Risk Management

PDHengineer.com Course № P-3006

Basic Risk Management for Consulting Engineers

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i Basic Risk Management for Consulting Engineers | PDHengineer.com ©2011 W.L. Christy, Jr., TCCG. Portions ©2011 Decatur Professional Development, LLC All rights reserved

BASIC RISK MANAGEMENT for

CONSULTING ENGINEERS

ii Basic Risk Management for Consulting Engineers | PDHengineer.com ©2011 W.L. Christy, Jr., TCCG. Portions ©2011 Decatur Professional Development, LLC All rights reserved

BASIC RISK MANAGEMENT for CONSULTING ENGINEERS

TABLE OF CONTENTS

Section 1 OVERVIEW 1

Section 2 RISK MANAGEMENT STRATEGIES 2

Section 3 CONCEPTS and THEORIES of LIABILITY 6

Section 4 CONTRACTS 12

Section 5 INSURANCE AND BONDS 22

Section 6 PROJECT RECORDS & PROFESSIONAL CONDUCT 28

SUMMARY 38

1 Basic Risk Management for Consulting Engineers | PDHengineer.com ©2011 W.L. Christy, Jr., TCCG. Portions ©2011 Decatur Professional Development, LLC All rights reserved

BASIC RISK MANAGEMENT for CONSULTING ENGINEERS

Section 1 OVERVIEW

Consulting Engineering encompasses a variety of disciplines and a very wide variety of professional services. It is inherently a risky business. The mere fact that an individual must be certified and issued a license to perform certain technical services implies that a minimum level of competence is required. Regardless of how competent an engineer is or the care taken to perform impeccably, conflict, at some level of criticality, can easily arise at some point due to miscommunication, unforeseen circumstances or just plain old unintentional mistakes. Whether we like it or not we live in a litigious society. During the past twenty to twenty‐five years there has been an explosion of claims against architects and engineers precipitating a liability crisis within the professions. Simultaneously and largely in response to these circumstances, the concept and practice of risk management has become more and more relevant and necessary for survival. Before an individual or organization can effectively develop, implement and practice risk management it is essential to understand the following:

• Theories of Liability (mostly those that typically confront a consulting engineer on a day‐to‐day or project by project basis),

• Conflict, • Claims and, • Litigation

Risk management can be described as a collection of related guidelines, rules, practices and procedures designed to:

• Assess potential risk in particular sets of circumstances (e.g. a defined scope of work or project)

• Prevent circumstances or events that can lead to conflict, claims or litigation • Mitigate conflict if it arises • Minimize liability throughout the process of dispute resolution

An effective risk management program should employ both proactive and protective strategies.


Section 2 RISK MANAGEMENT STRATEGIES

Proactive Strategies:

Elements of a Sound Proactive Strategy 3

Importance of the Individual in Effective Risk Management 3

Indications and Signs of Potential Conflict 3

Action Items for Conflict Management and Mitigation 4

Protective Strategies: Dispute Resolution via Legal Processes

Litigation 5

Mediation 5

Arbitration 5


Section 2 RISK MANAGEMENT STRATEGIES

Proactive Strategies:

Elements of a Sound Proactive Strategy:

• Continuous Enhancement of technical expertise and competence • Ready availability of competent business and legal support • Effective design management • Thorough understanding of project scope definition • Strong quality assurance programs and effective documentation process • Establishment and nurturing of personal/professional relationships with clients,

subcontractors, vendors, and if applicable, with the public • Regular, periodic training or continuing education on the nature of legal liability

and risk management

Importance of the Individual in Effective Risk Management:

Regardless of the thoroughness of a risk management program, its effectiveness is largely dependent on how well an individual exercises good risk management practices on a day to day, project by project basis.

If an individual is well trained in the components of the Proactive and Protective Strategies and is able to immediately recognize the signs leading to conflict or litigation, chances are the situation can be mitigated at a very early stage minimizing or eliminating any potential loss.

Indications and Signs of Potential Conflict:

The following are some common circumstances or situations that can be an indicator or sign of impending conflict that could lead to claims or litigation:

• Initiating or performing out of scope work without written authorization, a contract or proper documentation. Such action most typically results in confusion over the scope of work, terms and conditions, and/or change orders.

• Vague or ambiguous scope of work definition.

• Any injury on the job site or a job site condition that is recognized by more than one individual as "hazardous".


• Use of the word '"estimate." In the world of service contractors, the word estimate typically infers a not to exceed cost for performing a specific technical task that may or may not include parts and materials. For the consulting engineer a more appropriate and less binding term to convey similar information would be the phrase "opinion of costs."

• Trading: Persuading a contractor to perform extra work (made necessary by an omission or error in the drawings and/or specifications) by allowing him, in return, to omit another specified requirement.

• The gratuitous gesture: Providing a contractor with more information than required implies a voluntary sharing of his problem‐solving tasks and may lead to a sharing of potential liability for the contractor's performance. The engineer should focus on his/her own clearly defined tasks during a construction process.

• Unreturned phone calls during a period of attempted problem resolution.

• Inability to collect fees.

Action Items for Conflict Management and Mitigation:

Action Item 1: Remain calm. Emotion serves no positive purpose in such situations. It actually worsens the situation. When a client or contractor makes an accusation, do not retaliate by countering or attempting to injure the person or organization making the accusation.

Action Item 2: DO NOT automatically assume responsibility for the situation no matter what the facts appear to be at the moment. Once the engineer does this and communicates it to the other parties connected with the loss or potential loss, it is virtually impossible to undo the resulting damage. This habit or practice of accepting blame or responsibility prematurely is so prevalent among well‐meaning but uninformed engineers that many other professionals have categorized it as “The Good Guy Syndrome.”

Action Item 3: Communicate. While one should not assume responsibility, neither should one fail to communicate. Shying away from the situation and hoping it goes away will only cause the situation to worsen. Be alert in gathering as much pertinent information as possible. If a personal attorney or a company attorney is involved at this point, carefully adhere to their advice regarding the sharing of information, and keep the attorney informed regarding all developments in the situation.

Action Item 4: Notify the personal or company attorney immediately when there are indications that the potential for a claim or litigation might be imminent. DO NOT wait until the situation has developed to such a state that negotiations are impossible and special strategies are useless.


