Boston, Massachusetts ~ November 13-15 , 2005

2005 INTERNATIONAL 2005 INTERNATIONAL CONFERENCECONFERENCE

CURRENT TRENDS IMPACTING CURRENT TRENDS IMPACTING ARCHITECTS & ENGINEERS ARCHITECTS & ENGINEERS

PROFESSIONAL LIABILTYPROFESSIONAL LIABILTY

….or what you don’t know will hurt you!

Accelerating Financial Accelerating Financial Pressures Faced by A&E FirmsPressures Faced by A&E Firms

• Project owners face increasing project costs and competitive pressures, and pass those down the line. Project owners “squeeze the supply

chain” to cut costs.

Accelerating Financial Accelerating Financial Pressures Faced by A&E Firms Pressures Faced by A&E Firms

(Cont’d.)(Cont’d.)

• Hyper competition for work among A&E firms. “Will go anywhere for work” trend. Larger out of state firms often are chosen

to do local larger projects. Out of state firms acquire local firms as

means to enter local market. Globalization/outsourcing of design

services to other countries.

Accelerating Financial Accelerating Financial Pressures Faced by A&E Firms Pressures Faced by A&E Firms

(Cont’d.)(Cont’d.)

“Irrational underbidding” for work. Design fees as a percentage of

construction values continue to trend downward on the whole.

• Correlatively A&E carriers on the whole take on more exposure for less premium.

Increasing use of design technology and “commoditization” of the design process.

Accelerating Financial Accelerating Financial Pressures Faced by A&E Firms Pressures Faced by A&E Firms

(Cont’d.)(Cont’d.)

• Increasingly uncertain and irregular available work and revenue streams for A&E firms. Harder to stay in business and make a

profit. More difficult to manage firm operations

and keep firm intact. Firms are challenged to be able to retain

top talent and key staff.

Accelerating Financial Accelerating Financial Pressures Faced by A&E Firms Pressures Faced by A&E Firms

(Cont’d.)(Cont’d.)

• Underwriting ramifications of financial pressures on A&E firms. Firms may: Take on marginal or high risk project

owners, projects, or work partners. Be intimidated or “bullied” by project

owners and clients. Take on work which is outside of their

scope of expertise.

Accelerating Financial Accelerating Financial Pressures Faced by A&E Firms Pressures Faced by A&E Firms

(Cont’d.)(Cont’d.)

• Underwriting ramifications (cont’d.) Agree to work in far away, unfamiliar

locales. “Cut corners” or take “shortcuts” in the

design and project administration process.

Agree to egregious or overbearing contract terms.

Accelerating Financial Accelerating Financial Pressures Faced by A&E Firms Pressures Faced by A&E Firms

(Cont’d.)(Cont’d.)

• Key underwriting strategies. Favor well resourced firms with strong

long term operational track records and “staying power”.

Important that A&E firm has strong internal management procedures and risk management in place.

Design Build and Construction Design Build and Construction Management Project Delivery Management Project Delivery

Methods Methods

• Trends Ongoing increasing acceptance and

usage of both methods. Higher level of usage within public and

industrial sectors (legislative and regulatory barriers being eroded).

D/B’s and C/M’s tend to do a much better job of marketing and “selling themselves” than A&E firms.

Design Build and Construction Design Build and Construction Management Project Delivery Management Project Delivery

Methods (Cont’d.)Methods (Cont’d.)

• Trends (cont’d.) Architects push for licensing and

regulation of D/B’s and C/M’s to “level the playing field”.

D/B and C/M trade associations becoming stronger on national and local levels.

Design Build and Construction Design Build and Construction Management Project Delivery Management Project Delivery

Methods (Cont’d.)Methods (Cont’d.)

• Potential drawbacks. CM can usurp architect’s traditional “lead

role” on the project. Design component can be de-

emphasized or design quality can suffer.• Grave consequences on some projects

(collapses, worksite deaths).

Design Build and Construction Design Build and Construction Management Project Delivery Management Project Delivery

Methods (Cont’d.)Methods (Cont’d.)

• Potential drawbacks (cont’d.) Increasing use of “fast-track” projects

(construction phase starts before design has been completed).

Need for Design Build “Best Practices” to be developed/accepted/implemented.

Design Build and Construction Design Build and Construction Management Project Delivery Management Project Delivery

Methods (Cont’d.)Methods (Cont’d.)

• Single point legal responsibility One party is primarily liable for project

delay and cost overrun claims. Consequential damages can be very

substantial. Creates a potentially huge liability

exposure for A&E underwriters. A&E policy limit claims.

Design Build and Construction Design Build and Construction Management Project Delivery Management Project Delivery

Methods (Cont’d.)Methods (Cont’d.)

• Advent of Fixed Price/Guaranteed Maximum Price Contracts. Project owner intolerance for any cost

overruns. D/B or C/M guarantees project will come

in exactly on time and on budget.

Construction Defect Construction Defect LitigationLitigation

• Locale driven – “Hotbed” states.

• Rapid growth as bane of underwriters. Las Vegas luxury high rise condominiums

Construction Defect Construction Defect Litigation (Cont’d.)Litigation (Cont’d.)

• “Build it cheaper and faster” as core cause of actual construction defects. Cheap or inferior building materials and

processes used. Use of substandard contractors,

subcontractors, and suppliers. “Cutting corners” and taking “short-cuts”.

Construction Defect Construction Defect Litigation (Cont’d.)Litigation (Cont’d.)

• Construction defect litigation as: “growth industry” for plaintiff bar. Lawyer attendance at construction defect

“how to” seminars skyrockets.

