Emerging Trends in Construction:Insurance Coverage and Practice

James B. Atkins, FAIA, FKIA

Atkins Consulting Solutions

7139 Briarmeadow Dr. Dallas, Texas 75230-5421 214-649-4134 jim@atkinscs.com

James B. Atkins, FAIA, FKIA, has worked in design and construction for over 45 years. He was an owner/principal at HKS architects for 32 years. His published work includes articles in the Architect’s Handbook, numerous periodicals, and two books. Speaking includes venues for design, construction, insurance and legal associations and organizations. Jim provides standard of care consulting services, and he is the 2017 Chairman of the AIA International Committee.

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Emerging Trends in Construction: Insurance Coverage and Practice

I. Professional Liability Insurance Carrier Survey and Annual Interviews ...................................................5 II. PLI Carrier Survey and Interview Summary ...............................................................................................6

A. Insurance Industry Trends .....................................................................................................................6B. Professional Service Trends ...................................................................................................................6C. Claims Type/Frequency .........................................................................................................................6D. Claims Severity .......................................................................................................................................7E. Alternative Project Delivery Methods ...................................................................................................7F. Green/Sustainable Related Services ......................................................................................................7G. Cyber Security ........................................................................................................................................7H. Condominium Projects ..........................................................................................................................8I. Alternate Counsel ...................................................................................................................................8

III. The AIA Trust .................................................................................................................................................8A. Practice Resources ..................................................................................................................................8B. White Papers ...........................................................................................................................................8C. Legal Network .........................................................................................................................................9D. Contacting the AIA Trust .......................................................................................................................9

IV. Attachment: REPORT: AIA/AI ATRUST Professional Liability Insurance Carrier Annual Interviews—2015 (NOTE: The 2016 report will be published in the first quarter of 2017) ...................10

Table of Contents

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Emerging Trends in Construction: Insurance Coverage and Practice

The risks inherent in the design and construction industry are determined by many factors which include the economy, available labor, case law, and product availability/performance to name a few. Accord-ingly, the way in which the industry responds to these factors through insurance resources, industry docu-ments, and design and construction trends can provide beneficial insights for anticipating and planning risk averse work strategies. This paper and the insurance carrier interview report referenced and enclosed reflects the emerging trends in the design and construction industry and the responsive actions taken by the AIA the AIA Trust, the NSPE, and the ACEC to aid in managing the risks we take.

Risk comes from not knowing what you are doing.

WARREN BUFFETT

I. Professional Liability Insurance Carrier Survey and Annual InterviewsEvery year the AIA/AIA Trust join with the National Society of Professional Engineers (NSPE) and

the American Council of Engineering Companies (ACEC) in surveying professional liability insurance (PLI) carriers to gather information regarding their policies, services, and related trends. The information gathered is intended to assist design professionals in evaluating and comparing PLI carrier products as well as for mon-itoring risk related trends in the industry.

The process begins with a written survey submitted to all PLI carriers. Management of the survey process rotates among the three each year. The 2016 survey was developed by the NSPE with input from the AIA/AIA Trust and ACEC. The survey is typically sent out in June with responses due by the end of July. There were 18 respondents in 2016. A matrix of survey responses is compiled from the returned questionnaires, but it is not finalized until after the face-to-face interviews. Results of the 2016 final matrix can be accessed at https://www.nspe.org/PLI-Survey.

The face-to-face interviews are held in Chicago typically in late September or early October. Only the carriers with a larger market share are invited due to time limitations. In 2016 twelve carriers out of the eigh-teen respondents were interviewed for 30 minutes each.

The survey respondents are listed below with an asterisk (*) notation for those that participated in the face-to-face interviews.

* AIG/Lexington

* Allied World

Aspen Insurance

* AXIS Insurance

* Beazley Group

* Berkley Design Professional Underwriters

Chubb Group (merged with ACE USA)

Euclid AE

* Hanover Insurance Group

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* Ironshore Specialty Insurance Company

* Liberty International Underwriters

Markel

Navigators Insurance Company

* RLI

TM/HCC Specialty (merged with ACE USA)

* Travelers Insurance

* Victor O. Schinnerer & Company

* XL Catlin

II. PLI Carrier Survey and Interview SummaryThe following is a summary of the face-to-face interview discussions and the survey results. Results

were taken from the 2015 PLI carrier interviews and updated with responses from the 2016 interviews.

