Presented at:New Jersey Society of Professional Land Surveyors

SurvCon 2010February 5th, 2010

PROTECTING YOUR PRACTICE:PROTECTING YOUR PRACTICE:A RISK MANAGEMENT SURVIVAL GUIDEA RISK MANAGEMENT SURVIVAL GUIDE

Presented by:Debra Pellet, Marquis Agency

John Becker, Esq. and Kevin Bothwell, Esq.,Thompson, Becker & Bothwell, Attorneys at Law

The Importance of Evaluating the Client and the Project

According to Schinnerer/CNA:

Two-Thirds of Claims Against Surveyors Originate From the Client

Claim Frequency

Client/Project Owner, 66.5%

General Contractor, 11.5%

3rd Party Damage, 8.5%

Bodily Injury of a 3rd Party, 4.5%

Worker Injury, 2.5%

Subcontractor, 2.0%

Other, 4.5%

Types of Claims

% of claim is calculated based upon the number of claims against design professional firms.

Economic Loss 47%

Property Damage 33%

Bodily Injury 13%

Risk Management

• Potential Clients Often Spend Great Time and Effort in Evaluating Potential Surveyors For Their Project.

• The Same Should Hold True For You As The Surveyor

• Think Like a Business Person

CLIENT EVALUATION

Does this client/project owner understand, appreciate and value the services of a land surveyor?

Before you sign the contract or agree to take the project:

• Do you know who your client is?

– If an LLC or Corporation, who are the members of the LLC or shareholders of the Corporation?

• What is the client’s experience/knowledge with the project type?

• What is their budget/schedule, is it realistic?

• Is the client a state agency? What is your experience in working with state agencies?

Client Evaluation

Client Evaluation

• If you are sub to another design firm or contractor, have you asked the prime about their history with this project owner?

• What is the client’s claim history?

• What is their ability to pay? What is their financial capability? Are they seeking funding?

• What are the expectations of the client? Can you manage these expectations?

Client Project Financing Problems

Increased Risk Factors; Credit Crisis, Economic Downturn, thus Creating The Perfect Storm For Claims And Litigation.

Client Problems with Project Financing 65%

Construction Bonds, Late Payments 19%

Construction Costs 8%

Other 8%

A surveyor provided a boundary and topographic survey for a farm property awaiting development. The client had little experience with surveyors and never had a proper survey done before. The surveyor discovered that the property, which had never been properly surveyed before, had various discrepancies and notified the client verbally that the problems needed to be fixed. Several years passed before the client began working with the property without the problems getting fixed.

The client later claimed $260,000 in losses in a lawsuit, and also filed a complaint against the surveyor with the state licensing board, alleging incompetence and misconduct. Based on various documentation that showed that the client knew of the boundary issues, the board ruled in favor of the surveyor. However, in the lawsuit, the client continued to assert 25 errors with the survey. While the errors were irrelevant to the claim, and there appeared to be minimal liability on the part of the surveyor, defense counsel felt that this could affect a jury if the case went to trial. The case settled with $95,000 as an indemnity payment and defense costs of more than $68,000.

Case in Point

PROJECT EVALUATION

Project Evaluation

Now that you’ve researched the client, ask yourselfthe following questions about the project:

• Is this a project type you have worked on before?

• Is this project in or out of your comfort zone?

• Do you have the capabilities/experience to perform the services?

• Do you have a formalized process for managing project communications and documentation?

• Do you have the staffing necessary to perform the services in the time frame set by the client? Is this time frame realistic?

• Is there anything about this project that could impede your services, cause delays?

• Are you relying on information provided to you by “Others”?

• Who is responsible for checking the accuracy of this information?

• Can you deliver this project successfully?

If so, ask yourself:

• What are the potential liabilities for your firm?

• Is the compensation fair and equitable to the liabilities your firm may be taking on?

Project Evaluation (continued)

Rely On Your Resources

Research the client and project:

• Talk with your peers. Do they know this client?

• Have they had past experiences with this client?

• Run a Dun & Bradstreet report.

• Google the client.

• Check the local papers for recent articles.

