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Armed With Information – Claim Survey Results
Many design firms are doing well with gross revenues up in the past year. Seventy seven percent (77%) of firms identify an increase in gross revenues compared to the previous year. Twenty five percent (25%) are up 10-19% and another 25% up 5-9% with an average for 50% of firms up 12% in gross revenue (ACEC member firm Survey). However, problems have come with this growth for many design firms.
SmartRisk Survey Participants
SmartRisk conducted a survey of risk and claim trends for design firms. Fifteen (15) Architect and Engineers (A/E) Professional Liability (PL) Insurance Carriers, and five (5*) Law Firm representatives specializing in design and construction litigation participated.
1. Admiral - Stephen Jones
2. AIG - Robert Rogers
3. Allianz - Glen R. Mangold
4. Aspen - Robert Cunningham
5. AXA XL - Albert Rabasca
6. Beazley - James Schwartz
7. Berkley DP - Larry Moonan
8. Berkshire Hathaway - Joe Schrancz
9. Byrne & O’Neil - Steve Schreckinger *
10. Collins Collins Muir & Stewart - Brian Stewart *
11. Great American - David Blue
12. Hall & Evans - Benton Barton *
13. HCC - T. S. Accente
14. Jones Waldo Holbrook McDonough - Craig Mariger *
15. Liberty - Georges Pagault
16. PUA - Sandip Chandarana
17. Schinnerer - Kevin Collins
18. Terra - David Coduto
19. Travelers - John Rapp
20. Wilson Elser - James Obrien *
Key Finding
67% of claims are being caused by technical errors and omissions.
Major Causes of Claims
20% - increase pressure on project scope and schedule
20% - poor project communication and documentation
19% - Improper quality assurance, quality controls
18% - inexperienced and inadequate number of staff
15% - lack of oversight of project team and subconsultants
Major Challenges
20% - finding experienced, qualified staff including PM's
19% - inadequate scope, compressed schedules, reduced fees
14% - not managing unrealistic client expectations
13% - not implementing effective risk management for condo's
Construction Expenditures
Total construction expenditures have been on a steady incline since 2012. According to the U.S. Census Bureau, total Construction spending during May 2019 was estimated at a seasonally adjusted annual rate of $1,293.9 billion compared to May 2018 of $1,324.3 billion, an all time high to date (-1.02%).
Revenue and Staffing
On average, the revenues for design firms has increased four to five percent (4 - 5%) for the past five years especially if firms have been providing services in the private, residential market segments. However the design profession is much leaner today than prior to the 2008 recessionary period. According to Architectural Record, the net revenues of firms have recovered from the recession period, with revenues returning to the 2008 peak by 2015. However architectural firms staffing has decreased by 17 percent, from 128,000 billable positions in 2008 to 106,000 in late 2016, meaning 22,000 fewer in staff are doing roughly the same amount of work.
Technology advancements and improved efficiencies can be playing a role in the reduction of staffing levels, however when design firms have been polled, approximately 87% indicate they are trying to hire, however are having a difficult time finding qualified staff.
Technical Claims
Reviewing past ACEC member firm surveys regarding causes of claims with between 350 to 410 firms participating, in 2008 and 2009, 25% of claims were caused by an error or omission of a technical nature. When causes of claims are totaled, the primary cause during these years continues to be non-technical in nature including a breakdown in communication, documentation - 22%, unfavorable contracts - 15%, project management, training - 14% and client selection - 14%.
In 2011 a change started to occur. An error or omission of a technical nature as a cause of claims rose to 40%. On average, a majority of claims usually occur between three to five (3-5) years after a project is completed - placing the time period for project completion for these claims at 2008, the beginning of the recessionary period. In 2012 it rose again to 49%, and in 2016 an error or omission of a technical nature was identified 57% as a cause.
This same trend has also been identified in SmartRisk surveys. In this SmartRisk survey, 67% indicated technical error or omission as the cause of claims and 33% as non-technical. Respondents when stating a rise in technical claims, 18% - indicated inexperienced and inadequate number of staff, 18% - improper, incomplete quality assurance, quality controls, 15% - lack of oversight of project team and sub-consultants as a cause for the rise in technical claims.
Indicated as the number one challenge for firms today - finding experienced, qualified staff including project manager (PM's).
Product Liability Risk
A topic of increased risk brought to our attention is specifying certain products, including green products that do not have a proven track record, or products that require stringent preparation and installations processes that are extremely difficult to follow and control (temperature, timing requirements, etc.). If instructions are not followed exactly, and a product fails, that has lead to claims and litigation against design firms. Certain manufactures have provided initial training certifying installers, however with contractor turnover, the knowledge is not passed along to other employees.
Owner experts are also imposing a higher standard of care on design firms specifying the product with a duty to undertake “rigorous” investigation of the product, including a duty to obtain product test results because it is not enough to rely on the manufacturers’ representations and data sheets. Despite the engineers’ reasonable reliance on manufacturers’ representations, owners’ experts are creating factual issues that prevent summary judgment.
Continued Concern
Until a solution to the shortfall of finding qualified staffing is resolved (a non-technical cause of claims causing technical claims), or a slowdown in the industry occurs, it is the opinion of SmartRisk that technical error and omission claims will continue, and for three to five years (3-5) years following the completion of projects. The lack of having qualified staffing levels within a design firm can be related to any of the primary causes of technical, and non-technical claims identified in this survey.
SmartRisk Survey Report
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