Have you been involved in a claim or lawsuit as a result of issues arising on a project? Hopefully the answer is no, but a more realistic answer is “not yet.”

Have you been involved in a claim or lawsuit as a result of issues arising on a project? Hopefully the answer is no, but a more realistic answer is “not yet.”

In this economy everyone is looking to cut back on expenses, especially insurance companies. If issues arise on a project site, someone will be looking to be compensated, and you don’t want to find yourself unprotected. A good understanding of risk management and the development of a risk management program will protect you and reduce your liability should an issue arise.

Contracts

The biggest piece of the risk management puzzle is your contract. Contracts are complex legal instruments between you, the water damage restoration professional, and another party such as the homeowner or the building owner/manager. They cover myriad business and legal issues. If an issue arises during or after completion of the project that results in a claim against you, the courts look at the contract as the defining document and tend to disregard all other outside information. This is known as the “four corners rule.”

Most likely, you work under an emergency work authorization (“EWA”) which in and of itself is a contract. The EWA most likely will state the scope of the work, fees, and schedule but will have very little substance to the document to protect you should things go awry. It is a good idea to follow up the EWA with a full contract laying out the business and legal terms of the project you are working on. You may want to consider adding language to your EWA that specifically states that the project is contingent on the execution of a full contract. There are many good form documents out there to use as boilerplate language, but be careful to tailor these contracts to your specific business.

As each project is unique and complex, it is not possible to cover all issues that may arise. However, some general tips on what a solid contract should cover include:

• Identification and contact information for all parties involved in the project, which should include the property owner, property manager, and any applicable insurance companies. This is especially important in the water damage industry, as the property owner’s insurance company is most likely the entity that is paying the bill.
• The scope of the work, which can often be an attachment to your form contracts. The scope of work should be specific and point out what you will be doing as well as what you will not be doing for the project so there are no questions as to what you were responsible for should an issues arise.
• Payment provisions should clearly state who is paying you and what your terms for payment will be. Be sure to avoid pay-when-paid or pay-if-paid clauses where the property owner would not be on the hook to pay you unless and until the insurance company pays the property owner. (Note that some states have regulations against these types of provisions).
• Clearly state the default and termination provisions, making sure that you have the right to terminate the contract with or without cause for termination. Include methods for handling any delays or changes in the project, including how you will get paid for any such changes in the project, for situations such as encountering anything previously concealed or unknown.

Most contracts include assumption of risk provisions, which can protect a party from future claims or lawsuits so you want to pay particular attention to these provisions. Make sure any assumption of risk provisions are consistent with the insurance polices that you carry. For example, professional liability insurance will not cover claims involving warranties or guarantees of your work. If you are performing professional services, you want to be sure the contract doesn’t require you to warrant your services. It is a good idea to include standard-of-care language to make it clear that you will be performing services to the same level and standards as a reasonable water damage restoration professional. This gives the courts a standard to determine professional negligence.

Most contracts contain an indemnity provision, which in the event of a loss to the property owner, the water damage restoration professional will be asked to assume any liability the property owner has acquired due to acts of the water damage professional. In addition, be sure to include any known limitations of the project. Clearly specify any insurance you are required to carry and that the property owner is required to carry. For example, you want to make sure that if the building burns down due to no fault of yours, the property owner is carrying insurance to cover the damage; otherwise, you may find yourself on the other side of a lawsuit.

Contracts with Subcontractors

If you are hiring subcontractors or outside consultants, you want to execute a full contract with each of them. Your subcontractor and consultant contracts should contain proper assumption of risk language so that you will not be responsible for any negligence on their behalf. In this situation you may want to consider a pay-when-paid or pay-if-paid clause whereby you would only be required to pay your subs if and when you get paid. In general, make sure your subcontractor/consultant contracts contain a flow-down provision, where the sub would assume any risk toward you that you assume toward the property owner in your contract. A good way of making sure this happens is to include a provision in which your contract with the property owner becomes part of the subcontractor/consultant agreement.

Other Risk-Management Considerations

An important advantage to developing a risk-management program for your company to follow is that it will help you avoid liability lawsuits and claims. Along with having strong contracts there are myriad other components to a risk management program.

Communication at all stages of the project is key. Know your points of contact up front, and be clear and concise on what is going on with the project at all times.

Communication should be documented in writing where appropriate, and be sure to keep a copy. There is an art to delivering bad news; be sure to communicate problems right away and it is helpful to provide a solution to the problem at the same time. An email at 5:00 p.m. on Friday is generally not the best time to deliver such news. Remember to stay professional in all communications; anything may come back to you in a courtroom someday. One rule of thumb is to never send anything you wouldn’t want to be posted on a public billboard.

Documentation and record keeping are important when a suit arises. Document everything on the project! Don’t assume that somebody else has documented something on the site; it may not always be in your favor. Keep written logs on change orders, payment applications, observations at the site, weather, problems or issues encountered on the site, etc. Be sure to apply good record-keeping practices as specified in the IICRC S500 regarding methods and the completion of the project. Some records to consider keeping include administration information; executed contracts; insurance certificates; certificates of completion; job documentation and any other records required by law in the jurisdiction of the project. Check with your state as to the required timeframe to keep all legal records.

Applying good risk management practices will reduce future liability. Consider talking to a risk management consultant on what you can do to manage your risk.