• Check with your attorney.

• Call your insurance broker.

Insurance Carrier View of Land Surveying Services and Project Types

• In the past couple of years, Professional Liability carriers have tightened their underwriting belts. They have become extremely cautious in evaluating a firms’ services and the project type.

• The list of carriers willing to write land surveying firms is shrinking.

• At least one carrier has implemented a 25% rate increase in New Jersey.

Problem Project Types

These project types have caused a spike in both the frequency and severity claims:

• Condo Projects• Residential Projects• Land/Site Development • School Projects• Roads and Highways

There are some carriers that will decline quoting an account if residential projects are greater than 5%.

A developer hired a surveyor to survey property and obtain a letter of map revision from FEMA to show that home sites were not within the 100-year flood plain. The surveyor also prepared flood plain development forms and other documents needed by the developer.

Seven homes on the site experienced alleged flood damage. Their claims totaled more than $709,000, the majority of which was for alleged diminished value to their homes. The homeowners filed suit against the surveyor and other project parties. Defense counsel argued that the homes were not within the 100-year flood plain based on FEMA’s mapping system. The case eventually settled through mediation, with the insurer paying $438,500 on behalf of the surveyor (defense costs totaled more than $145,000). The real estate agent contributed $20,000 and the developer contributed $70,000.

Case in Point

Services That Have Caused Claims

• Construction stakeout services related to commercial projects and roads/highway projects.

– Resulting in 59% frequency of claims and 65% in severity

claims.

• Boundary surveys related to residential and land/site development projects.

– Represent a significant increase in both frequency and severity claims.

• Insurance carriers have filed rates, which include debits and credits.

• They will apply these debits to the project types and services that have caused and continue to cause claims.

• Is New Jersey becoming a “severity state” in terms of large claim settlements? In the last 2 to 3 years the number of six figure indemnity payments by insurance carriers has increased dramatically.

• A large part of these claims are coming from developers seeking a remedy to their financial woes in not being able to sell/rent the units in either a residential or commercial development.

• Land surveyors are not immune to these types of claims. Developers have claimed project delays due to:

– Errors in the boundary survey– Errors in staking the property

• Thus causing delays in construction and securing permits.

• Developers have and will continue to sue for consequential damages (loss of use, rent, etc.)

Services That Have Caused Claims (continued)

CONTRACTS AS A RISK MANAGEMENT TOOL

Using an oral contract, a surveyor was hired to perform surveying for the foundation on a church project. The surveyor did not have any overall dimensions for the project and was not given a current set of plans. As a result, there was an inaccurate pile plot for one of the buildings and possible problems with another building.

While the surveyor was not given adequate information from the start of this project, the general contractor brought suit against the surveyor to recover delays and extras associated with the pile problems. The lack of a written agreement specifying the scope of services and what information was required to be provided by others hampered the surveyor’s defense. Ultimately, the case settled, with the surveyor contributing almost $113,000, with $100,000 in the form of an indemnity payment.

Case in Point

Are you prepared for the type of contract youwill be signing?:

• Review the contract terms and the insurance provisions.

• Can your firm comply with the provisions set forth including the probability of increased liability and insurance costs?

• Did your fee proposal include the costs of increased insurance limits?

• Most, if not all, state agencies & large developers have complex contracts that should be read thoroughly.

• The insurance provisions generally dictate a firm carry a higher than normal limit of liability, including: general liability, umbrella, and professional liability.

• Generally these insurance limits cannot be negotiated down. Even if your firm is a sub- consultant, the limits will not be any different

Commentary: Insurance Issues

Contact your insurance broker:

• What do they know about the contract/client?

• What is the cost to increase the insurance limits?

• Is your firm eligible to increase to the required limits?

• Indemnification provisions allocate risk and liability among parties; typically designed to shift liability to the party who is thought to be more involved or able to control risk producing activities.

• Indemnification provisions are usually written to require one party (Indemnitor) to bear the cost and expense of another party’s (Indemnitee) share of liability; also often includes a defense to the Indemnitee.

• In New Jersey, one party may legally indemnify another party for up to 99% of the Indemnitee’s fault or liability.