Action Item 5: Document and Photograph. When there is evidence pointing to a potential liability claim, immediately gather all project files and make detailed notes of any and all related communications. (See Records are Discoverable in Section 6). Never rely on recall.

Action Item 6: Keep seeking alternatives and solutions with guidance from the attorney.

Protective Strategies: Dispute Resolution via Legal Processes

Litigation

Litigation is the act or process of bringing about or contesting a lawsuit utilizing the traditional court system and is the most widely used method of dispute resolution. There are two reasons for this:

(1) an individual or company can exercise greater control over litigation than over other forms of dispute resolution, and

(2) if a form of dispute resolution other than litigation is used, many insurance carriers will waive certain insurance and legal rights.

Mediation

Mediation is a process in which a neutral intermediary agent works with both sides facilitating communication between the parties in a dispute in an attempt to bring consensus out of dispute.

Mediation can be generally described as a non‐binding conciliatory process wherein the parties specify the least they will take, and arbitration is often termed as an adversarial process wherein the parties ask for the most they can get.

Arbitration

Arbitration is the process of resolving disputes between people or groups by referring them to a third party (not a judge), either agreed on by them or provided by law, who subsequently makes a judgment at a hearing.

Many companies do not typically subscribe to arbitration since greater control can be exercised in litigation. However, arbitration may be appropriate in certain circumstances. Advance agreement to arbitration should be avoided.

The arbitration process provides the parties involved with a voice in selecting the arbitrator(s). The arbitrator is granted significant powers by the parties and by law and has the right to issue subpoenas, fix the date of hearing, grant postponement, and proceed with the hearing in the absence of a party who fails to appear.


Section 3 CONCEPTS and THEORIES of LIABILITY

Forms of Liability:

Contractual Liability 7

Professional Negligence 7

Theories of Liability that Commonly Confront the CE

Breach of Contract 8

Negligence 8

Negligent Acts or Omissions Negligence per se

Breach of Warranty 9

Theories of Liability Evolving in Professional Liability Claims

Strict Liability 9

Products Liability Ultra‐hazardous activities

Fraud 10

Criminal Liability 10

Common Defenses Against Theories of Liability

Contributory Negligence 11

Comparative Negligence 11

Assumption of Risk 11

Statute of Limitations and Statutes of Repose 11


Section 3 CONCEPTS and THEORIES of LIABILITY

Two Forms of Liability that Commonly Confront the Consulting Engineer

Contractual Liability, and

Professional Negligence

Two separate theories of liability comprise the legal definition of professional malpractice:

1) contractual liability (liability arising out of contract) and, 2) professional negligence (liability arising out of tort).

Professional malpractice is an area of legal practice that deals with an individual professional’s or a business’ wrongdoing or negligence that causes injury or damage and typically carries connotations of impropriety. Examples of professional malpractice are breach of fiduciary duty, fraud, mismanagement, errors in judgment, misconduct and carelessness.

A tort is a private or civil wrongful act, independent of a contract or trust, that results in injury to another's person, property, reputation, or the like, and for which the injured party is entitled to compensation.

The majority of torts are complete and compensation must be made when there is conduct, causation, fault and damage.

"Fault” assumes three forms: malice, intention (including recklessness) and negligence.

More simply put, in a tort case, three conditions must exist:

1. Existence of a legal duty from defendant to plaintiff 2. Breach of duty (result of negligence or intent on the part of defendant) 3. Damage (plaintiff suffered damages as probable result of defendant's breach of duty)

Within the bounds of contractual liability, the relevant question is:

“Did the professional reasonably satisfy the specific obligations defined in the contract?”

Regarding professional negligence, the question would be:

“Were the professional services reasonably performed in a manner consistent with the education, experience, and skill ordinarily exercised by reputable members of the same profession, in the same general locality and, under similar circumstances?”

Among other factors, negligence is the failure to apply a standard of care in a situation that results in damages to property or injury to persons.


"Standard of Care" can be defined as:

“The watchfulness, attention, caution and prudence ordinarily possessed by engineers of good standing, practicing in the same locality at the same time their services are performed.”

Theories of Liability that Commonly Confront the Consulting Engineer

Breach of Contact

A contract carries with it an implied duty which is typically defined in an attached “scope of work”. One of the most effective measures to prevent even the thought of “breach of contract” is a well‐defined, explicitly written scope of work. Add on top of that a diligent personal policy of “do what you say you will do” and projects typically run their course uneventfully. In addition, a contract cannot be revoked unilaterally. However, a contract can be legally terminated by its terms, by an act of the parties (e.g., breach of contract), by force of law, or because it was illegal before it was executed. When a contract is broken or breached, payment of damages, however modest, can be ordered by a court.

Negligence

Negligent Acts or Omissions

Negligence is essentially the failure to exercise the “standard of care” provided that such failure resulted in damages. For a charge of negligence to be valid, the following elements must be proven:

1. A legal duty must have existed, 2. there was a breach of that duty and, 3. that breach of duty must be the probable cause of the actual injury or damage.

Negligence per se

A conduct which may be declared and treated as negligence without any proof or contention as to the specific surrounding circumstances is considered “Negligence Per Se”. Conduct treated as such results from the violation of a statute, valid municipal ordinance or official regulation and is generally a rebuttable presumption.


Breach of Warranty

A warranty is an obligation or promise to attain a specific result in contrast to performing services with a standard of care. An express, or actual, warranty is conferred when language explicitly states that something is designed for or adapted to its purpose, whereas an implied warranty is inferred. An example of the latter is a contention that an engineer implied a warranty that plans, specifications and/or drawings were complete and sufficient for the purpose intended.

The vast majority of jurisdictions have found that, absent an agreement, professional services are not subject to the principle of implied warranty. The foundation for this is similar to that expressed in products liability cases. As engineers work with inexact sciences they must depend largely on their judgment, and even the finest engineering mind is subject to error. Engineers, therefore, cannot be required to be infallible, but only to use a “standard of care” consistent with their experience and competence. While the design professional is not an insurer of perfect plans, he implicitly warrants that, if adhered to by the constructors, his plans will result in a design structure reasonably fit for its intended use.

Theories of Liability Surfacing in Professional Liability Claims

Strict Liability

Liability for damages is typically imposed only upon proving that an engineer was negligent (i.e., failed to use due care) or somehow intended to bring about an injury or damage to another. There are cases, however, where an engineer can be held responsible for an injury even where no negligence can be shown. Enter the principle of strict liability.

