapter in the Contract eguide. Rigassio recommends against using the date of final payment as the trigger date for when a cause of action accrues, because this gives the client control over when the time period begins. The client s delay in paying some or all of your final bill could extend the period during which the client can sue you, she says. You should also make the time limits apply to both parties. Rigassio sometimes sees owner-drafted contracts that give the owner three or five years in which to bring an action against the design professional, but only one year for the design professional to make a claim against the owner. This could prevent you from filing a counter-claim against the owner, she says. Most states allow you and your client to establish the period of time in which the claim can be made and when that period begins. Parsing Standard Form Agreements Both the EJCDC and the AIA standard form agreements have clauses that establish time bars to legal action. For example, the EJCDC clause states: To the fullest extent permitted by law, all causes of action arising under this Agreement shall be deemed to have accrued, and all statutory periods of limitation shall commence, no later than the date of Substantial Completion. The 2007 version of AIA s B101 requires that binding dispute resolution be initiated in accordance with time periods specified in the applicable state law or no more than ten years after the date of substantial completion, whichever occurs first. Some worry, however, that the AIA clause may actually serve to extend the overall limitation period. According to Rigassio, The AIA paragraph suggests a 10-year period when many states call for three to six. Perhaps the AIA was trying to create its own statute of repose, but I think that paragraph gives owners an argument to extend the limitation period. If you use AIA standard form agreements, Rigassio advises that you talk to your attorney about revising the clause to substitute the appropriate statute of limitation period. (Remember, you ll want to make certain any changes are coordinated with other agreements, such as subconsulting agreements.) Rigassio stresses that to be enforceable, the length of time you choose must be reasonable and shouldn t be longer than that established by applicable law. Since statutes of limitation vary by state and the type of action, you should consult your attorney. Your contract should make the limitation period apply to all actions negligence actions as well as breach of contract. The limitation periods for negligence are typically shorter than for breach of contract. Owners may try to take advantage of the longer limitation period by suing for breach of contract when the owner s allegations are really based on professional negligence. In spite of your efforts, Rigassio reminds, shortening the limitation period in your contract will affect only causes of action between you and your client. All other potential claimants can use the statutory limitation period for making claims against you, until barred by any applicable statute of repose, she says.

4 Communiqué September Building a Better Contract, Pt. 2 In the last issue of Communiqué, Building a Better Contract provided a list of clauses we recommend design professionals include in every contract. This month, we look at some of the clauses you ll want to either delete or rewrite to your advantage. Bear in mind, however, that because no two firms have the same appetite or tolerance for risk, and because each project is different, you ll need to carefully consider and develop your own list of key clauses your own bottom line on risk. This list is intended as an overview for more information, read the relevant chapters in your Contract eguide. Assignment Don t give the owner the unilateral right to assign your contract to others. Instead, make sure your agreement has a strong, two-way clause that prohibits both parties from assigning rights and duties to another without written mutual consent. Nor should you agree to give up any right to notice of the owner s intention to assign the contract to a lender; instead, make this a condition that allows you to terminate the contract. You don t want to find yourself working with a new client you don t know or have never negotiated with, or who may not be willing to pay you. Certifications, Guarantees and Warranties Owners often ask design professionals to certify, guarantee or warrant the outcome of the project or the existence of specific conditions. Our advice: don t do it, unless you have absolute, first-hand knowledge of something as fact. Such assurances go well beyond the legally required professional standard of care and will only result in your assuming more liability liability that may not be insurable. (This also means deleting client-included red flag words such as ensure, assure, represent, declare and others.) Delays There are a million and one factors that might delay a project, and you have control over very few. Not only should you refuse to accept any clause that makes you responsible for damages arising from delays caused by others, you should include a clause that adjusts your compensation and schedule when delays by another party affect your ability to provide your own services. Beware, too, the seemingly innocuous phrase, time is of the essence, which