Did You Know?

“Did you know” is a new feature of our 2016 website and newsletters.  In this section we will post brief informational items from the legal and insurance professions that will be of importance to most architects.

The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, first speak with a qualified professional.

Be forewarned! If an architect agrees (or the court finds) that his relationship with his client is of a fiduciary nature, the result could have serious and unintended consequences; that is, not only would the architect’s standard of care be raised to a much-harder-to-meet “higher” standard, but also the architect’s professional liability policy may not cover such claims.

In California, “[a] fiduciary relationship is “ ‘any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. …’ ” (Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29 [130 Cal.Rptr.2d 860], internal citations omitted.) This imposes a higher standard of care upon the architect than his typical professional standard of care. More importantly, an architect’s professional liability policy provides coverage only for the architect’s professional negligence (e.g. when the architect’s services have fallen below his professional standard of care). So, if the architect has agreed to provide his services consistent with those of a fiduciary, the architect may find himself without professional liability coverage for this type of claim.

The best place to avoid creating such a fiduciary relationship is in the client/architect agreement, by avoiding direct or indirect language creating such a relationship. For example, delete language that the client/architect relationship is that of “trust and confidence,” or that the architect agrees only to act only in the client’s interest, and not his own. A more direct approach is to add a simple sentence negating the relationship, such as: “This agreement is not intended to create a fiduciary relationship between client and architect.”

AIAOC thanks Michelle Generaux for her helpful contribution!

Michelle Generaux, Partner
Murtaugh Meyer Nelson & Treglia LLP
2603 Main Street, 9th Floor Irvine, CA 92614
Telephone: (949) 794-4031

Murtaigh, Meyer Nelson & Treglia

What follows is a simple explanation of California’s much-trumpeted Crawford problem. Unfortunately, because this problem involves the confluence of two arcane and unintuitive areas of law, any simple explanation is wrong; but the following is not as wrong as others.

To begin with, a fundamental problem with which all design professionals are confronted is this: all A/E E&O policies provide coverage only to the extent of an insured’s fault, and not for contract obligations or risks. In particular, the standard insurance agreement provides coverage for damages that the insured firm becomes “legally obligated to pay because of Claims that arise from the insured’s negligent act, error or omission in the performance of its professional services…” While all E&O policies contain a standard provision that purports to provide contractual coverage, in contrast with CGL policies, the E&O contractual coverage is illusory, with a typical provision providing: “We will not cover you for any liability you assume under any contract or agreement, whether written or oral, including but not limited to hold harmless and indemnity clauses, agreements to defend another, warranties, guarantees, certifications, penalty clauses or liquidated damages; however, this exclusion shall not apply if you would have been legally liable in the absence of contract or agreement because of your negligent act, error or omission in the performance of your professional services.” These coverage provisions have been universal since at least the 1970s; but only in the last few years have E&O insurers asserted them. In any event, they are alive and well and being aggressively asserted today, and should not be taken lightly.

In combination with this severe limitation of E&O insurance coverage is the California Supreme Court’s July of 2008 decision in Crawford v Weather Shield that if a contractual indemnification clause does not address the duty to defend (which has been the norm for decades), then by default, except for some governmental contracts, pursuant to California Civil Code §2778 that clause will be interpreted as requiring an immediate duty to defend even if the indemnitor is found to be totally innocent, essentially an obligation like that of an insurance company which must automatically defend its insureds as soon as asked to do so – which is to say that an innocent design professional indemnitor would have an immediate uninsured contractual obligation to retain and pay for its developer client’s defense attorneys. While unintended and nonsensical, given the current state of the E&O insurance industry and California law, this result is now the accepted norm.

In drafting contracts this problem can be addressed in any number of ways, but the following clause is one simple way to coordinate the indemnification defense obligations with standard insurance provisions so that the defense obligations are both fair and funded by insurance:

“The other provisions of this agreement notwithstanding, in the event of a claim within the purview of any indemnification provision, the indemnitee will control its own defense, and at the time of claim resolution the indemnitor will provide reimbursement for those defense costs caused by any negligence or willful misconduct by or attributable to the indemnitor.”

Murtaigh, Meyer Nelson & Treglia