The foundation for the theory of strict liability is that public policy requires that liability must arise from a defect in a product (sometimes, though much less often, a service), even if the product (service) was produced (rendered) without negligence.

Products Liability

Products liability can be a form of strict liability, and is beginning to appear in construction litigation. It holds, as its premise, that the "object " resulting from the design engineering process has potential to cause damage or injury to persons or property. This theory is usually applied to design engineering, where the result or object of the design is said to be responsible for injury or damages.


Ultra‐hazardous Activities

Strict liability can also be imposed upon engineers engaged in ultra‐hazardous activities, such as blasting, oil drilling, environmental remediation, and other dangerous but beneficial enterprises. If the road construction near your building causes damage to your building due to blasting, you need not show they were careless to prevail in a lawsuit.

Fraud

Fraud is typically very difficult to prove. To constitute fraud the misrepresentation or omission must be made knowingly and intentionally, not as a result of mistake or accident, or in negligent disregard of its truth or falsity. Also that,

• the plaintiff must prove that the defendant intended for the plaintiff to rely upon the misrepresentation and/or omission,

• the plaintiff did in fact rely upon the misrepresentation and/or omission and,

• the plaintiff suffered injury or damage as a result of the fraud.

Damages may include punitive damages as a punishment or public example due to the malicious nature of the fraud.

In summary, these components must exist and be proven:

1. Knowing and intentional misrepresentation of facts 2. Full knowledge and awareness of the falsity of the fact 3. Intent to deceive 4. Reliance on the part of the plaintiff on the misrepresentation 5. Damages

Misrepresentation is perhaps the most common assertion used against the engineer and can be listed in the formal complaint as an allegation, but, which by itself, is but one element of the theory of fraud.

Criminal Liability

In assigning liability under criminal law, society can protect the broader interests of the public (as a whole, not as individuals). Criminal liability has always been a possible theory against corporate officers and directors in their management of an engineering business. However, in the past twenty‐five years the theory has been extended such that, criminal liability can be alleged, for example, when there is failure to report the existence of certain contaminants or the need for remediation. When this failure exists, there is the appearance of conspiracy with owners and/or operators to conceal the presence of contamination. Generally when criminal


liability becomes an issue arising out of technical activities, a vigorous attempt is made to include officers and directors of a company as well as the front‐line technical employees.

Theories of Liability – Frequently Utilized Defenses

Contributory Negligence

The most frequently utilized defense against theories of liability is contributory negligence. Contributory negligence is very effective when and where the defendant can prove that the plaintiff was also negligent, or might have prevented the damages that were the proximate cause of injury, if the plaintiff had exercised a reasonable standard of care. In this case the plaintiff would not receive compensation for damages.

Comparative Negligence

In a comparative negligence system, the injured party may still recover some damages even if the injured party was partially to blame. In jurisdictions utilizing a comparative negligence system, a jury or judge determines the proportion of fault to be assigned to each responsible party.

Assumption of Risk

The primary assumption of risk defense is typically utilized where a plaintiff voluntarily participates in an activity where "inherent risks" are involved. When a particular activity necessarily involves risks that are inherent in the nature of the activity, there is no duty to protect the plaintiff from those risks or to take steps to reduce those risks.

Statute of Limitations and Statutes of Repose

The statute of limitations and the statutes of repose create limitations in which a tort or contract claim may be disallowed when certain, pre‐defined time limits have been exceeded.


Section 4 CONTRACTS

Nature of a Contract 13 Benefits of a Written Contract 14 Importance of Written Contracts 14 Role of Organizations or Individuals in Construction 15 Duties and How They are Created 15

By Contract

By Law

By Conduct

Selected Crucial Provisions of Contracts 19

Scope of Work

Payment Terms

Standard of Care

Insurance


Section 4 CONTRACTS

Nature of a Contract

A contract is a voluntary, deliberate, and legally binding agreement between two or more competent parties which creates duties for one or both of the parties, for the breach of which the law provides a remedy. The proper function of a well‐written and carefully negotiated contract is the documenting of an explicit understanding between the parties to the agreement, to eliminate the need for interpretation in a court of law.

Increasingly, the courts are finding that A/Es have a duty to others not a party to such agreements. In recent years the courts have been extending the duty of A/Es to those others who may be reasonably anticipated by the A/E to rely upon the A/E's work or judgment. The duty of the A/E has, for example, been extended to the general contractor, subcontractors, injured workers, sureties of the owner or contractor, subsequent purchasers of the completed project and even to unrelated parties or the general public. These duties may be found both in tort and contract.

There are certain elements that must be present for a contract to be valid: an offer, acceptance, consideration, and terms of which are not inconsistent with public policies of the state in which the contract is executed.

An offer denotes a proposal to perform an act or service in return for some valid form of consideration. An offer may be explicit or it may be made with conditions. The offer may be open for various periods of time such as a few minutes, a few hours, days or weeks or longer. The offer is considered to be outstanding and open until its acceptance, rejection or withdrawal by the person making the offer.

Acceptance means the intended beneficiary of the proposed services agrees to the scope and terms of the proposal.

Consideration is defined as anything of agreed or perceived value which is given by either party to a contract. The value of the consideration need not be great. Courts rarely intervene in a contract dispute where the major issue is whether the consideration is adequate. Consideration may be in the form of money, an exchange of services or even an exchange of promises.

Following are the essential elements of every contract:

1. The parties involved must have a legal authority or status to contract. 2. The parties must concur to the terms of the contract. (While a contract does not

necessarily have to be in writing to be enforced, this is not good practice.) 3. There must be a binding consideration.


4. There must be a subject matter upon which the contract can operate. (A scope of services.)

5. There must be substantial compliance with any legal requirements regarding form.

Benefits of a Written Contract

• Facilitates collection of fees earned or collections of past due amounts Liens Bad debts write‐off

• Provides the foundation for client communications • Provides definition of the duties of the involved parties • Limits liability • First line of defense should conflict arise

The Importance of Written Contracts

While a contract does not necessarily have to be in writing to be enforceable, it does have to be in writing to be explicit. A written contract is also lasting and permanent while memories and recollections are not. In the absence of a written contract there is also the risk that one of the parties may not be available at some future point in time to either confirm or deny the original intent.

