Architects, Engineers, and Design Professionals

Tender the claim to the professional liability (E&O) carrier promptly and retain defense counsel before making statements or producing documents. Institute a litigation hold and gather all project records, including emails and (if applicable) text or other forms of messages.

Professional E&O claims often arise when there are fees still owed to the A/E professional, and sometimes arise mid-project. Depending on the applicable contract language, design firms may have a right to stop work, but should always first consult an attorney about the risk that withholding service could exacerbate the alleged liability claims.

The attorney for a plaintiff suing a licensed architect, engineer, or land surveyor for professional negligence must, under Code of Civil Procedure section 411.35, file and serve a declaration under oath attesting that they have consulted a qualified expert who has confirmed a reasonable basis for the claim. The declaration should be served with or before the complaint. The statute allows a sixty-day extension to file the certificate where the limitations period would otherwise prevent the required consultation. But in Curtis Engineering Corp. v. Superior Court (2017), the court held that this grace period does not extend the underlying statute of limitations, so a late certificate does not relate back to the original complaint. In most situations, if the certificate is not filed and served before the statute of limitations expires, the claim is barred and should be dismissed.

The single most effective protection is a precise scope of services, defining clearly what the firm is and is not undertaking, because liability tends to expand into whatever the scope leaves ambiguous. Equally important is the standard-of-care provision: language that promises a result, warrants or guarantees the work, or commits the firm to the "highest" standard rather than the ordinary professional standard of care can both increase exposure and void E&O coverage, since professional liability policies generally do not cover liability the firm assumes by contract beyond its own negligence.

After scope, indemnity and limitation-of-liability clauses are the principal contractual tools. Limitations of liability, often capping recovery at the professional’s fee or a fixed sum, are enforceable for design professionals under Civil Code section 2782.5 and Markborough California, Inc. v. Superior Court (1991), provided the parties had an opportunity to negotiate the provision. The protection is strongest in commercial dealings between sophisticated parties; courts sometimes decline to enforce limitations of liability in take-it-or-leave-it form agreements signed by unsophisticated counterparties such as individual homeowners.

A properly formed corporation or LLC shields the principals' personal assets from the firm's general business liabilities and from claims arising out of the conduct of other employees. What entity structure cannot do is insulate a licensed professional from liability for their own negligent professional acts; California holds individual professionals personally accountable for their own work regardless of the entity. In practice, the more important backstop for individual exposure is the firm's E&O policy, which generally extends coverage to the firm's principals and employees as insureds, not just the entity.

Public entities will often not negotiate the terms of their standard agreements, but firms should still look for and push back on provisions that could result in uninsured liability such as a standard of care higher than ordinary professional standards, warranties or guarantees, requirements for “defect-free” plans and compliance with “all laws,” a duty to defend in the absence of fault (although that issue is largely resolved by Civil Code section 2782.8) and liquidated damages. In general, E&O policies exist to cover claims arising out of professional negligence, not claims that only exist (like warranty claims) because of contractual obligations.

Purely economic losses, such as lost profits, with no personal injury or property damage, are recoverable in contract; but under the economic loss rule, they are not recoverable in tort (negligence). In general, that means design professionals and others cannot be liable to parties for economic damages without a contract (although economic damages may still be available if they are related to physical damage).

In new residential construction, the SB 800 Right to Repair act sets forth a list of defects that owners can sue on even if the damages are purely economic; but otherwise, the economic loss rule has been consistently applied in the construction context since the California Supreme Court decided Aas v. Superior Court in 2000. Aas held that a plaintiff cannot recover in negligence for construction defects that have not yet caused property damage or personal injury.

Some take the view that there is an exception to the economic loss rule arising from Beacon Residential Community Assn. v. Skidmore, Owings & Merrill (2014). Beacon Residential held that the “principal architect” on a residential project could be liable to future homeowners even without a contract. But it is debatable whether Beacon Residential actually creates an exception, because that case did not analyze whether the homeowners’ alleged damages were economic losses.