A. Insurance Industry TrendsThere remains a high number of carriers participating in the PLI market. As a result, PLI products

and services are being provided at relatively competitive rates. In addition, mergers and acquisitions of carri-ers continue. Examples include XL/Catlin in 2015 and Chubb/ACE in 2016. Overall, the PLI market continues to recover from the 2008 recession.

B. Professional Service TrendsMany carriers reported that more and more design firms are being more proactive in monitoring and

managing risk management issues as well as responsible risk averse practice and project management. How-ever, there were trends in the industry that were noted for concern.

More specifically, due to the years of limited hiring or no hiring, there is a notable lack of experi-enced employees. This, combined with the slow return of workload, which causes less aggressive hiring prac-tices, can challenge a firm’s quality and management intensity. Water infiltration continues to be a significant cause for claims, thus emphasizing the need for quality management and control.

Building Information Modeling (BIM) continues to increase, however, there are no significant claims associated with this delivery process. Drone use is becoming more widespread, and the AIA Trust has issued a white paper addressing risk issues.

C. Claims Type/FrequencyOverall, claims frequency continues to trend downward, which has been the case over the past six

years. Frequency is greatly affected by market activity, and with the returning market claims frequency will inevitably rise. Larger projects continue to have more claims than smaller projects, and residential/condo projects continue to have a high frequency, especially in apartment to condominium conversions. Over half of the carriers surveyed reported that they have policy restrictions on residential/condo projects.

The second highest reported claims type/frequency was for geotechnical work. Over one fourth of the carriers surveyed reported policy restrictions on geotechnical services. Finally, structural services continue to have a higher incidence of claims.

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On a more positive note, Integrated Project Delivery (IPD) and Public Private Partnerships (P3), con-tinue to have a low incidence of claims. In addition, Design Build (DB) continues to have a lower incidence of claims than traditional Design Bid Build (DBB). Carriers reported a low number of claims related to green/sustainable services, and only minor claims related to emerging technologies and building materials were reported.

D. Claims SeverityClaims severity is determined by a comparison of the market percentage of a project type compared

to the total claim dollars paid out. Claims severity continues to trend upward from last year, and this is to be expected with the continuing rise in market activity.

When firm size is examined, large and small firms tend to have a higher loss ratio than mid-sized firms. Small firms struggle with claims severity because they lack the resources to manage risk effectively. Large firms, on the other hand, have the resources, but large firms do larger projects which traditionally have greater severity. Moreover, large firms, especially those with multiple offices, struggle with management conti-nuity which tends to increase overall risk.

As reported by carriers in the previous year, the trend continues for owners to attempt to make the design professional responsible for product liability. Design professionals traditionally rely on manufacturer’s product data when specifying, and the continuously changing landscape of new products with limited perfor-mance histories can be perilous.

Owners continue to demand increased limits on practice policies as well as project specific policies. As a result, over 70% of carriers surveyed reported that they provide some type of project specific policy.

E. Alternative Project Delivery MethodsThe insurance industry continues to follow alternative project delivery methods such as IPD, P3,

and DB. More information on these project delivery methods are contained in the AIA PLI Carrier Interview Report attached to this paper.

F. Green/Sustainable Related ServicesGreen/Sustainable projects continue to experience fewer claims than traditional projects, and carri-

ers continue to provide premium credits for LEED certified projects. The greatest risk on this type of project is contract language that promises at a higher level than the building can perform. The AIA Contract Documents program has published a detailed guide discussing key risk and contracting issues associated with the design and construction of green/sustainable projects. AIA Document D503-2013, Guide for Sustainable Projects, including Commentary on the AIA Sustainable Projects Documents, is available for download at http://www.aia.org/contractdocs/referencematerial/aiab098216.