Construction Defect Construction Defect Litigation (Cont’d.)Litigation (Cont’d.)

• High risk project types. Condominium conversions may now be

most hazardous. Trend towards more high rise buildings

being constructed. Condominiums, townhouses, apartments,

low income housing are prime class action targets.

Construction Defect Construction Defect Litigation (Cont’d.)Litigation (Cont’d.)

• Underwriting “high wire” act. Is project located in a “Hotbed” state? Has A&E firm already incurred

construction defect claims? Defensibility – award winning firms doing

very high quality construction.

Construction Defect Construction Defect Litigation (Cont’d.)Litigation (Cont’d.)

• Started in CA and has spread like “wildfire” to NV, AZ, TX, FL, etc.

• Uninsurable risk for some contractors creates real problems for E&O carriers

• Does SB 800 and other like “right to repair” statutes really help?

• OCIP’s on Condos…They’re BAACK

Claim Handling ChallengesClaim Handling ChallengesMultiparty Complex Multiparty Complex

Construction LitigationConstruction Litigation

• A&E program loss results are driven by two major factors: Defense expenses to defend complex

multi party construction litigation. Large damage backdrops, with the

amounts often “stipulated” in many situations (cost overruns, structural repairs).

Claim Handling ChallengesClaim Handling ChallengesMultiparty Complex Construction Multiparty Complex Construction

Litigation (Cont’d.)Litigation (Cont’d.)

• Multi party complex construction litigation often can be: Very expensive to defend. Protracted, unwieldy, time and emotion draining

litigation. Difficult to settle due to the number of parties. Require costly pretrial discovery. Require costly (multiple) expert witnesses. Involve costly “document glut”.

Claim Handling ChallengesClaim Handling ChallengesMultiparty Complex Construction Multiparty Complex Construction

Litigation (Cont’d.)Litigation (Cont’d.)

• A&E Claim Departments must be well staffed and resourced. Claim examiners must be highly proactive

on this type of litigation.

Claim Handling ChallengesClaim Handling ChallengesMultiparty Complex Construction Multiparty Complex Construction

Litigation (Cont’d.)Litigation (Cont’d.)

• MEDIATION: Is the cure worse than the disease?

• Mediator “Brain Drain” on the Bench

• Joint Defense can be beneficial or a real nightmare

• Creative Assumption of Defense Techniques

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers

MarketplaceMarketplace

1. There is abundant capacity available for most design firms.

• There are 20+ markets providing A/E coverage in the current marketplace through specialty agents, retail agents only, or retail and wholesale brokers as well

• The marketplace is perceived as softening, but there is some uncertainty about the effect of catastrophic loss from Hurricane Katrina and Rita on capacity as well as rates

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

• Companies are niche underwriting—declining unprofitable professional disciplines or unprofitable operations within acceptable disciplines

• Specialty agents no longer place 90-100% of their book with one carrier

2. Extremely broad coverage is available in the standard market, but the E & S market has expanded coverage as well.

• Carriers have agreed to provide mold coverage on a case-by-case basis

• There are options available for first dollar defense

• Punitive damages are available• Definition of Professional Services can be

amended to include Personal Injury arising out of those services

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

3. Agents are required to commit substantial time and resources to providing risk management services for their clients.

• Risk management seminars are held for individual or groups of clients to assist them in earning continuing education and premium credits

• Contract review is provided on a regular basis.• Analysis of Quality Assurance/Quality Control programs• Claims review and assistance with insurance carrier

representatives

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

4.There are exposures which continue to be difficult to place regardless of capacity

• Structural engineers• Geotechnical engineers• Environmental engineers that hire contractors• A/E firms that have design/build operations including

actual constructiono Professional markets want to exclude the construction entityo Most general liability for A/E firms is written on a BOP and

the construction operations eliminates BOP markets

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

• Residential work—especially condominiums

o Firms are underwritten on the basis of condo work as a percentage of total fees

o Some larger firms are limiting condo work or staying away from condo work entirely

o Smaller firms see this as an opportunity but can’t afford the premium if it is available

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

o Agents are seeing condominium development on the rise

Downtown renovation attractive to aging population Reconstruction due to hurricane damage in coastal

areas

o Loss Experience has been horrible for condominiums

A problem with one unit is multiplied by the number of units as a potential loss

Developers have dissolved themselves and A & E firms are targets for homeowner claims

Maintenance issues result when dues aren’t paid and properties begin to deteriorate

• Projects of any kindo No such thing as coverage for condo projects o Carriers limiting project coverage to those firms for

which they write practice coverageo Capacity for projects is limitedo OPPI has been marketed to fill the void

Protects the owner in the event the the A/E’s coverage is not available or is insufficient

Requires certificates of insurance be provided by the A/E firms for the practice professional liability

Carrier may waive right of subrogation against the A/E firm maintains practice professional liability

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

• Large firms with frequency and severityo Have been re-underwritten and in many cases non-

renewed by standard markets

o Placing them in the E & S market causes coverage issues for the agent which puts pressure on E & S

carriers

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)

• Non-traditional firmso Small operations with professionals who have split

away from larger firmso Trying to come up with new ways to make money

by specializing in the less desirable areas of practice that are also challenging from an insurance coverage perspective

o Don’t have enough fee revenue to pay for the E & S coverage and don’t qualify for standard markets

• Municipality work—firms whose practice includes a high percentage of municipal work are being required to carry higher limits

Trends in the Current Trends in the Current Architects & Engineers Architects & Engineers Marketplace (Cont’d.)Marketplace (Cont’d.)