A contract is documentation describing the mutual understanding of the scope of work, the resultant duties and obligations, expectations of the client, what is and what is not going to be done, and what and when you payment will be made. It is also a reflection of the client's expectations and understanding of the engineer’s responsibilities and of the client’s obligations to the engineer. It is a written record of the extent of the "meeting of the minds," so that in the event of a later disagreement, it can be determined just what it was that one party or another should have done or should not have been done.

Written contracts are necessary to:

• define the scope of services, • establish fees and payment schedule, • create the schedule for work progress and completion, • describe other duties and responsibilities (if applicable) between parties and • provide a common framework for dispute resolution.


Roles of Organizations or Individuals (Parties) in a Construction Project

OWNER: Generally recognized as that party with a concept and a desire to evaluate a problem, to develop a new facility, or to expand an existing facility. The owner is responsible for project financing, clear title and/or access to the parcel, timely payments to the parties involved, and adherence to local government rules. In construction, an owner often will contract directly with a general contractor; however, it is not uncommon for the general contractor to become a third party beneficiary of the agreement between the owner and/or the A/E.

ARCHITECT/ENGINEER: Generally recognized as that party who traditionally develops designs to address and satisfy the concept and provides plans and written specifications for buildings and/or other works. In the classic project, the professional's duties are derived from provisions of the applicable standard contract forms prepared by the various institutes such as AIA. In other projects the A/E may be the project manager responsible for coordination of all contractors, engineers and suppliers.

CONSULTANTS: Generally recognized as parties possessing specialized expertise that is required for accomplishing the project.

CONTRACTOR: Generally recognized as the party who constructs or builds the project utilizing either his own labor resources or the labor resources and expertise of subcontractors.

SUBCONTRACTOR: Generally recognized as the party who is utilized by a contractor to provide specialized expertise and assistance in building the project.

SUPPLIERS: Parties providing supplies and materials for the project.

Duties and How They Are Created

Liability arises out of the concept of "negligence" specifically in those situations where an engineer fails to act reasonably where a duty exists, and that failure is a direct and proximate cause of damage or injury.

An engineer’s conduct while performing services in a professional capacity is usually outside the common knowledge of most individuals. Therefore, the previously discussed concept of "standard of care." is applied to an engineer’s acts or failures to act to measure and define the reasonableness or acceptability of conduct. In the engineering and technical professions, duties are created any of four ways:


1. By contract 2. By law 3. By conduct 4. By the policies of an engineering firm (if employed by an engineering firm, the

firm’s standard client form of agreement becomes the policy)

By Contract

There are generally two types of liability which an engineer may be subject to in private practice.

Tort Liability: Tort arises when professionals perform their services in a negligent manner and cause injury or damages to their client or a third party.

Contractual Liability: This will arise when a professional breaches a contractual duty. Understanding the difference between the two is important. Contract liability arises from the breach of a promise and tort liability arises from the violation of a duty imposed by common (non‐statutory) and statutory law. The most common example of tort liability' is the failure to use a standard of care (negligence).

In engineering malpractice cases, the engineer almost always performs services because he has contractually‐agreed to do so. His duties, therefore, would logically be viewed as emanating from the contract and, generally speaking, they are defined in the contract. The measure of "standard of care", however, becomes an integral and inseparable part of the work, not only by virtue of the engineer’s contract, but also as a matter of law. It is not uncommon for engineering malpractice cases to be grounded on "breach of contract" and also on "tort" principles. The differences are more theoretical than practical as both areas of the law have principles that normally lead to similar results.

Some jurisdictions attempt to draw distinctions between various degrees of negligence in an effort to establish degrees of culpability. While many interpreters believe the exercise is futile, most jurisdictions differentiate between slight (passive) negligence, ordinary negligence and gross negligence. Slight negligence has been characterized as the failure to use great care, ordinary negligence as a failure to use ordinary care, and gross negligence as a failure to use even slight care.

Willful misconduct is commonly referred to as "wanton" or "reckless." It is conduct that is more culpable than negligence, (even gross negligence) and can include an intentional wrong. The term is generally used to indicate that the defendant has intentionally performed an act in total disregard of a known risk or a risk so blatantly obvious that the engineer must have been aware of it. The importance of willful misconduct by an engineer is that it could conceivably give rise to the application of punitive damages.


By Law

When an engineer’s work in the process of design or other conduct is in violation of an existing statute, municipal ordinance, or a governing building code, no expert may be needed to establish a violation of the standard of care. Rather, the violation of a statute or ordinance may be sufficient to invoke the principle of negligence per se. That principle has been interpreted differently in the past by various jurisdictions, but generally the prerequisites for the application of the principle are similar to those provided below. The failure of a person to exercise a standard of care is acknowledged if:

1. The engineer violated a statute, ordinance or regulation of a public entity, 2. the violation most probably caused death or injury to a person or damage to

property, 3. the death, injury or damage resulted from an occurrence of the nature of which

the statute, ordinance or regulation was designed to prevent, and 4. the person suffering the death or the injury to his person or property was one of

the class of persons for whose protection the statute, ordinance or regulation was adopted.

If all of the above conditions are met, there is a presumption of negligence which can only be overcome by the presentation of substantial evidence to the effect that the engineer acted reasonably under all the circumstances.

In general, some various types of law that have the potential to affect a consulting engineering practice or an individual engineer are as follows:

Common Law. Law originating in England, handed down through the English‐speaking culture, and based primarily on historical precedents. Its authority comes from the courts. A decision reached in one case by a court of sufficient standing is considered precedence or the basis for decisions in future similar cases.

Statutory Law. Contrasted with common law, statutory law is legislated law. It is written and stipulates specific actions that apply to specific situations. Statutes may codify, modify, reverse, or abolish common law principles on the same subject, and may themselves be changed or abolished by further legislative or judicial action.

Municipal Law. As a subclass of statutory law, this body of statutes is passed by local governments and is generally referred to as municipal ordinances.

Constitutional Law. A set of rules founded on a state's or nation's constitution and designed to define and control areas of governmental action and secure fundamental rights for the individual citizen. It is also concerned with the preservation of the federal system and its relationship to state governments.