G. Cyber SecurityThe events surrounding our recent presidential election involving Russian hackers has brought the

issue of cyber security risk to the forefront. Carriers have always reported that although they expect the fre-quency of cyber security related claims to be low, they expect the severity when such a claim occurs to be high. Given the vulnerability of the internet and the increasing incidence of denial-of-service cyber-attacks, this issue is sure to increase in concern and priority. Over half of the carriers now provide some form of cyber security coverage.

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H. Condominium ProjectsWith the case law resulting from Beacon Residential Community Association v. Skidmore, Owings &

Merrill LLP and HKS, Inc., and the increase in condominium claims, the AIA Contract Documents program has published a guide for use in contracting on condominium projects. AIA Document B509-2010, Guide for Supplementary Conditions to AIA Document B109-2010 for use on Condominium Projects, is available for download at http://www.aia.org/groups/aia/documents/pdf/aiab085986.

I. Alternate CounselWhile carriers typically use pre-qualified panel counsel, all carriers reported in the survey that they

accept alternate counsel when requested by the insured. Most carriers require pre-approval at the time of pol-icy renewal/initiation. Counsel are typically required to provide a track record of A/E defense experience.

III. The AIA TrustThis paper and the related DRI presentation are brought to you by the AIA Trust.

The AIA Trust was established more than 60 years ago to provide quality benefits to AIA members. It was formed as a separate entity from the AIA due to IRS regulations governing ERISA trusts. The AIA Trust is the primary risk management resource for the members and components of the American Institute of Architects. In this capacity, it provides a wealth of resources that includes insurance broker information, claims studies and guides, educational programs, a professional liability insurance database, white papers, and a legal network that assists members and their firms in locating qualified A/E construction lawyers for claims defense. Since no member authentication is required on the website www.theaiatrust.com, all information is accessible to the public.

In addition, papers and other resources that are provided to the AIA Trust are published in the AIA Trust Quarterly Newsletter which is sent to 20,000+ AIA members who are firm owners/managers/decision makers. Updates are periodically published in the AIA online magazine, AIArchitect, which is distributed to all AIA members. All resources are primarily posted to the AIA Trust website listed above.

A. Practice ResourcesOn the AIA Trust website, the second bar from the left at the top of the page directs you to Practice

Resources and Benefits. This section will direct you to all risk management resources. The intent of this sec-tion is to provide the design professional with the assistance necessary for managing all areas of professional risk. The AIA Trust remains open for commentary and suggestions for improving and enhancing this section. Contact information for providing suggestions can be found at the end of this paper.

B. White PapersThe AIA Trust provides cutting edge white papers on relevant risk management topics ranging from

Services and Project Delivery to the Standard of Care. Case studies are also included. The Trust is open for the submission of what papers pending approval by the Trustees, and formats include more abbreviated papers as well as longer versions.

The shorter articles are intended to provide information more succinctly as a guide or how-to mes-sage. The paper should begin with a short summary statement of risk/issue/problem as it relates to architects. It is important to include relevant examples where the architect may encounter the risk, or a short case study. The paper should conclude with specific recommendations for risk prevention and/or management and con-

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tainment, with a summary conclusion. Illustrations in the form of photos, charts, diagrams, drawings, etc. are preferred. Checklists, matrices, charts, graphs, timelines and the like are encouraged. The shorter papers should be 3 – 5 pages, or 800 – 1200 words maximum.

C. Legal NetworkThe Legal Network provides a listing of qualified A/E construction lawyers listed by state. Multiple

listings can be provided if the attorney is admitted in multiple states. Listing is currently free, and instructions for enrolling your firm are found under A/E Construction Law Firms, Legal Network Enrollment Process in the upper left corner of the Legal Network page.

D. Contacting the AIA TrustThe Executive Director of the AIA Trust is Ann Casso, Hon. AIA. For questions and commentary,

contact Director Casso at ACasso@aia.org.

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IV. Attachment: REPORT: AIA/AI ATRUST Professional Liability Insurance Carrier Annual Interviews—2015 (NOTE: The 2016 report will be published in the first quarter of 2017)

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