Setting Your Record Retention Policy

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                                        A L o s s P r e v e n t i o n N e w sl e t t e r f o r t h e D e s i g n P ro f e s s io n

MSP PL 03/02: “Setting Your Record Retention Policy”                                                                                                     March, 2002

                                Setting Your Record
                                 Retention Policy
                               Paperwork. The modern design firm                                             Regardless of why a claim occurs, a
                           is drowning in it. Plans, reports, sched-                                     firm’s defense will largely rest on its
                           ules, requests for information, technical                                                ability to produce records of
                           calculations, memos and other cor-                                                          what actually happened.
                           respondence are scattered across a                                                          That is especially true if the
                           variety of mediums: computer                                                                claim occurs years after
                           disks, blueprints, photo-                                                                    project completion as there
                           graphs, and the old staple:                                                                   are fewer other means
                           paper — reams of it.                                                                         (e.g., witnesses) to confirm
                               Once a project is com-                                                                   your side of the story.
                           pleted, the question of                                                                              The law tradition-
                           what to do with all these                                                           ally has offered design firms some
                           records arises. Should a                                                      protections against “stale’” claims –
                           firm keep them? If so, how                                                    those started so long after the work was
                           long should the firm keep them? And                                           completed that the firm couldn’t be held
                           what records should it keep? The answer                                       reasonably responsible. These protec-
                           is: it depends.                                                                                                          (Continued on page 2)

                           A Matter of Liability
                                                                                                         In This Issue:
                               The issue of how long to retain re-
                                                                                                         Setting Your Record Retention Policy…..…...1-4
                           cords usually revolves around the need
                           to defend your firm against charges of                                        Statutes of Repose.……..………….………….2

                           negligence and professional liability.                                        Do You Ever Use Subcontractors?……….…….4
                           Simply put, a consulting firm that pro-                                       3rd Commandment of Loss Prevention                            5
                           vides a professional service may find it-
                           self sued for negligence long after its
                           work is done and the project completed.
                                                                                                                                     Published by
                               These claims can come years –
                           sometimes decades – later and involve                                                 Cavignac & Associates
                                                                                                                      I N S U R A N C E B R O K E R S
                           problems that have more to do with poor                                                         License No. OA99520
                           maintenance and upkeep than initial de-                                                      1230 Columbia Street, Suite 850
                           sign errors. Whatever the time lapse,                                                         San Diego, CA 92101-3547

                           your firm can still be the princi-                                               Phone: 619-234-6848! Facsimile: 619-234-8601
                           pal target.                                                                          Web Site:
Record Retention (Continued from page 1)
                                                                                Statutes of Repose
                                                                           AL   13 years
tions are usually embodied in two areas of law: statutes of limi-          AK   10 years
tations and statutes of repose.                                            AR   5 years for property damage
                                                                                4 years for personal injury
Statutes of Limitation                                                     AZ   8 years
                                                                           CA   4 years for patent defects
    Statutes of limitations set time periods in which a party can               10 years for latent defects
file a lawsuit once a defect has been discovered or an injury              CO   6 years
caused. This can be problematic as the discovery of a defect or            CT   7 years
an injury could happen at any time — often long after the work             DC   10 years
has been completed. That means that a firm’s exposure to a                 DE   6 years
                                                                           FL   15 years
claim could theoretically run forever
                                                                           GA   8 years
    So, while statutes of limitations do offer some protection, it         HI   10 years
is a thin protection at best. Recognizing this, several profes-            IA   15 years
sional organizations, including the National Society of Profes-            ID   6 years for tort
sional Engineers, the American Institute of Architects and the                  5 years for contract
Associated General Contractors of America, lobbied state legis-            IL   10 years
                                                                           IN   10 years
latures to adopt statutes of repose.
                                                                           KS   10 years
Statutes of Repose                                                         KY
                                                                                10 years
    Statutes of repose differ from statutes of limitations in that         MA   6 years
they set definite time limits under which a cause of action can            MD   10 years
                                                                           ME   10 years
be brought against the design firm. Under a statute of repose, the         MI   6 years
time limit starts running at a specific point in the project’s life,       MN   10 years
generally either at the completion of services or the substantial          MO   10 years
completion of construction. Once the time elapses, all causes of           MS   6 years
action are barred, no matter when the injury occurs or the defect          MT   10 years
is discovered.                                                             NC   6 years
                                                                           ND   10 years
    Statute of repose time frames vary from state to state, with           NE   10 years
some as short as four years and others as long as 15. Some                 NH   8 years
states, like Kentucky, do not offer a statute while other states           NJ   10 years
may impose different lengths of repose for different types                 NM   10 years
of claims. (See the table for a state-by-state summary of statutes         NV   10 years for known defects
of repose.)                                                                     8 years for latent defects
                                                                                6 years for patent defects