• However, a poorly written indemnity provision that requires a design professional to indemnify and/or defend another party is likely not going to be covered by the professional liability insurance company due to the contractual liability exclusion.

Commentary: Indemnification Issues

Surveyor shall indemnify, defend and save harmless the Client, and its officers, directors, employees and agents, from and against all liability, loss, cost or expense (including attorney’s fees) by reason of liability imposed upon the Client, arising out of or related to Surveyor’s services whether caused by or contributed to by the Client or any other party indemnified herein (including active and passive negligence of the Client).

Other examples are:

The Surveyor shall indemnify and hold harmless the Client for all damages, losses and claims arising out of or in connection with the performance of the Agreement.

Surveyors shall indemnify and hold harmless Client “from any…liability…in any way caused by the Surveyor.”

Example of Indemnity Language to Avoid

Surveyor (including any subconsultant, and each of their officers, owners, partners, employees), shall indemnify the Client for damages arising out of the performance of professional services, but only to the extent found to be caused by the negligent acts, errors or omissions of the Surveyor.

Surveyor (including any subconsultant, and each of their officers, owners, partners, employees), shall indemnify the Client for damages arising out of the performance of professional services, but solely to the extent found to be caused by the negligent acts, errors or omissions of the Surveyor.

Acceptable Provisions

Limitation clauses may be enforceable depending upon the parties and the substances of the contract.

The Three Prong Test:

Criteria to meet in order for a limitation of liability clause to have a chance of being upheld in the courts:

1.The contract must have been the result of a

negotiation

2. The negotiation must have been between parties of roughly equal bargaining power.

3. The amount the liability is limited to must be sufficient enough to provide an incentive to perform.

Limitation of Liability (LOL) Clauses

Marbro v. Borough of Tinton Falls, 297 N.J. Super. 411 (Law Div. 1996)

– court upheld a limitation of $32,500

North Brunswick BOE v. French & Parrello (App. Div.) – unpublished 2008

– court upheld limitation for “the amount of the fee or $50,000,

whichever was greater”

West Essex Highlands Condominium Association vs. Construction Design Technologies (Law Div.) – unpublished 2009

– court did no enforce limitation to the amount of the fee

Discussion of a Recent New Jersey Court Case

The Client and the Surveyor each recognize the risks, rewards and benefits of the project, as well as the fact that the vast preponderance of the money to be paid for this project is to be paid to others rather than to the Surveyor.  In recognition of this reality, Client and Surveyor agree that, to the fullest extent permitted by law, the total liability, in the aggregate, of the Surveyor, its consultants, and their agents, servants and/or employees, for all injuries, damages (including damage to the project itself), losses, expenses or claims whatsoever related to services provided by the Surveyor or its consultants under this agreement, including, but not limited to negligence, errors, omissions, strict liability, breach of contract or any claim whatsoever, shall……………………

Examples of LOL Clauses

• … not exceed six* times the total fees paid to the Surveyor under

this agreement or $50,000**, whichever is greater.

• … not exceed the lesser amount of either six times the fees paid or due the Surveyor under this agreement, or the total amount of any available professional liability insurance for the Surveyor at the time that the claim is resolved either by settlement, arbitration award or final judgment. Any requests by Client that the Surveyor increase its limits of professional liability insurance coverage, at the Client’s cost, must be made in writing to Surveyor within fourteen (14) days of the date of this agreement.

• … not exceed the available amount of the professional liability insurance coverage for the Surveyor at the time that the claim is resolved either by settlement, arbitration award or final judgment.  Any requests by Client that the Surveyor increase its limits of professional liability insurance coverage, at the Client’s cost, must be made in writing to Architect within fourteen (14) days of the date of this Agreement.

Examples of LOL Clauses (continued)

Project Fees• Reducing your fee is like advertising a garage sale.

• What are the quality of the services being performed!

• Can your firm actually perform the services for a reduced fee to “the standard of care”.? What corners need to be cut to perform these services for the reduced fee?

• If there were a claim, is the fee enough to cover your deductible?

