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VIEWPOINT Project Risk Sharing: Owner Clauses-Bad Practice?

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The sluggish U.S. economy has exacerbated a challenging situation for architects, engineers and construction professionals. Not only do they face a landscape marked by fewer projects and greater competition, they also are being pushed by owners to bear contractual responsibility for risks associated with activities outside their control

and beyond the scope of their professional purview.

On the surface, it might seem good business practice to use negotiating leverage in contracts to try to shift as much project risk as possible to those doing the work.

However, a general misunderstanding between owners and their attorneys with respect to the roles and responsibilities among project participants has resulted in more use of onerous contract provisions. A/E/C professionals vying for work often find themselves with a difficult choice: either sign the contract and accept unmanageable risk or engage in protracted contract negotiations that could delay the project or cost them the job altogether.

Yet the risks of signing a contract without removing or revising onerous clauses can be devastating. The extended burdens that owners and their attorneys try to include in contractual agreements—such as the "duty to defend" in indemnification clauses and express warranties—can leave A/E/C firms with uninsured risk for matters they can't control.

Consider, for example, indemnification clauses that might also include a duty to defend. In addition to seeking indemnification for third-party claims, losses and expenses caused by a design professional's negligence, owners increasingly insist on a defense for claims allegedly caused by that professional's actions. Increasingly, in contracts this clause is not necessarily tied—as it should be—to claims caused by the professional's negligence or willful misconduct. Thus, the professional is left with a significant potential exposure for which it is unlikely to be insured.

Another growing trend is the insistence that the design professional's services be perfect in every regard. A firm essentially is expected to guarantee project success, even if a negative outcome did not result directly from its negligence or willful misconduct.

Uninsurable Risk

Professional liability insurance only covers claims arising from a failure to meet the industry standard of care. Thus, contractual wording that guarantees a design free of defect, a specific LEED certification or any other obligations that fall outside the generally acknowledged responsibilities of design or construction professionals can create uninsurable risk that the professional must guard against by relying on assets other than insurance.

Owners need to recognize that, in the end, they themselves may suffer by including onerous contract provisions. If the language proves uninsurable, owners lose the benefit of the very asset they relied on to back the design professional's obligations: the design professional's insurance program. Protracted contract negotiations over onerous provisions also delay the project start and drive up costs.

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