Record Retention
                                                                           NY   None/3 year statute of limitations
                                                                           OH   None
                                                                                10 years
                                                                           OR   10 years
                                                                           PA   12 years
     Because of their concrete time limits, statutes of repose offer       PR   10 years
design firms a stronger level of protection against stale claims.          RI   10 years
They also help dictate the minimum lengths of time firms                   SC   13 years
should retain their records. Generally speaking, firms should              SD   10 years
                                                                           TN   4 years       Note: These are very
keep records for the length of repose plus two or three years for
                                                                           TX   10 years
a safety margin.                                                           UT   6 years
                                                                                              general guidelines
     Firms may also want to keep in mind that professional liabil-         VA   5 years       subject to change.
ity insurers report that nine out of ten claims are brought within         VT   8 years       Have your legal
five years after project completion and nearly all claims are filed        WA   6 years       counsel verify
within nine years of substantial completion.                               WI   10 years      the applicable rules
                                                   (Continued on page 3)   WV   6 years       in your territory.!
                                                                           WY   10 years
Record Retention (Continued from page 2)                 2.    Documents retained should include contracts,
                                                               approvals, drawings, specifications, calcula-
    Knowing how long to keep project documents,                tions, reports, design criteria and standards,
however, is only half the battle. The other half is            records of phone calls, advisory letters, prod-
determining what to keep.                                      uct research, submittal logs, site visit reports,
    First, a firm does not have to keep everything.            correspondence with contractors, owners or
In fact, it is often best that a firm does not keep            agencies, change orders and close-
everything. The reason is “discovery.”                         out documentation.
    Discovery is a legal process that allows oppos-
                                                         3.    “Working” documents, drafts and notes
ing attorneys to get access to all of a firm’s records         should be scheduled for destruction soon after
relating to the project. “All,” in this case, means            the final document is created. Keep only the
every plan, every schedule, every memo, every                  final document, not all the iterations that lead
piece of correspondence — including e-mail — in                up to it. Those early versions may contain in-
short, everything that a firm or its employees has             complete or inaccurate information that could
kept, whether it knows that it has the information             mislead a judge or jury.
on file or not.
    Discovery can turn up some ugly surprises if a       4.    Do not use sticky notes (paper or electronic).
firm has not taken a consistent and systematic ap-             They can cause confusion if they are mis-
proach to record retention. For example, records               placed or raise questions of whether or not
can be scattered among several locations. They can             there were other notes that were removed.
include drafts of plans that were later discarded        5.    Require that employees aggressively manage
or — true dynamite in an attorney’s hands — cop-               e-mail with most e-mail correspondence be-
ies of informal com-                                           ing purged after relatively short periods — six
munication among                                               months or a year.
team members con-
taining inflamma-                                        6.    Do not allow employees to archive records
tory remarks about                                             offsite. A forgotten box of records in an em-
the quality of work                                            ployee’s garage is as subject to discovery as
being performed.                                               those records found in an office file cabinet.
    The solution is                                      7.    Make sure your policy covers desk calendars
to develop and en-                                             and daily planners.
force a company-
wide record reten-                                       8.    Archive electronic records on an appropriate
tion policy that                                               storage medium and consider keeping a dupli-
clearly states what                                            cate copy off-site, but make sure both copies
kinds of records are to be retained, sets out sched-           are destroyed at the same time.
ules for record destruction and outlines how and         9.    Provide for suspension of record destruction
where records are to be stored.                                in the event of pending or ongoing litigation.
                                                               Continuing to destroy relevant documents
Rules of Thumb                                                 when you know a claim is likely can be inter-
                                                               preted as an attempt to eliminate damag-
    While there is no one record retention program             ing evidence.
that fits all companies — and a firm should develop
one with the assistance of its legal counsel — there     10.   When the time comes, destroy the records.
are some simple rules of thumb you can follow.                 Discarded records may be retrievable at a fu-
                                                               ture date so be sure that the records are de-
1.    The plan should be written and distributed to            stroyed through shredding, burning or other
      all employees. Clients should also be in-                irreversible methods.
      formed and a firm may want to consider re-
                                                                                               (Continued on page 4)
      cording acknowledgement of the policy
      through additional contract language.
Record Retention (Continued from page 3)
11.   Make sure this plan is consistent from project              Conclusion
      to project. You don’t want to be caught doing
                                                                      Using the applicable statute of repose in your
      a little too much “house cleaning” on that one
                                                                  jurisdiction or jurisdictions, it is well advised to es-
      job that went south. (Courts have shown that
                                                                  tablish and then follow a formal record retention
      they are willing to accept a company’s expla-
                                                                  policy. Have it drafted or at least reviewed by legal
      nation that records were destroyed in accor-
                                                                  counsel and then distribute it to all appropriate em-
      dance with company policy only if the firm
                                                                  ployees. Such a system can go a long way toward
      can show that its policy was consistently im-
                                                                  eliminating the clutter of unnecessary paperwork
      plemented.) For that reason, it is critical that
                                                                  and ensuring appropriate records are maintained in
      all employees know, understand, and be held
                                                                  the event of a future dispute or claim.!
      accountable for implementing a firm’s record
      retention policy.