Administrative Law. A body of law founded upon decisions, rulings, and regulations of various federal, state, and local agencies other than legislatures and courts. Once empowered with general guidelines by the Legislature or Congress, the agencies create enforceable rules that apply to their specific areas, such as interstate commerce, labor relations, environment and immigration. Administrative law is a combination of constitutional law, statutory law, case law, and agency rules and regulations. Examples of administrative agencies include:

• Occupational Safety and Health Administration • Environmental Protection Agency. • Food and Drug Administration • Federal Communications Commission

Federal Law and State Law: Bodies of law created at the Federal level or the State level can be Statutory, Constitutional, or Administrative. Examples of Federal Law are:

• Americans with Disabilities Act (ADA) • National Environmental Policy Act, • Federal Water Pollution Control Act, • Davis Bacon and Related Acts (DBRA) • Clean Air Act.

Examples of state and local laws are:

• Licensing statutes, • Building codes, • Safety regulations, • Zoning and land use controls, • Coastal management, • Engineering licensing statutes, • Selection of engineers and contractors for public contracts, • Public utility regulation and, • Water resources law.

The majority of ordinances, statutes and codes concerning the design and construction of buildings are enacted to establish specific minimum standards for design and construction that are intended to ensure the integrity and safety of the structure and prevent damage or injury to the owner of the building or people who might utilize the structure. Accordingly, when the engineer, either by his design or supervision of construction, participates in the construction of a structure which violates a statute, code or ordinance, the principle of negligence per se generally applies.


By Conduct

An engineer’s conduct can, in and of itself alone, inadvertently create a duty. Following are some common behaviors that can and often do lead to the creation of a duty:

1. Routinely performing services outside the scope of work, 2. Routinely advising the client or other parties of matters for which you are

not responsible, 3. Performing services without a written contract, 4. Deviating from standard industry practices, 5. Performing services without appropriate qualifications or experience; e.g.,

civil engineer performing electrical engineering service.

SELECTED IMPORTANT CONTRACT ELEMENTS

SCOPE OF SERVICES

Following is a typical contract clause regarding scope of services that addresses more than one form of understanding.

SERVICES TO BE PROVIDED: (engineer’s name) is an independent consultant and agrees to provide CLIENT, for its sole benefit and exclusive use, with the consulting services described and defined in the attached Scope of Work ("Services"), which is made a part of this Contract. There are no third party beneficiaries to this Agreement.

The use of the term "independent consultant" above is intended to emphasize that the engineer does not normally manage or direct any of the client's personnel or regular activities. The phrase above also establishes that the engineer is not a payroll employee of the client and incorporates the engineer’s proposal as part of the overall Agreement between the engineer and the client.

One other very important facet to this clause is that it also informs the client at the onset of the project that the results of the services to be rendered are NOT to be relied on by third parties for any reason.


PAYMENT TERMS

It is very important that the client understand and agree up front what the terms of payment are going to be. The terms can be negotiated from client to client or project to project depending on a variety of circumstances and situations but, regardless of the terms agreed upon, it needs to be clear from the beginning and made an integral part of the contract so there are no misunderstandings regarding this element of the agreement. A typical and reasonable payment terms provision is as follows:

CLIENT agrees to pay each and every invoice upon receipt, time being of the essence. If payment is not received within thirty (30) days from the date of the invoice, CLIENT agrees to pay the lesser of 1% per month or the maximum legal rate on the past due amount until the amount is paid in full, plus the hourly rate for (engineer’s) time, reasonable attorneys’ fees and all other costs incurred by (engineer) in collecting the amounts due (engineer) under this Agreement. If CLIENT reasonably objects to all or any portion of an invoice, CLIENT shall notify (engineer) in writing within ten (10) days from the date of receipt of (engineer's) invoice, give reasons for the objection, and pay that portion of the invoice not in dispute. Failure of CLIENT to provide such written notice within the allowed ten (10) day period shall be deemed to be a waiver of all objections to that invoice. (Engineer) may suspend any and all of the Services if payment of any invoiced amount, not reasonably in dispute, is not received by (engineer) within sixty (60) days from the date of (engineer's) invoice.

In summary, this clause specifically stipulates when the client is to make payment and the costs to the client in the event payment is not made in a timely fashion. With the acceptance of this clause, the client has agreed to interest charges on payments over thirty (30) days old and our right to suspend services after sixty (60) days.

STANDARD OF CARE

The language below might at first appear to be a Protective Strategy but it is actually more of a Proactive Strategy. It sets the framework for the first step of conflict resolution from the onset of the project. This is typically a very effective method of preventing any escalation of a problem, real or perceived.

(engineer/firm) will perform the Services defined and described in the Scope of Work attached to and made part of this Agreement utilizing that degree of skill and care ordinarily exercised under similar conditions by reputable members of the profession and practicing in the same or similar locality at the time of performance. NO OTHER WARRANTY, EXPRESS OR IMPLIED, IS MADE OR INTENDED AND THE SAME ARE SPECIFICALLY DISCLAIMED.

CLIENT shall not be entitled to assert a claim against (engineer) based on any theory of professional negligence or violation of the standard of care unless and until CLIENT has


obtained the written opinion from an independent third party, licensed, and reputable engineering professional, knowledgeable of the nature of the Services in question, that (engineer/firm) has violated the standard of care applicable to (engineer’s) performance of those Services under this Agreement. CLIENT shall promptly provide such independent opinion to (engineer/firm) and the parties shall proceed from that point in good faith to resolve the claim within thirty (30) days.

This clause limits performance to generally accepted standards.

The omission of this language in some contracts can, in some instances, violate professional liability insurance coverage, which is for negligence. A client may wish to elevate the standards to the "highest" practiced by the profession, however, this will typically foster a great deal of uncertainty as to special precautions that might be required and will inevitably result in higher fees. This clause, unaltered, provides more certainty in recommendations. The last sentence disclaiming any warranties is required in most states to make clear that implied commercial warranties in the Uniform Commercial Code and the related statutes do not apply.

The second paragraph stipulates that the client must obtain a third party opinion that the engineer has breached the standard of care before the client can bring a professional malpractice action against the engineer. Placing such an additional obligation on the client will help minimize and deter frivolous actions against the engineer.

INSURANCE

Not all, but many organizations, for their own protection, will require an engineer or engineering firm providing services to carry certain types of insurance coverage and name the organization as an additionally insured. Following are types and levels of coverage that are commonly carried and/or requested to be in‐force at the time of contract execution. Government institutions almost always require this as a matter of law or ordinance.

