Hanover Architects & Engineers Advantage
Lender Agreements — Don’t Let Being a Team Player
Put You in Foul Trouble
Construction is risky business plagued with safety dangers, cost overruns, schedule delays,
mechanic’s liens, construction defects and contractor defaults. Much of what separates the
winners from the losers in construction is the ability to manage these risks through contractual
risk transfer and insurance coverage.
Contracts do more than define duties, responsibilities and price. Smartly-crafted contracts
transfer risk from one contracting party to the other. While allocating risk to the party in the
best position to manage and mitigate the risk makes sense, shoving off unreasonable risk to
the other contracting party doesn’t. Alongside negotiating a reasonable fee, design professionals
and surveyors must always be alert to contract language that makes them responsible for risks
they can’t realistically control.
Similar to contractual risk transfer, project owners, design professionals, surveyors and contractors
use insurance for transferring risk. Project owners use a variety of insurance products before,
during and after construction. Contractors buy general liability insurance for property damage,
bodily injury and construction defect exposures. Design professionals and surveyors rely on
professional liability insurance for protection against negligence in the performance of their
professional services.
While not a contract or an insurance policy, there is another tool used in the construction industry
to transfer risk — lender agreements. These are the documents that banks, title companies and
other financial institutions require design professionals and surveyors to execute as part of project
financing requirements. While lender agreements may appear to be just one more harmless,
non-negotiable piece of paper work, these documents can be just as problematic as the most
onerous contract provisions. While being a “team player” is commendable, “rubber stamping”
lender agreements is not advisable. These documents can saddle design professionals and
surveyors with unreasonable liability exposures and put professional liability insurance coverage
in jeopardy.
H A N OV E R A R C H I T E C T S & E N G I N E E R S A DVA N TAG E
The Problem with
Lender Agreements
ALTA/NSPS LAND TITLE SURVEYS
Beware of the Camel’s Nose
The camel’s nose is a metaphor for a situation where the
permitting of a small, seemingly innocuous act can open
the door for larger and potentially troublesome outcomes.
The metaphor’s origin dates back to a seventeenth century
fable in which an Arab mill worker allows a camel to stick
its nose into his tent , then other parts of its body, until the
camel is entirely inside and refuses to leave. This parable,
while more than 200 years old, has meaning for surveyors
when performing today’s ALTA/NSPS Land Title Surveys.
The 2016 Minimum Standard Detail Requirements
for ALTA/NSPS Land Title Surveys sets forth a
specifically-worded certification that land surveyors
are required to affix to their surveys to be ALTA/NSPS
compliant. The certification can only be altered to comply
with state-specific statutes and surveyor licensing
regulations. While eliminating disagreements between
title insurance companies and surveyors over certification
wording, the certification invites unreasonable risks
that land surveyors need to understand.
The certification:
To (name of insured, if known), (name of lender, if known),
(name of insurer, if known), (names of others as
negotiated with the client):
This is to certify that this map or plat and the survey on
which it is based were made in accordance with the 2016
Minimum Standard Detail Requirements for ALTA/ACSM
Land Title Surveys, jointly established and adopted by
ALTA and NSPS, and includes Items ___ of Table A there
of. The field work was completed on ___________.
[ date ]
Date of Plat or Map: _____ (Surveyor’s signature, printed
name and seal with Registration/License Number)
Emphasis Added
Hanover cautions its land surveyor clients to limit the
named parties in any certification and never agree to
add successors and assigns. There is no upside to
expanding liability exposures to third parties. Like the
story of the camel’s nose, don’t let your liability
exposures go unchecked.
IMPOSSIBLE REQUESTS
Many lender agreements include unreasonable
certification requirements. The lender may ask
design professionals and surveyors to certify
that the construction, when completed, will
be in strict conformance with the contract
documents. Obviously professionals cannot
guarantee the future any more than lenders
can. Lender agreements may also require design
professionals and surveyors to certify that their
services will be free of errors and be in strict
compliance with all codes, regulations and
statues that somehow might remotely apply.
These requirements are unreasonable, if not
completely impossible, for design professionals
and surveyors to warrant. Guaranteeing that
services will be in conformance with all applicable
laws, codes and ordinances constitutes a
legal opinion that design professionals and
surveyors are not qualified to offer. Additionally,
projects are often governed by the laws of many
jurisdictions, some of which may be in conflict.
Other lender documents may require the design
professional or surveyor to certify that all
subsurface conditions have been identified.
This too is unreasonable. Even the most extensive
geotechnical investigation cannot guarantee that
all subsurface conditions have been identified.
TOO MANY PLAYERS
Lenders cast a wide net over their loans by
requiring design professionals and surveyors
to provide assurances to a long list of entities,
some of which aren’t even known at the time
the agreement is drafted. Among these “players
to be named later” are successors and assigns.
A successor is a person or entity who takes over
and continues the role or position of another.
An assign is an Individual to whom property
is, will, or may be legally transferred. Design
professionals and surveyors should push back
against signing any document that extends
assurances to anyone beyond the client.
H A N OV E R A R C H I T E C T S & E N G I N E E R S A DVA N TAG E
QUESTIONABLE INSURANCE PROTECTION
Most professional liability insurance policies
exclude certifications, warranties and guarantees:
Based upon, arising out of, or in any way
relating directly or indirectly to any warranty
or guarantee by you; however, this exclusion
will not apply to any guarantee that your
professional services conform with the
generally accepted standard of care
applicable to that professional service.
Hanover Policy Exclusion 7.
Any lender agreement that goes beyond
what you know to be true or confirms that your
professional services conform to the “generally
accepted standard of care” should be avoided.
What Can Design Professionals
and Surveyors Do?
Avoid Uninsurable Language — Here are
examples of language to avoid:
The Engineer represents and warrants that all
Services performed hereunder will be free
from errors and deficiencies.
Include Contract Protection — To avoid being
backed into a corner, include language similar
to this in all professional services agreements:
Consultant shall not be required to execute
any certificates, warrantees or guarantees
including lender agreements that (1) require
the Consultant to certify, guarantee, or warrant
the existence of conditions that the Consultant
cannot discern to be true, (2) require knowledge,
services or responsibilities beyond the scope of
this Agreement, or (3) in any way might, in the
Consultant’s opinion, increase the Consultant’s
risk or adversely impact the Consultant’s cost
of insurance coverage or ability to procure
insurance coverage.
Lender agreements can come out of nowhere to
put design professionals and surveyors in “foul
trouble” with their professional liability insurance
coverage. Don’t sign these agreements without
first having a complete understanding what’s
included in these documents.
Remember lender agreements do more than
facilitate the loan process, they are crafted to
shift risk.
The Architect certifies that construction, when
completed, will comply with the Construction
Documents.
The Surveyor hereby certifies that the survey
accurately represents all easements, use
restrictions, rights-of-way, subsurface rights
and the like.
The Hanover Insurance Company
440 Lincoln Street, Worcester, MA 01653
hanover.com
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All products are underwritten by The Hanover Insurance Company or one of its insurance company subsidiaries or affiliates (“The Hanover”). Coverage may not be available in all
jurisdictions and is subject to the company underwriting guidelines and the issued policy. This material is provided for informational purposes only and does not provide any coverage.
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©2016 The Hanover Insurance Group, Inc. All Rights Reserved.
119-0399 (6/16)
LC 2014-167