        Disclaimer: This article is written from an insurance perspective and is meant to be used for informational
        purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact,
        situation or circumstance. Contact legal counsel for specific advice.

      Do You Ever Use Subcontractors?
     Note that the term is “subcontractors” and not                    The blanket subcontract should basically state that
“subconsultants.” Certainly most design professionals             the agreement covers all work done for you by the sub-
(especially architects and prime engineers) will, at              contractor during a given period of time unless a sepa-
times, use consultants to complete a portion of the work          rate subcontract has been issued for work done on a spe-
for which they have contracted.                                   cific job.
     On occasion, however, certain professionals                       The blanket subcontract agreement can be issued to
(geotechnical and environmental engineers are good ex-            all subcontractors that you use on a repetitive basis. You
amples) will use subcontractors. The subcontractors               should also obtain a blanket insurance certificate at the
may drill for a soil sample, test borings, or other things.       time the blanket subcontract agreement is issued that
     While most design professionals have a standard              provides evidence of the insurance required in the sub-
form “sub-consultant” agreement that they use, many do            contract, and specifically names you as an additional
not have a standard form “subcontract” agreement (they            insured (the Additional Insured Endorsement you
are different). Of even more concern is when design pro-          should request is a CG 20 10 11 85). You should also
fessionals sign their subcontractors’ purchase order forms.       get a copy of the Additional Insured Endorsement.
     Purchase order forms are a subcontractor-drafted                  You might consider establishing a guideline for
agreement, and almost without exception are written to            your project managers on the use of the blanket subcon-
protect the subcontractor. Design professionals should            tracts. For example:
develop their own subcontract agreements and avoid
                                                                  " A job-specific subcontract is required for any sub-
signing a subcontractor’s agreement at all costs.
                                                                      contract, either exceeding $50,000 or lasting more
     The problem is that a lot of times these are small
                                                                      than three months.
jobs. By the time a contract is signed, the job has come
and gone. You can reduce your risk substantially by us-           " If more than one billing is anticipated for a job, and
ing a blanket subcontract.                                            this blanket subcontract is used, a one page notice to
     The basis for a blanket subcontract can be your ba-              proceed can be issued, providing a subcontract num-
sic subconsultant standard agreement with insurance re-               ber to allow your accounting system to track total
quirements designed for a subcontractor and a broader                 billing for the subcontractor on a job.
indemnification provision running in your favor.
                                                                      While no system is perfect, a blanket subcontract
     The contractual coverage in a contractor’s general
                                                                  agreement will enable you to have appropriate risk man-
liability policy is broader than the contractual coverage
                                                                  agement protections in place for those contractors that
in a professional liability policy, and therefore a con-
                                                                  you use on a repetitive basis for smaller jobs. !
tractor can sign an intermediate form indemnity and still
be insured.
                           Ten Commandments
                            of Loss Prevention
           The Third Commandment:
Foresee the Foreseeable – Identify Those Areas of the Contract that Tradition-
ally have been a Source of Liability for A/E’s and Address them in the Negotia-
tions and/or the Language of the Contract
                              Excepted from “Ten Commandments of Loss Prevention”
                      by Gunther O. Carrle, Esq. Copyright RA&MCO Insurance Services, 1998

