How do you avoid assuming uninsurable risk?

Design and construction of the built environment involves risk. Managing that risk is the responsibility of the firm’s risk manager. Typical strategies include accepting risk that can be controlled and allocating risk to others who are better suited to control or accept the risk. For risk not borne by other project participants, insurance is the primary risk transfer tool for architects. Professional liability insurance is available for those acts that normally fall within the standard practice of architecture. A careful read of your policy or discussion with your agent will show that certain types of risk are not covered by the policy. Avoiding the assumption, often unwittingly, of these risks requires knowledge, careful contract negotiation, and a proactive approach during the delivery of architectural services.  

Identifying the risk

Fortunately, the insurance carriers do an excellent job of identifying typical uninsurable risks. Taking advantage of the educational offerings of the carriers, the AIA’s Risk Management Program, and other available resources can quickly raise your awareness of potential issues. Additionally, standard form agreements, such as AIA Contract Documents, align well with the insurance industry coverages and are therefore a good starting point in contract negotiations.

The challenge often arises when clients, and their attorneys, offer manuscript agreements or deeply altered versions of standard form contracts. When you accept contract language that increases your risk beyond that required by law or the standard of care, you will likely find no insurance coverage for damages resulting from that assumed risk. Examples of potentially uninsurable risk include the following:

  • Broad indemnification obligations
  • A duty to defend the client or pay the client’s attorney fees
  • Agreeing to a higher standard of care than required by law
  • Agreeing to an impossible performance, such as complying with all laws and statutes
  • Penalties, fines, and liquidated damages assumed by contract
  • Responsibility for jobsite safety
  • ADA compliance suits and fines (a civil rights complaint)
  • Certifications, guarantees (such as achieving a certain LEED standard) and warranties
  • Prevailing parties clause – attorney fees

Avoiding incurring the risk

Knowing and identifying the risk is step one to avoiding the assumption of uninsurable risk. Keeping the obligation out of your agreement is the next step. Explaining to the client that this type of risk is not covered, and may weaken the protection the owner seeks, is often enough to remove the problem language. Carriers often provide alternative language that can help negotiations, and most carriers are willing to review contract language to help identify uninsurable contractual risk.

Disclaiming the risk

Another strategy is to develop language of your own that specifically states you are not responsible for certain types of risks. For example, including language that says you will not provide certifications to third parties without prior approval of language can help avoid problems when the project’s lenders often ask for guaranties of project performance well beyond the standard of care.

Allocating the risk to another party

In addition to stating the risk is not borne by you, the agreement can be further strengthened by clearly allocating the risk to another identified project participant. Many projects have someone other than the architect providing cost estimating. Your agreement can clearly state your reliance on the other party and require that they bear the risk of errors or inconsistencies in their cost estimates. AIA document B103-2017 includes language addressing the architect’s reliance on a third-party cost estimator.

Performing services consistent with risk allocation

Lastly, caution should be exercised to avoid actions of the firm’s employees taking on the risk you avoided in the agreement. AIA contracts clearly state that jobsite safety is the contractor’s responsibility. If an unsafe condition is observed by you or an employee of the firm, report it to the general contractor and follow up with correspondence that reaffirms that safety is his—not your—responsibility. Similarly, if certifications are requested near the end of a job, ensure that the principal in charge of the project—not just any team member—reviews and signs off on them.

A proactive approach to discussing uninsurable risks with the entire staff before delivering services—and a watchful approach during the project—can go a long way to prevent unnecessary trouble.

For more on this subject, visit the Risk Management Program's website.

AIA has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice.

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