Claim of the Week: Stay In Your Lane

The insured, a principal of an architectural firm that focused primarily on commercial projects, was approached by one of its largest clients to design his personal residence. The client was a friend of the principal and both the client and the insured served on the board of a charitable organization in their local community. The insured had no experience in residential design work but took this project as a “favor” for his friend and top client.

Prior to the project starting, the insured submitted a typical proposal outlining its services and fees. The client brought the proposal to his wife, who was an attorney. She advised the insured that the contract needed revision and would get back to him. Meanwhile, after the next charity board meeting, the client introduced his wife’s brother, a structural engineer, to the insured. The client wanted his most trusted designers working on his new home and asked the insured to work out the arrangements for his brother-in–law to join the team. The insured was hesitant at first, but the engineer’s firm had an impressive CV and the level of enthusiasm swept away any concerns.

The insured brought the structural’s proposal back to his shop and reminded his team this was a personal project for their top client. They promptly reviewed and signed the subconsultant agreement. Meanwhile, the insured never received the revised owner-architect agreement back from the client.

The client was anxious to start the project and pushed the bidding process forward. The insured’s plans were only 85% complete, but the client sent them out to bid. The house was originally designed to be 5,000 square feet with a budget of $700,000. During construction, the client and his wife increased the size of the house to 6,700 square feet and the projected cost of the house increased to $1,100,000. The increased cost was due not only to the additional square footage, but also for the material upgrades the client’s wife added to the project. To make matters worse, the fees the insured proposed at the start of the project were lean to begin with, as he viewed this as a personal favor. The relationship with the client was significantly strained because of the increased costs and inadequate professional fees to deal with the expanded scope.

Mid-way through the project, the foundation was exhibiting significant distress. An investigation uncovered that the structural fill used was unsuitable and the project came to a halt. When the insured turned to the structural engineer to resolve the problem, the strain with his clients turned to acrimony. They demanded that the insured clean up the mess that he created, and they also claimed that he was the cause of the cost overruns. Because of his personal relationship, the insured let his guard down and admittedly did not document this project in his typical fashion. Besides his painful recollections of the countless non-billable hours he spent with the client’s wife, there simply was not much in the way of documentation of the owner-driven changes.

To add to the confusion, the client’s wife also worked directly with the contractor on change orders. Frequently, the change orders were signed without consulting the insured. In some instances, the client signed the change orders against the advice of the insured. The insured did not document its objections.

The remedial work to the foundation cost $150,000 and the project was over budget by $400,000. The insured’s top client and close personal friend sued the design firm. To complicate the insured’s position even further, his firm signed a subconsultant agreement with the structural engineer that contained an enforceable $50,000 limitation of liability clause. In doing so, they effectively assumed responsibility for all of the structural engineer’s mistakes that exceeded $50,000. This matter eventually settled for $350,000. The legal and expert fees exceeded $60,000. With a $100,000 dollar deductible this was a painful lesson both financially and personally.

Lessons Learned

--If you don’t get a written contract –you need to consider not giving your services. -----Be sure not to give a limitation of liability to your subconsultants, if you have not negotiated one with the owner.

--Beware of retaining unknown or owner recommended subconsultants.

--Project documentation of owner driven changes is essential regardless of relationships.

This Claim was selected from the November 2008 Agents Quarterly Newsletter of X.L. America, Inc.

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