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Considering Standard of Care Provisions in Green Construction Contracts

One of the most critical provisions in any contract for professional design services relates to the standard of care under which the design professional will be required to render its services. In the absence of contract language to the contrary, a design professional will be held to a common law standard of care commensurate with that of other professionals providing the same services to a geographically similar community. However, on a green building project, an owner may seek to retain a design professional specifically because of its sustainable design expertise. Accordingly, it may attempt to hold the design professional to a higher standard of care than that which prevails in the industry. This may be problematic for both sides for a number of reasons. Professional liability insurance policies provide insurance for legal liability that arises out of negligent professional acts, errors, or omissions. However, if not properly vetted, standard of care provisions have the potential to trigger standard exclusions to such policies. This article suggests two such exclusions and strategies for owners and design professionals to consider as they draft and negotiate construction agreements for green building projects.

There are two key questions for owners and design professionals to consider in connection with standard of care provisions in construction agreements: (1) has the design professional agreed to perform at a higher standard of care than that which prevails in the industry? and (2) has the design professional provided the equivalent of a warranty or guarantee to the owner with respect to the services that it will render? Language that obligates the design professional to satisfy “the highest standards of the profession” or “the standards of similar firms with extensive green design expertise” is ambiguous and may allow an insurance carrier to argue that the design professional agreed to perform with a higher level of care for which insurance coverage may be unavailable. This is because most professional liability insurance policies contain an exclusion for assumptions of liability that are not imposed by law (i.e., by agreeing to perform at a higher level than the prevailing common law standard, the design professional will not be covered for any resulting claims of negligent design services). Such language may also be construed by a court to be the functional equivalent of a warranty or guarantee in the event of a dispute; as set forth below, most professional liability policies exclude coverage for these types of claims as well.

Performance-based (i.e., “this design will achieve a LEED Gold rating” or “will reduce operating costs by 50 percent”) language in a standard of care provision may also be problematic if the insurer believes that the design professional has provided the owner with the equivalent of a warranty or guarantee. For example, in a case out of the Eighth Circuit, an engineer agreed to provide an owner with “[t]he necessary engineering plant layout and equipment design and the on-site engineering supervision and start up engineering services necessary for the construction of a hully by-product facility capable of reducing a minimum of 7.5 tons of rice hulls per hour to an ash and producing a minimum of 48 million BTUs per hour of steam at 200 pounds pressure.” Arkansas Rice Growers Co-op Ass’n v. Alchemy Indus. Inc., 797 F.2d 565 (8th Cir. 1986). The plant never operated as intended, and the owner sued the engineer. The court expressly held that the design professional had “warranted that a plant constructed according to the design was capable of achieving the performance criteria” and noted that “[t]he evidence is undisputed that the plant was never capable of achieving the performance criteria on a sustained basis.” Professional liability policies generally exclude coverage for claims arising out of the breach of a warranty or guarantee. Both owners and design professionals should thus review language in their construction agreements for provisions that could potentially be construed by an insurer as the equivalent of a warranty or guarantee, particularly with respect to the project achieving a certain level of LEED or other third-party certification.

It is also important to note that the form standard of care language in the AIA’s B101 Owner – Architect Agreement (2007), which is found in Section 2.2, states that “[t]he Architect shall perform its services consistent with the professional skill and care ordinarily provided by architects practicing in the same or similar locality under the same or similar circumstances. The Architect shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project.” This language mirrors the common law standard of care which a professional liability policy will insure against. However, exactly what constitutes the “professional skill and care ordinarily provided by architects (or engineers, as the case may be) practicing in the same or similar locality under the same or similar circumstances” is a much thornier question; this standard is, by nature, not objective but subjective; it changes periodically based on the prevailing level of competency of other similarly-situated professionals in the same geographic region.

Although professional liability insurance will track the prevailing standard of care, as we noted previously in an article over at gbNYC, and as attorney/architect Fred Butters discusses extensively in his article in Understanding the Business of Green, there is no question that LEED and green building practices generally are shifting the standard of care for design professionals to a higher level. For example, new obligations in the 2007 version of the AIA documents and Canon of Ethics require the architect to recommend sustainable design alternatives to the owner. Moreover, the proliferation of the LEED AP and other representations that many architects and engineers are making throughout the industry with respect to their sustainable design expertise is increasing the expectation that such design professionals will deliver a design that performs at a higher level than in the past. The danger here is for design professionals who are not sufficiently well-versed in green design; if the standard of care has increased, are such design professionals failing to satisfy the prevailing standard of care and thus exposing themselves to claims for negligent design work? This is not an insurance coverage question, but nevertheless an important consideration for both construction attorneys and insurance professionals to monitor closely in the months ahead.

Owners and design professionals must consider the foregoing standard of care considerations in connection with green building projects and should discuss the professional liability insurance coverage implications of such provisions with their insurance carriers if they have yet to do so already. A more general discussion of whether certain representations in standard of care provisions will be deemed by the carrier as raising the standard of care beyond the prevailing common law standard is also advisable. Regardless, it is critical for design professionals to keep in mind that because the standard of care is a moving target, paying careful attention to the language in such provisions during the course of construction contract negotiations for a green building project is imperative.

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5 Responses to Considering Standard of Care Provisions in Green Construction Contracts

  1. Cliona May 16, 2009 at 1:36 am #

    Why isn’t there standard language to address this issue? Would this be something the AIA would address?

  2. Geoff White May 16, 2009 at 3:50 am #

    Great post Stephen. The standard of care issue is likely to create some serious problems for the design profession when dealing with some of the projects created as a result of the Recovery Act. I would encourage clients on the design, construction and developer/owner side to take an active role in working with the design professionals insurance carriers in regard to coverage issues pertaining to both the standard of care detailed and the consideration of whether LEED credit templates themselves rise to performance guarantees and could also void coverage, as it is in everyone’s best interest to make certain that won’t happen. This might take some front end time and timing frustrations, but it sure beat the alternative.

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