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    Licensed To Design: Complying with Regulations Governing Professional Services

    Jonathan C. Shoemaker, Lee/Shoemaker PLLC, and Rochanne Keane, Beazley Insurance Services

    When presented with a new and exciting project in an out-of-state jurisdiction, most design professionals begin thinking about the opportunity to enhance their portfolio, to generate a healthy fee, or both. While most design professionals consider whether they hold an individual license to practice architecture or engineering in the out-of-state jurisdiction, fewer design professionals focus their attention on whether their firm is qualified to transact business and to practice in the out-of-state jurisdiction.

    Far too often, the first time a design professional discovers the various regulations governing the practice of architecture or engineering in an out-of-state jurisdiction is when claims are asserted related to the quality of those services. Rather than investigating the regulatory requirements imposed in an out-of-state jurisdiction when claims of professional negligence are being asserted, the best course of action is to comply with all regulatory requirements before performing any professional services in an out-of-state jurisdiction.

    Qualifying to Provide Professional Services in Most Jurisdictions

    In most jurisdictions, there are three requirements a design firm must comply with in order to practice in accordance with all regulatory requirements:

    1. Individual license to practice architecture or engineering in the jurisdiction for the architect of record/engineer of record;
    2. Firm registration to transact business in the jurisdiction; and
    3. Firm license to practice architecture or engineering in the jurisdiction. 

    The first requirement applies to the individual licensee who is performing, or supervising and controlling, the professional services. The second and third requirements apply to the design firm who is contracting to perform the professional services.

    Individual Licensure Requirement

    Subject to limited exceptions, every jurisdiction mandates that architecture or engineering services be performed by, or under the supervision and control of, a licensed professional in that jurisdiction. Most jurisdictions broadly define the practice of architecture and engineering to include the full array of professional services provided by design professionals. In Virginia, for example, the practice of architecture is defined as follows:

    The "practice of architecture" means any service wherein the principles and methods of architecture are applied, such as consultation, investigation, evaluation, planning and design, and includes the responsible administration of construction contracts, in connection with any private or public buildings, structures or projects, or the related equipment or accessories. Va. Code § 54.1-400. 

    In most jurisdictions, the definition of professional practice is comprehensive in scope and – depending on how the jurisdiction’s licensure board has defined professional practice – may including the solicitation of work in a jurisdiction.

    When design professionals perform services in an out-of-state jurisdiction without an individual license, they often justify their unlicensed status by suggesting that the nature of the services provided does not require a license. For example, a residential architect may argue that they need not have an individual license in a particular jurisdiction because plans submitted to the authority for approval need not be signed and sealed. As professional practice is typically regulated by a state board, and not a locality’s filing requirements, performing any kind of services without a license in the out-of-state jurisdiction can be a mistake, unless the licensure board has expressly authorized the unlicensed performance of services the design professional intends to provide.

    Firm Qualification and Licensure Requirements

    Most design professionals enter into contracts and perform services through their firm, which typically operates as a corporation, a limited liability company, or a limited liability partnership. In most states, any business (whether a design firm or not) that intends to transact business in the jurisdiction is required to register with the state and to appoint an agent within the state. Additionally, in most states, any business that intends to engage in professional practice is required to obtain a license or permit from the applicable board of architecture or engineering. Design firms who transact business in a jurisdiction before obtaining both qualifications may be surprised to learn that they may be engaged in illegal practice.

    The process for complying with these two regulatory obligations varies from state to state. In some jurisdictions, a design firm must register as a foreign company before it may obtain a permit to engage in professional practice. In other jurisdictions, a design firm must demonstrate its qualifications to engage in professional practice before it registers as a foreign company in the state.

    Moreover, the requirements for becoming qualified to engage in professional practice as a firm vary from state to state. In some states, a company need only designate a professional in responsible charge, licensed in the jurisdiction, in order to qualify to engage in professional practice as a firm. In some states, a company must be owned entirely by licensed individuals in order to engage in professional practice as a firm. In some states, a certain number of the firm’s owners or management must be licensed in that state in order to engage in professional practice as a firm. In some states, a company must take a particular corporate form (e.g., corporation, LLC, or LLP) in order to engage in professional practice as a firm.

    Before pursuing work in a new jurisdiction, the prudent design professional will consult with a competent legal professional to advise them on how to meet all of the regulatory requirements the jurisdiction may impose on a design firm seeking to transact business there. 

    Consequences of Performing Professional Services without a License

    When a design firm performs services without being appropriately licensed, the design firm (and potentially the individual licensees) may face significant consequences, including, but not limited to, the following:

    • Complaints to licensure board;
    • Contracts being deemed unenforceable; and
    • Insurance coverage issues.

    Proper registration in each jurisdiction in which a design professional practices is critical to avoiding these risks.

    Licensure Board Complaints

    When a design firm engages in the practice of architecture or engineering without being qualified to do so, it risks exposure to being sanctioned by the licensure board. Unlike a complaint regarding the quality or adequacy of the services performed by the design firm, a complaint regarding the firm’s qualification to provide the services rendered will likely depend on whether the firm engaged in professional practice, as defined by the licensure board, in the jurisdiction.

    A licensure board may discover a firm is practicing without a license in a number of different ways, but – anecdotally – this occurs when a competitor “squeals” on an unlicensed firm or when a client becomes dissatisfied with a design firm’s services. In the first situation, a competitor for a project may attempt to “limit” competition by reporting an out-of-jurisdiction/unlicensed design firm for submitting a proposal on a project. While the reporting firm may remain “anonymous,” the investigation by the licensure board will proceed against the unlicensed design firm. In the second situation, an unsatisfied client who discovers their design professional is unlicensed may try to leverage reporting the design professional to a licensure board to extract a settlement.