GENERAL LIABILITY EACH OCCURRENCE $1,000.000 DAMAGE TO RENTED PREMISES (Each Occurrence) $300,000 MEDICAL EXPENSES (Any One Person) $10,000 PERSONAL & ADVERTISING INJURY $1,000,000 GENERAL AGGREGATE $2,000,000 PRODUCTS – COMPLETED OPERATIONS – GENERAL AGGREGATE $2,000,000

AUTOMOBILE LIABILITY COMBINED SINGLE LIMIT (each accident) $1,000,000

EXCESS/UMBRELLA LIABILITY

EACH OCCURRENCE $5,000,000 AGGREGATE $5,000,000

WORKERS COMPENSATION & EMPLOYERS’ LIABILITY

EACH ACCIDENT DISEASE – EACH EMPLOYEE $1,000,000 DISEASE – POLICY LIMIT $1,000,000


Section 5 INSURANCE AND BONDS

Insurance 23

Types of Insurance 23

Commercial General Liability Insurance

Workers' Compensation and Employer's Liability Insurance

Business Automobile Insurance

Property Insurance

Professional Liability Insurance

What Policies Typically Do Not Cover 24

Certificates of Insurance 25

Bonds, Types 25

Bid Bond

Payment Bond

Performance Bond

Miscellaneous Terminology 27

Experience Modification Rating (EMR)?

Subrogation

"Claims‐Made" versus "Occurrence‐Based" Insurance

Limitation of Liability versus Amount of Insurance


Section 5 INSURANCE AND BONDS

INSURANCE

Types of Insurance

Commercial General Liability Insurance

Generally, commercial general liability coverage is intended to protect an individual or engineering firm from injuries that may arise from work by engineers or technicians at job sites due to negligence in the handling or misuse of certain types of equipment or other incidental actions.

Commercial general liability insurance covers bodily injury and property damage claims on a per occurrence basis that may be asserted against and engineer or engineering firm by third parties. This coverage specifically excludes and does not apply to bodily injury, property damage, personal injury, or advertising injury arising out of the engineer’s or the engineering firm’s rendering of or failure to render any professional services, including

(1) the preparation of, approval of, or failure to prepare or approve, drawings, opinions, reports, surveys, designs or specifications, and

(2) supervisory, inspection, visual observation or other engineering services.

General liability insurance also covers operations/premises liability, which, for all practical purposes, means bodily injury or property damage caused by an occurrence in buildings or on premises owned or leased by the insured and their business operations in progress.

Workers' Compensation and Employer's Liability Insurance.

In accordance with specific provisions of the applicable Workers' Compensation and Occupational Disease Acts of the various states, workers' compensation insurance provides statutory compensation and medical benefits to an injured employee.

This coverage is basically "no‐fault" coverage meaning that an employee is not required to prove the negligence of his employer to collect, and the extent of coverage is always determined by state law.

Employer’s liability insurance provides coverage for an employer's liability for bodily injury to employees occurring within the scope of their employment when that liability is not covered by Workers' Compensation.


Business Automobile Insurance.

Business automobile insurance policies guarantee that the insurance company will pay all sums the engineer/firm that is insured must legally pay as damages because of bodily injury or property damage to which the insurance applies and which is caused by an accident and resulting from the ownership, maintenance or use of a covered vehicle. This coverage also includes legal defense costs but does not extend to employee‐owned vehicles used in business travel.

Property Insurance.

Property insurance covers loss or damage to company‐owned properties, personal property, and various types of equipment that is owned or leased. In the case of owned real property, the coverage insures the value of the building, excluding the cost of replacing the foundation. Personal property insurance covers items such as furniture, fixtures, and various types of equipment to the extent of their respective fair market value.

Professional Liability Insurance

Professional liability insurance covers claims allegedly caused by the professional errors or omissions.

What Policies Typically Do Not Cover

Insurance policies typically do not cover the following:

• Hold Harmless and indemnity clauses‐except where an "insured contract" contains language consistent with the insurance policy to cover an indemnity agreement for tort liability, i.e., typically "negligence" (not to be confused with contracts liability)

• Warranties

• Certifications

• Penalty clauses

• Surety or bonds

• Joint ventures

• Punitive damages

• Intentional wrongdoing or crimes

• Fraud


Certificates of Insurance

During the course of requesting bids for a particular project, organizations, both private and public, may request proof of insurance from all companies submitting a Bid for the work. This proof is almost always provided with a “Certificate of Insurance” which is typically generated and provided by the Bidder’s insurance representative. The Certificate clearly shows current coverage as well as the amount of coverage for the various categories and was discussed in Section 4 of this document. Public entities such as State, County and local municipalities are typically required by law or ordinance to request this information for the bidders and are not allowed to issue a contract in the absence of this information.

Bonds

The three most common types of bonds in the construction industry are:

• Bid Bonds.

• Performance Bonds and ,

• Payment Bonds.

Performance and Payment Bonds provide the greatest benefit to the owner. These two types of bonds inure to the direct benefit of the owner, and also produce an indirect benefit in that subcontractors and suppliers on a bonded project generally provide better performance than those not bonded.

Bid Bonds

Generally, there are two types of bid deposit security methods:

1. provides that, in the event the bidder does not enter into the contract when the award is tendered, the bidder forfeits the amount of the bid bond, regardless of the extent, if any, of owner's actual damages might be in having to award the contract to the next low bidder.

2. provides that the bid deposit is applicable towards the difference between the low bidder and the bidder to whom the contract is actually awarded.

Payment Bonds

Payment bonds are designed to protect the owner by ensuring that subcontractors and suppliers are paid for their services, materials, parts and supplies as part of the project. The Miller Act, 40 U. S. C. 270a, mandates payment bonds on all federal projects exceeding $25,000. Additionally, most states have "Little Miller Acts" placing similar requirements on state and/or local construction contracts. Payment bonds also benefit subcontractors, workmen, and materials suppliers, who can make a claim on the bond.


Performance Bonds

The performance bond provides a financial guarantee to the owner that the project will be completed in accordance with the original construction contract. It requires the surety not only to perform the contractor's obligations but should require the surety to pay any subcontractors and materials suppliers upon the failure of the contractor to make such payment. Performance bonds are often required by statute.


Miscellaneous Terminology

Experience Modification Rating (EMR)?