carries huge ramifications. It can be interpreted as an uninsurable guarantee, making you responsible for delays beyond your control. Hazardous Materials Delete any contract language that makes you responsible for certifying or guaranteeing the absence of hazardous materials on a jobsite. Instead, try to include in your contract a clause that indemnifies you from damages arising from the detection, presence, handling or removal of hazardous materials, and gives you the right to suspend your services until your client has the site cleaned up. Indemnities These days, owners often write one-way, onerous indemnification clauses into their contracts and threaten to walk away if you don t agree to them. They may also require you to defend the client (i.e., pay for the client s defense) in the event of a claim. But many owners don t realize that they re asking you to assume risk far out of proportion to your potential reward, nor do they understand that professional liability insurance won t cover most such obligations. Educating the owner and discussing alternative language that allays the owner s concerns can help you avoid these onerous clauses. Don t give the owner the unilateral right to assign your contract to others. Jobsite Safety Remember, responsibility for jobsite safety is the general contractor s responsibility, not the A/E s. Under no circumstances should you accept a contract clause that makes you responsible for overseeing worker safety or liable for any losses or injuries that occur at the jobsite. Nor should you agree to be responsible for construction means, methods, procedures, sequences or techniques. Continued

5 Communiqué September On the contrary, your contract should clearly place these responsibilities squarely where they belong: with the contractor. Lenders Requirements Owners often want to include clauses that require you to cooperate in every respect with the owner s lender. This could end up meaning anything from guaranteeing the absence of asbestos or certifying the outcome of construction or the fitness for use of an incomplete project to accepting unreasonable insurance requirements. While you may be willing to comply with reasonable lender requirements, be sure to delete from such a clause any red flag words such as every, fully or totally. And be sure to specify that you must be afforded an appropriate amount of time in which to review a lender s forms. Liquidated damages clauses are totally inappropriate for professional services contracts. Liquidated Damages Claims for liquidated damages usually stem from project delays, and clauses covering such damages are most often found in agreements between owners and contractors. But these clauses are totally inappropriate for professional services contracts. And because they are also generally uninsurable, such clauses represent unacceptable risk to you. Delete them. Right to Stop Work Delete any client-provided contract clause that gives you the right to stop work on a project. Right is often confused with duty, and it shouldn t be your duty to stop an entire project should a contractor s work not conform to the documents you provided. Stopping a project could incur additional liabilities (e.g. project delays) you don t want or deserve. However, using the proper contract language, you might agree to a clause giving you the right, but not the duty, to reject a contractor s work. Standard of Care Never agree to contract language that alters or elevates the standard to which you will perform (e.g., the highest standard of practice ) or that allows the client to make a unilateral determination of the performance of your services (e.g., in the client s sole judgment ). Once you ve raised the standard, you ll be liable for failure to perform to it, even if you have performed to the normal standard of care. There s also a good chance your PL policy won t cover your expanded standard of care. Unreasonable or Unattainable Insurance Terms Design professionals are frequently asked to agree to insurance requirements that are either unreasonable or impossible to obtain. For instance, an owner may ask you to carry insurance limits of $10 million on a project for which you re being paid just $50,000. Whether an owner is simply lining up some deep pockets or asking you to name the owner as an additional insured on your PL policy, get help. Consult with your professional liability agent or broker before agreeing to any insurance terms. You can read more about each of these topics in the Contract eguide. Design Professional The information contained herein is intended for informational purposes only and does not constitute legal advice. For legal advice, seek the services of a competent attorney. Any descriptions of insurance provisions are general overviews only. In the US and Canada, the insurance companies of XL Group plc are: Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Insurance Company of New York, Inc., XL Select Insurance Company, XL Specialty Insurance Company and XL Insurance Company Limited Canadian Branch. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. XL Group is the global brand used by XL Group plc s insurance companies. Information accurate as of September Published by the Design Professional unit of XL Group 30 Ragsdale Drive, Suite 201, Monterey, CA xldp.com Learn More. xldp.com/learnmore