• Are there provisions in the contract allowing for additional fees to be charged should the scope of the project change or expand?

• Do you have payment terms in the contract? Do you invoice and collect the fees according to the contract schedule?

A surveyor was retained by a client to provide services for a small residential project. Due to the downturn in the economy and to ensure he got the project, the surveyor agreed to a reduced fee since the project was small. He also hoped to secure more work from this client. The surveyor collected the first payment, however upon completion of the project and despite numerous payment invoices, the surveyor was not paid.

While awaiting final payment, the client decided to retain the surveyor for a second project, all the while promising to pay the first project. The second project involved a site plan and site layout for a housing development. This project was larger in scope than the first, thus tempting the surveyor to take the project at a reduced fee again even though he/she had not been fully paid for the first project.

Case in Point

• The surveyor prepared the topographic map of the project site and designed the layout of the buildings.

• The surveyor was paid in full for this project, but still had not collected his fee for the first. The surveyor promptly sued the client for non-payment of fees on the first project.

• The client quickly countersued the surveyor for alleged errors in the layout of the second project.

• The surveyor felt this claim was in retaliation for the fee claim.

• The claim was eventually closed in favor of the surveyor, however defense costs were paid by the surveyor because of the deductible.

Case in Point (continued)

• Fees should be commensurate with the scope of the project.

• Have a payment and termination provision as part of your standard terms and conditions. Enforce them.

• Use an attorney fee collection clause.

• Not wise to start another project with the same client who has not paid for the first.

• Consider the consequences should you elect to sue your client for uncollected fees.

Lessons Learned

Financial Troubles Impacting Your Practice

• Reductions- affecting every region and market segment

• Reduced revenue, opportunities, cash flow

• Changing strategies, services, markets

• Leadership management changes

• Layoffs, talented key staff leaving

• Accounts receivable: late and delayed payments

If your firm were to be purchased by another entity or you retired the business:

• What would you need to protect?

• What is “Tail’ coverage or as defined in the insurance policy as the “Extended Reporting Period” provision (ERP)?

• Should a firm elect to cancel or non-renew their policy, they can choose to extend the current policy for a specified period of time in order to report claims for an additional premium.

• What does the “ERP” or “Tail” coverage protect?

Mergers, Acquisitions And Closing Shop

• The firms’ “Prior Acts” for past projects

• Why do you need to protect you firms “prior acts”?

• For the same reasons you carry PL insurance now

• The statue of limitations in New Jersey is either 2 or 6 years, and the statute of repose is 10 years

• The statue of limitations in Pennsylvania is either 2 or 4 years, and the statute of repose is 12 years

Mergers, Acquisitions And Closing Shop

In order for any insurance carrier to offer quotes on the tail coverage:

• All projects must be completed and closed out.

• The insurance carriers can offer a 1, 3 or 5 year tail or erp. However not all carriers will offer a 5 year tail.

• The cost is based upon a % of the expiring or current premium.

• Example – a 1 year tail premium is 100% of the expiring/current premium. (Differs by carrier)

Mergers, Acquisitions And Closing Shop

Mergers, Acquisitions And Closing Shop• Example – A 5 Year Tail Premium Can Cost As Much

As 250% of the Expiring/Current Premium (% Differs By Carrier)

• Carriers that will offer a 5 year “Tail/ERP”:– Schinnerer/CNA– Lexington– Travelers– Argonaut/Insight

• Whether you are being acquired, purchasing a firm, merging or closing your business, you must investigate the issue of how to protect the prior acts of your firm

• If you are contemplating any of the above call your insurance broker to discuss your options and the cost.

Retired Professional Policy

• Schinnerer/CNA and travelers offer firms that are closing their practice or retiring the practice a Retired Professional Policy

• This is a separate policy, usually written for a 5-year term. The premium is determined by the expiring premium and claim history.

• It is possible to renew the policy for a 2nd 5-year term.

Risk Management Websites

The following are valuable resources for risk management information and articles:

www.marquisagency.com

www.schinnerer.com

www.beazley.com

www.aepronet.org

www.marquisagency.com