The Experience Modification Rate (EMR) can have a strong impact upon a business. It is a number used by insurance companies to gauge both past cost of injuries and future chances of risk. The lower the EMR, the lower the projected worker compensation insurance premiums will be. An EMR of 1.0 is considered the industry average.

If an engineering firm has an EMR greater than 1.0 the reasons are simple. There has been a worker compensation claim that the insurance provider has paid. To mitigate the insurance company’s risk, the insurance provider will raise the worker compensation premiums. The new increased EMR remains as the basis for the calculation of premiums for 3 years.

Subrogation

Webster's New Collegiate Dictionary defines subrogation as "to put in the place of another." As pertains to insurance it means that after an insurance company pays a claim it then goes after the person who caused the damage (by means of collection procedures or lawsuit). The insurance company is exercising its right of subrogation. In other words, the insurance company takes the place of its policyholder and sues the defendant directly.

"Claims‐Made" versus "Occurrence‐Based" Insurance

With a “Claims‐Made” policy, the policy that was in force when the claim was actually made is the policy that pays the claim. A feature of “Claims‐Made” policies is that if the policy is not renewed, then there is no coverage for any claims made after the termination date. While this makes occurrence‐based insurance the preferable policy form, occurrence‐based insurance is not always available for E&O coverage.

With an occurrence‐based policy, the policy that was in force when the incident actually occurred is the policy that pays even if the claim is made after the policy has lapsed.

Limitation of Liability versus Amount of Insurance

The mere fact that an engineer/firm provides for insurance on a project within the contract does not mean the client has limited the engineer’s/firm’s liability. The “Limitation of Liability” must be addressed separately in the contract by inclusion of the provision as an additional term in any client‐contract agreement. “Limitations of Liability” are not determined or created by the required minimum limits of insurance.


Section 6 PROJECT RECORDS & PROFESSIONAL CONDUCT

Professional Conduct 29

Effective Client Communications

Safety

Inspections

Project Records 32

Billing Practices Guidelines 32

Documentation 32

Report Writing

Categories of Words to Avoid

Engineering "Vernacular" to Avoid

Project Records Retention 37

Records are Discoverable

Records Commonly Requested in Liability Actions


Section 6 PROJECT RECORDS & PROFESSIONAL CONDUCT

Professional Conduct

Effective Client Communications

• The client should clearly understand that the nature of the engineer’s business is the rendering of opinions based on professional technical education and experience for which the engineer is compensated by an hourly fee.

• Do not promise, represent, guarantee, or predict to the client any specific result.

• Before performing any services advise the client of the amount of the fees or the basis for computing the fees.

• Continuously inform the client of what has transpired by periodic status reports.

• If there are long periods of delay, explain to the client the reason for inactivity. Don't put the client in a position where the client must call for an update.

• At a minimum, send copies of reports and self‐explanatory letters.

• Return all client telephone calls on the same day even if there is no valid answer at that point to any question the client may have posed.

• Do not withhold any information from the client regarding any serious problems that develop. It is very rare that such situations improve with time or just go away.

• Do advise the client of likely risks that may be involved and document with letters and/or emails.

• If there are alternative designs or options involving risks, involve the client, make the client very aware of the risks and let the client choose whenever possible.

• Confirm all oral instructions or important conversations with the client in writing , specifically those pertaining to changes in scope and cost.

Safety

During the normal course of providing engineering services to a client as part of a team effort with other contracted individuals or companies, situations may arise that, in an engineer’s professional opinion, are potential safety issues. In these situations, a dedicated engineer’s instinctive response is to do something before someone is injured, however, the engineer must avoid assuming authority to stop work until the issue is addressed. This authority technically lies with the general contractor and there is typically an accepted protocol for communicating this type of information.

Occasionally, in client provided contract documents, there will be a clause that requires that the engineer has the right to stop the work. It is imperative to recognize that this particular clause imposes upon the engineer a duty to stop the work should safety hazards be observed.


The engineer should make every effort to avoid responsibility for methods of performance of construction work, the role of superintendent, sequencing of construction, or safety in, on, or about the job site.

If it is not made clear through the contract that the engineer is not responsible for the above, the engineer is, by law, a potential target for lawsuits by injured workers and other injured third parties.

The engineer should be wary of clauses such as the following where the client proposes that

"the engineer shall be responsible for any losses or injuries which occur at the job site due to unsafe conditions which result from the plans and specifications provided by the engineer."

This is a typical clause that should be avoided at all costs.

Nonetheless, in the event that the engineer observes or becomes aware of a specific job site safety issue related to the engineer’s areas of the engineer’s expertise, the engineer should immediately notify the contractor of the safety issue by a handwritten field note. Next, the engineer should notify the owner or the owner’s representative in writing as to the nature of the issue such that appropriate action can be taken to correct the problem. The engineer should NEVER recommend a corrective action for the safety issue. Simply notifying the contractor that a safety issue exists is sufficient.

Inspections

While not new to the profession, during the past twenty‐five years, the demand for engineering services, which are generally referred to as “Property Condition Assessments” (PCA), has increased dramatically. The need for this type of service generally arises from one of the following situations:

1. Owner desiring to sell a property 2. Buyer shopping for property 3. Organization/Institution developing a long‐term Capital Renewal Plan for internal use.

This is very common with colleges and universities. 4. In construction, engineer is tasked with monitoring construction activities for contract

and/or specification compliance.

Depending on the scope of the particular project, a PCA can potentially involve teams of engineers from every facility related discipline.

If possible, the word “inspection” should be avoided and replaced with the term “visual observation”. The word “inspection” has a connotation that once something has "passed inspection," it is somehow certified as meeting contract specifications or that there are no existing flaws.


Following is a list of "DOs" and a list of "DON'Ts" to assist with "inspections," or visual observations”:

"DOs" for INSPECTORS/OBSERVERS

• DO inspect and test in a timely manner such that the contractor's work is not delayed.

• DO keep a daily report or log.

• DO ask the contractor how he proposes to correct a mistake rather than telling him how to do it.

• DO note whether the prime contractor is doing his job to assure that his subcontractor's work meets contract standards.

• DO know the plans and specifications.

• DO be friendly with everyone on the job. but familiar with none.

• DO give notice of rejection in a reasonable time after completion of tests or acceptance may be assumed, or worse, implied.

• DO insist that the contractor take positive steps to provide a safe job and complies with OSHA in your work areas. However, DO NOT direct the contractor's safety operations or enter areas you feel are unsafe.

