Q: I read your recent comments regarding professional and personal liability for financial damages. I understand that engineers are always personally responsible. As to financial liability, if for any reason a corporate entity or professional entity is unable to pay, would the engineer have to bear personal financial liability? Also, if an engineer were a partner in an engineering firm that is no longer in existence, would that engineer still be liable for services performed with the firm after the firm folded and he retired?

A: The questions and answers regarding engineer personal liability and liability to pay damages has generated a large volume of questions along the lines of those above. The important thing to keep in mind when reviewing and working your way through developing an understanding as to the distinction between personal liability and financial liability as a business is to know your state’s regulations in terms of professional practice and business formation. Many states are different in their approach to business form and liability for professionals.

It is important to know what your state allows in terms of whether a group of engineers could practice as a separate entity to avoid personal financial responsibility. You should also keep in mind that the engineer will remain professionally responsible for engineering decisions as opposed to being personally responsible for financial damages. In some states, there is no distinction; however, in many states there is a distinction and you need to be aware of it.

In regard to personal financial liability—should the firm go out of business or dissolve—it would depend on your state’s law in terms of winding down a professional engineering company and the ability of the individual to avoid personal financial responsibility for the company, if properly terminated. To guard against exposure, the common practice is for a retiring principal to obtain insurance called "tail coverage" in the events of retirement and the firm ending its business. Most professional liability policies are written on a claims-made basis, and therefore the insurance is only effective during the claim period. The claim must be made during the effective claim period to trigger coverage. The "tail coverage" covers a situation where you may have designed a project in years past, but a claim is made today on that project.

Under a typical claims-made policy, the claim would be covered in the current year of a policy, even though designed some years in the past. In absence of coverage, in the case of where the firm is no longer in existence or the engineer is retired, the "tail policy" may cover past events depending on the coverage and what is purchased.

If the engineer wants to avoid personal financial responsibility for any errors and omissions, then the engineer needs to be aware of the regulations that address what business form professional engineers may take in the state where he or she is practicing. Some states do not allow professional engineers to incorporate or create a business entity to escape personal financial responsibility. To determine what applies to your situation, consult a lawyer in the state where you practice to determine what the potential exposure is.

The most common way to avoid any personal financial loss is to be properly insured, including insurance coverage for when you retire and when your firm dissolves. The best way to protect against personal financial responsibility for errors and omissions is to have the appropriate insurance in place with the appropriate amount of coverage.

While business entities can be formed and maintained to avoid personal liability, it is always an excellent practice to evaluate your professional errors and omissions, insurance, and the protection it affords you personally, as well as your firm. And, if you are planning on retiring or ending your firm’s practice, you should consult the appropriate insurance professional, as well as a risk manager—including legal counsel—to determine what long-term exposure may remain when your practice concludes.

Q: What is the difference between "a cardinal change" and "abandonment of contract"?

A: Generally speaking, under established common law, a cardinal change is a breach of the contract. The cardinal change occurs when the owner effects an alteration in the work being constructed that effectively requires the contractor to perform duties materially different from those originally bargained for under the terms of the contract. By definition, a cardinal change is a change that is so profound that it is not addressed under the terms of the contract and thus renders the owner in breach. It is a breach of contract.

"Contract abandonment" occurs when both parties to a contract agree by conduct (implied) or expressly agree to depart from the terms of the contract. Contract abandonment has been recognized where there have been so many substantial changes to the contract that it can be no longer used to determine the value of the work performed by the contractor. In contract abandonment, the courts often look for or at the number of changes, a detailed description of the effect of the changes, the character of the changes, the timing of the changes, and the extent of the work the contractor had to do pursuant to those changes.

Michael J. Baker, Esq., is a partner in the Cerritos, Calif.-based law firm of Atkinson, Andelson, Loya, Ruud & Romo. He is an expert in design and construction contracts, mediation, and litigation. Please send him your legal questions via e-mail at mbaker@gostructural.com.