Shop Drawing Review                                   Ownership of Documents
" The purpose of your review should be clearly        " You should retain ownership.
  stated. Generally, it is limited to a review for    " Do not permit your documents to be used for
  general conformance with design concept and           completion of the project, for additions thereto
  with the information contained in the contract        or for other projects without permission of the
  documents. You are not reviewing for: means           A/E and with additional compensation.
  and methods of construction, safety, dimen-
  sions, methods of installation, etc. Your shop      " The alternative is to require that your seal and
  drawing stamp should clearly set forth the pur-       title block be removed and the documents re-
  pose of, and limitations on, your review as con-      drawn and reviewed by a design professional.
  tained in your Agreement. The shop drawing          Construction Cost
  stamp cannot modify your contrac-
  tual obligations.                                   " Detailed cost estimates vs. preliminary estimate
                                                        of construction cost.
" You should specify which shop drawings are to
  be submitted and immediately return shop            " Preliminary cost estimates should allow for
  drawings that do not require your re-                 contingencies and escalating labor and mate-
  view immediately.                                     rial costs.
" Require the contractor to review and approve        " If detailed cost estimates are required, the
  shop drawings first and do not review shop            owner should retain the cost estimator.
  drawings which have not been reviewed by            “As-Built” or Record Drawings
  him first.
                                                      " You should be entitled to rely on data supplied
" Maintain a log of when shop drawings were re-         by contractors without independent verification
  ceived, what action was taken, and when they          subject only to your obligation to note obvious
  were returned.                                        discrepancies of which you have actual knowl-
" Document all of your shop drawing comments.           edge and, possibly, your obligation to detect er-
                                                        rors which a reasonably prudent (architect or
" Require that the contractor notify you
                                                        engineer) exercising usual and customary pro-
  of changes.
                                                        fessional skill and care would have detected.
" Your contract should state that you will not re-
  view a manufacturer’s shop drawings prepared        Structural Details
  in response to a performance specification for a    " If the structural details (in particular connec-
  determination that the system will per-               tions) raise questions of means and methods,
  form properly.                                                    The Third Commandment (continued on page 6)
The Third Commandment (continued from page 5)           " You should not be responsible for delays
    the contract should limit your responsibility for     caused by the design/build contractor.
    means and methods to that aspect.
                                                        Indemnification Agreements
Geotechnical Consultants
                                                        " Determine that your insurance provides cover-
" Should be retained by the owner.                        age for indemnification agreements.
" You should be entitled to rely on their conclu-       " Only agree to indemnify against losses to the
  sions without independent verification.                 extent that they arise directly as the result of
" They should be required to make specific de-            your professional negligence in the perform-
  sign recommendations, not merely present                ance of services under this Agreement.
  raw data.                                             " Specifically determine who is to be indemni-
                                                          fied – limit it to the Owner, employees
Owner and Vendor Supplied Data                            and agents.
" You should be entitled to rely on such data           " Get a mutual indemnification where possible.
  without independent verification subject to the
  same limitations as in “as-built” drawings.           " Under certain circumstances, anti-
                                                          indemnification statutes preclude them.
Design/Build Consultants
                                                        Limitation of Liability Clauses
" You should not be responsible for code compli-
  ance of design/build work.                            " Limit liability to your fee, to available insur-
                                                          ance, to a fixed amount or exclude damages re-
" You should not be responsible for the adequacy          sulting from loss of profits and loss of use.
  of the design/build systems.
                                                        " The limitation must be rationally related to the
" Your obligation to coordinate should be limited         services rendered.
  to providing the design/build contractor with
  the design criteria to be used by you that im-        " There should be a preamble that sets forth a ba-
  pacts on his aspect of the project, i.e. the archi-     sis for the clause such as:
  tect can provide a space layout and wall section      " “Insurance is not available for the risk”
  to the HVAC contractor; in turn, you should re-       " “The fee is small in relation to the risk."
  ceive HVAC criteria that impacts on your as-
  pect of the project, i.e. architect receives size
  and location of ducts from HVAC contractor.

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