• DO settle matters of a controversial nature by mutual agreement on the job whenever possible. Avoid formal disputes.

"DON'Ts" for INSPECTORS/OBSERVERS

• DON'T demand a higher quality of work or better materials than what is specified in the plans and specifications.

• DON'T waste workmen's time by carrying on long conversations with them.

• DON'T dictate or even suggest a method of construction to the contractor. Being wrong could open areas of enormous liability.

• DON'T cause the contractor to constructively accelerate his work.

• DON'T give decisions on matters strictly of a design nature. Leave that to the proper party such as the Architect or Design Engineer.

• DON'T deal with a subcontractor. DO go through the prime contractor with proper communications and protocol.

• DON'T discuss differences of opinion among the inspection staff in the presence of the contractor.

• DON'T argue with the contractor's personnel. If a dispute arises DO refer it to the resident engineer or project manager.


Project Records

Billing Practices Guidelines

Invoicing on a regular basis as per contract or agreement is a simple and effective method to reduce malpractice claims exposure by discovering problems or, situations that could become problems, early, when they can be more easily resolved and before they escalate to crisis or emergency levels. Some guidelines in effective billing practices are:

• Provide a full and detailed description of all applicable rates, billing practices and estimates during initial meetings and repeat within the proposal document. Determining any client specific billing requirements and willingly accommodating those will usually help expedite payment of all future invoices.

• Provide the client with a clear itemized statement of charges based on the proposal and the contract. (Be certain the invoices are prepared in accordance with the client's instructions.)

• Have a standardized method for confirming receipt of the bill, correcting errors promptly and reminding clients of overdue accounts.

• Submit invoices for work performed on a regular and timely basis as should be defined in the contract documents. Do not accumulate charges over long periods.

Documentation

A successful legal defense depends heavily on accurate and complete project records. The cost of generating and maintaining project records during the course of a project is miniscule compared to the cost of preparing a legal defense without the documentation.

• Use preprinted forms and phone logs, identifying individual participants on the project preferably by name but at minimum by initials.

• Maintain accurate records of all telephone conversations pertaining to any issue of substance and is project related.

• Make notes of all field visits, owner/client visits, meetings and other similar activities.

• Use digital recorders and digital cameras to the extent that at any particular time there is more documentation than necessary rather than a lack thereof.


Report Writing

Perhaps the two most fundamental rules to writing engineering reports are:

1. BE EXACT AND PRECISE. 2. SAY WHAT YOU MEAN AND MEAN WHAT YOU SAY.

• State a clear purpose.

• Identify owner/client information provided.

• Clearly define how tests or evaluations are to be accomplished. Compare report with requirements of proposal for consistency and explain any deviations.

• Choice of words should correctly describe your intent. For example, "will" or "shall" are appropriate at times, but if you can't be that definite, "may" is perhaps more appropriate.

Categories of Words to Avoid

Words to avoid generally fall into three categories:

Extreme words

Any Optimize Final

All Minimize Full

None Maximize Equal

Words of ambiguity

Inspect Supervise

Words of promise

Guarantee Ensure Assure

Warrant Insure Certify


Engineering " VERNACULAR " to Avoid

Engineering Vernacular Preferable Word(s)

Approve

Review (Decide. Judge. Consider) Work is in general conformance

Certification Memorandum

Control (the job), (Regulate, Direct, Manage)

Control Tests, Compaction Tests. Guidance

Or Equal

Or Equivalent

Essential (it is)

Considered. Advised, (Suitable. Satisfactory)

Examination (Determine)

Observation, Reviewing. Study. Evaluate. Look over (the job)

Inspection

Periodic observation of work in progress: Look over (the job), Review. Study

Insure (to be sure)

So that

Investigation (soil)

Exploration. Reconnaissance (Probe. Sounding. Search)

Necessary (it is)

Considered, Advised. Study. Observe (Suitable, Satisfactory)

Required

Considered, Advised

Satisfactory operation

Operation as specified

Supervise

Observe. Review. Look over (the job). Guide. Guidance

Assure (to insure)

So that

(Estimate)

(Approximate)


Superlatives Suggested Substitutes

All

Some, Most. Usually

At least, All times

All if practicable, Sometimes

All Circumstances

In most cases

Any When practicable

Bet

Recommended

Complete (investigation)

Scope limited to:

Critical

Might or may be...

Essential (it is)

Recommended. Advised

Extremely

(do not use or qualify very carefully)

Final


Inevitable


(Is, Are, Will, Shall)

(qualify)

Maximum

((do not use or qualify very carefully) e.g. “to the fullest extent possible”)

Minimum

((do not use or qualify very carefully)e.g. to the least extent possible”)

Must, Must always, Must do, Shall

Should

Never

Usually

No, None

Usually

Not less than (More than)

Usually

Obvious

Apparent

Possible

Practicable

Properly

Recommended

Readily

May be


Safe, unsafe

(qualify, explain, or define)

Sound


Stable


Suitable


Sufficient


Thorough



Project Records Retention

Records are Discoverable

PROPER and complete documentation is the first line of defense, but knowing what NOT to document is also very important.

• Avoid recording opinions, conclusions and references to personalities.

• Do not include profanity or disparaging comments in any field or informal office notes unless specifically quoting someone else's personnel.

• Unless you have the authority and/or are willing to charge off an activity to marketing or sales, do not perform gratuitous services.

• Do not assume responsibility for any safety matters unless clear responsibility has been established.

Records Commonly Requested in Liability Actions

Records that may be requested during the course of liability action and the discovery process include but are not limited to ALL OF THE FOLLOWING:

• Contract documents • Correspondence, memoranda and emails • Progress reports • Daily reports and field notes • Engineer’s calculations, conclusions and recommendations • Project meeting minutes and notes • Project photographs • Cost records • Test reports • Invoices • Change orders • Design drawings and sketches • Shop drawings and shop drawing logs


SUMMARY

While risk management is far from an exact science, a great many of the areas of potential conflict and ultimate liability have been identified and guidelines have been established to help avoid the conflict and avoid or minimize potential liability.

Regardless of how competent an engineer is or the care taken to perform impeccably, conflict, at some level of criticality, can easily arise at some point due to miscommunication, unforeseen circumstances or just plain old unintentional mistakes.

Being well prepared could be described as another form of valuable insurance.

Risk Management

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