    If a design firm has performed services in a jurisdiction in which it is not properly qualified and licensed, there are a variety of potential consequences, including the following:

    • Imposition of a fine associated with the unlicensed practice;
    • Suspension or revocation of individual license to engage in professional practice;
    • If the complaint is filed after the design firm has registered, then suspension or revocation of the design firm’s license to engage in professional practice; or
    • Referral to a prosecutor for pursuit of criminal charges against the individual licensee and/or the owners of the design firm.
    • Some jurisdictions even enforce jail time as a possible penalty.

    While many licensure boards are “compliance oriented” and avoid severe punishment of design professionals seeking to comply with their regulations, other licensure boards are “deterrence oriented” and impose onerous penalties on design professionals who are “caught” engaged in practice without a license.

    The consequences of a licensure board complaint may have cascading consequences for a design professional. Many applications (and renewal applications) for both licensure boards may seek to confirm (a) the different jurisdictions in which the design professional is practicing and (b) the absence of any adverse actions taken by a licensure board. If one licensure board finds that a design professional performed professional license without a license, another licensure board may elect to impose a reciprocal penalty on the design professional.

    There may also be business consequences to a licensure board’s finding that a design professional engaged in unlicensed conduct. A licensure board’s finding may impair the design professional’s ability to complete on-going projects in the jurisdiction, and expose the design professional to damages incurred by their client having to replace the design professional on the project.

    Contract May Be Unenforceable

    If a design firm is not properly licensed to engage in professional practice at the time it enters into a contract to perform professional services, its contract may be deemed to be illegal and, therefore, unenforceable. See, e.g., Food Management, Inc. v. Blue Ribbon Beef Pack, Inc., 413 F.2d 716, 724 (8th Cir. 1969)(stating that “[a]rchitectural and professional engineering contracts which violate registration statutes are generally unenforceable”). Moreover, while the law varies from state-to-state, some courts may require disgorgement of fees (i.e., refund of amounts previously paid to the design professional) when performing professional services without being properly qualified and permitted in the jurisdiction. If a design firm’s contract is deemed illegal and unenforceable, then this may impair its ability to collect outstanding fees and its ability to enforce risk management provisions.

    For example, where a project experiences significant delays which the contractor attributes to the performance of the design professional, the owner may elect to withhold payment of fees from the design team. If the design professional pursues its fee claim against the owner and the owner counterclaims against the design professional for the contractor’s delay claims the owner may argue that the unlicensed design professional may not rely on any limitation of liability or waiver of consequential damages provision in the contract.

    The investment of time and effort that most design professionals put into obtaining favorable risk management provisions may be a wasted cost if the design professional is not properly licensed to provide professional services in the jurisdiction for the project. The investment of time and effort that most design professionals put into executing a project may be a wasted cost if the design professional may not enforce the contract to collect on the anticipated fee for the services.

    Insurance Coverage Issues

    Professional liability policies are intended to cover design professionals for negligent acts, errors or omissions in the rendering or failure to render a professional service. Being an unlicensed professional may negate coverage for a design professional who is not legally licensed to practice in that jurisdiction. Some insurance policies may require licensure as a condition to coverage.

    Other potential coverage issues may arise where there is an allegation of improper licensure made in the complaint. For example, an allegation that the design professional acted intentional to defraud the client by holding themselves out as a licensed professional and knowingly entered a contract for services they were not legally licensed to perform in that jurisdiction.  Therefore, being unlicensed may negate coverage in its entirety or for part of the claim.

    Professional liability policies also do not cover damages that arise from fraudulent, illegal or intentional acts. Therefore, if there is a finding by a trier of fact that being unlicensed results in fines or other sanctions related to fraudulent or illegal activity, a design professional’s policy may not provide coverage for any damages resulting from these judgements or findings. 

    Conclusions

    The consequences of practicing architecture or engineering without a license can be significant. Fortunately, the prudent design professional may avoid the risks associated with engaging in professional practice without a license through proactive planning. While the upfront investment of time and money associated with qualifying to transact business in an out-of-state jurisdiction may be frustrating, compliance with the regulatory framework imposed on licensed professionals can help to avoid a relatively simple challenge becoming a more significant issue down the road.

     

    Jonathan C. Shoemaker is a founding member of Lee/Shoemaker PLLC, a law firm with offices in Washington, DC and Charlottesville, VA, devoted to the representation of design professionals. Rochanne Keane is a claims manager for Beazley Insurance Services, an insurance carrier internationally recognized for its excellence in claims service. The content of this article was prepared to educate related to licensure-related issues and risks, but is not intended to be a substitute for professional legal advice related to the specific jurisdictions in which a design professional may practice

     

    The information set forth in this document is intended as general risk management information. It is made available with the understanding that Beazley does not render legal services or advice. It should not be construed or relied upon as legal advice and is not intended as a substitute for consultation with counsel. Beazley has not examined and/ or had access to any particular circumstances, needs, contracts and/or operations of any party having access to this document. There may be specific issues under applicable law, or related to the particular circumstances of your contracts or operations, for which you may wish the assistance of counsel. Although reasonable care has been taken in preparing the information set forth in this document, Beazley accepts no responsibility for any errors it may contain or for any losses allegedly attributable to this information.

    About the author:

    Rochanne Keane is the Focus Group Leader for the U.S. Architects & Engineers Claims Team and direclty manages professional liability claims for design professionals. She has extensitve experience handling construction defect litigation nationally and internationally. She serves on the AIACC Task Force and other A&E affiliated advisory boards. Rochanne has spoken at numerous national and regional forums to discuss construction defect litigation, contract and insurance issues, including risk management for design professionals. Rochanne is licensed to practice law in the states of California, New York and New Jersey.

    Rochanne Keane
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