Just when the construction industry was about to emerge from the doldrums, a series of game-changing events has raised the stakes for some of its major participants. Design professionals and contractors face increased risk and liability following the introduction of new design standards and several precedent-setting court decisions.
“The convergence of recent activities is a call to action for architects and contractors,” says Steve Erigero, a partner specializing in commercial litigation at Ropers Majeski Kohn & Bentley PC. “They must take immediate steps to minimize exposure.”
Smart Business spoke with Erigero about the ways design professionals and contractors can benefit from the rebound while limiting their exposure.
What’s behind the rise in liability for contractors and design professionals?
Design professionals were largely immune from liability under California Senate Bill 800, but that changed when a California appeals court ruled that homeowners and homeowners associations could now sue them for defects.
Then, the California Legislature eliminated another safe harbor, when it decided that contractors and developers could no longer pass liability to downstream parties like subcontractors.
Finally, the escalation of green building projects has resulted in a host of new design standards and certifications. Professionals who fail to comply with Leadership in Energy and Environmental Design or other green building standards may be held liable for any shortcomings.
What are the most common risks associated with development projects?
Architects can be liable for construction defects, delays or cost overruns resulting from plan deviations as well as the improper installation or under-performance of specified building materials. For instance, they can be liable for a leaky window, even when the framer or product manufacturer is at fault. In addition, design professionals risk becoming a deep pocket if a general contractor is underinsured or files for bankruptcy.
To protect themselves, architects need to perform visual inspections throughout the course of construction and make sure their contracts include clauses that limit pass-through liability.
How can professionals minimize exposure to risk and liability?
The first step is to conduct a risk assessment and an insurance review. Even a high-deductible insurance plan may be better than going bare, but you need facts to assess your exposure and determine your risk tolerance.
Next, be cautious about signing indemnification agreements given the court’s reinterpretation of Senate Bill 800’s statutes. A contract review may reveal opportunities to insert clauses that limit liability and damages, especially in California.
Finally, consider the capitalization and financial stability of builders and developers before taking on a project. You certainly don’t want to be the last guy standing in the event of litigation.
How can professionals head off potential problems by working with legal counsel?
Besides helping with contract and insurance reviews, your lawyer can alert you to possible trouble by monitoring litigation activity on your current projects. It may be possible to mitigate risk by purchasing insurance if you receive a timely warning. He or she can help contractors decide whether to hire employees or continue subbing work out. Since contractors can no longer pass-through liability, it may be less risky and more profitable to exercise greater control over the construction process. Your lawyer can even help you compete for new deals by creating several versions of the same contract with varying levels of liability. That way, you can tailor your risk each time you bid on a project.
The key is to take immediate action so you don’t miss out on the long-awaited rebound in the construction industry.
Steve Erigero is a partner, Commercial Litigation, at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2013 or SErigero@rmkb.com.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC