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The Recession’s Impact on A/E Claims
At the peak in 2006, total construction expenditures, which included design fees, were just over 1.2 trillion dollars. The recession hit in 2008 and finally bottomed out midway through 2011 with expenditures at approximately $772 billion, 40% off the 2006 peak. That challenging economic period changed the landscape for many design firms, forcing them to make difficult decisions to reduce overhead and implement cost-cutting measures including staff reductions, changes in business practices, and accepting work at reduced fees with unfavorable contractual terms. The results of these actions showcase the cost of increased risk and liability exposures for many firms. Two SmartRisk A/E Law Firm Surveys provide interesting and insightful results for design professionals including how actions taken then, are now impacting project today.
2010 SmartRisk A/E Law Firm Survey Results
It is helpful to first look back at the 2010 SmartRisk survey of 20 A/E law firms (292 attorneys) across the United States that specialize in design and construction litigation. SmartRisk Law Firm Survey Report
80%: Indicated design firms are taking on more risk
- Projects outside area of expertise
- Seeking any work available
- Not negotiating contract terms properly, particularly indemnities
- Staffing; reduction of experienced, mid-level technical management, reducing technical peer reviews
- Low Profit Margins; selecting less experienced staff leading to poor performance, quality
80%: Stated unique claims driven by economic climate
- Client trying to recoup monies for cancelled or delayed projects
- Developers recovering money from any source; make up for losses caused by poor economic conditions
- Cost overruns arising out of design errors
- Lost sales due to delay based on design error
- Design professional did not consider/advise owner on budget challenges, eliminating extras to save dollars
- Negligence, errors and omissions caused project delays, missed market peak
2014 SmartRisk A/E Law Firm Survey Results
In 2014 SmartRisk conducted another A/E Law Firm Survey of eleven (11) law firms nationally representing over 150 attorneys. This survey identified interesting results comparative to the 2010 survey findings, including the frequency and severity of claims, major causes of claims, claim resolution and new challenges and risks.
Participating individuals and firms:
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Benton J. Barton, Hall & Evans, Denver, CO
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Timothy Covey, Hinckley Allen Synder, Hartford, CT
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David Ericksen, Severson & Werson, San Francisco, CA
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Michael Kashtan, Daniels Kashtan Downs Robertson & McGimey, Miami, FL
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Doug Palandech, Forman Glennon Palandech Ponzi & Rudloff, Chicago, IL
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David Pollack, Lewis Brisbois Bisgard & Smith, New York, NY
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Thomas Schaufelberger, Saul Ewing, Washington, D.C.
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Scott Sirich, Plunkett Cooney, Bloomfield Hills, MI
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Brian Stewart, Collins, Collins, Muir & Stewart, Los Angeles, CA
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Cary Wood, Lewis Brisbois Bisgard & Smith, Los Angeles, CA
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Nicholas M. Wieczorek, Morris, Polich & Purdy, Las Vegas, NV
Regarding frequency and severity of claims; fifty percent (50%) indicated they have seen a “decrease” in frequency and/or severity of claims.
Changes in claims filed against A/E firms in the last few years?
- 25%: Increase in frequency and/or severity
- 25%: About the same
- 50%: Decrease in frequency and/or severity
Certain attorneys provided comments clarifying that the “decrease” was related to the “frequency” of claims, not severity.
Brian Stewart, of Collins, Collins, Muir & Stewart states “trends appear a bit slower in frequency of claims. I attribute this to the hangover from the recession. About five years ago virtually nothing was being built which means fewer claims. However, with the improving economy starting in 2012 including more projects, I would expect an uptick in frequency of claims to begin in the near future. Claims usually begin two to five years after projects are completed.”
Benton J. Barton of Hall & Evans Denver states, “we have seen less frequency, but in general the severity has been greater. The thinking goes, since there are less projects being built, there should be less claims on the back end, right? In our experience, there is not a true cause and effect relationship between broader market conditions and eventual claim activity.”
Disciplines with Highest Frequency of Claims:
- Architects: 28%
- Structural: 24%
- Geotechs: 21%
David Ericksen, Severson & Werson San Francisco, indicated “the prime, which is usually the architect always gets hit the most with claims.”
Projects with Highest Frequency of Claims:
- Condominiums: 29%
- Schools/Colleges/Universities: 21%
- Public Projects: 11%
Brian Steward states “condos remain a 4 letter word!” David Ericksen adds, “project types with the highest frequency and/or severity of claims have been schools.” Doug Palandech of Foran Glennon Palandech Ponzi & Rudloff Chicago indicates “we have seen an uptick in claims for multi-unit residential and hospital projects.”
Major causes of claims:
- 26%: Construction defects
- 20%: Unrealistic client expectations
- 14%: Poor project communication
Doug Palandech states, “compressed design-build schedules often result in claims, which constitute a mistaken developer expectation regarding design quality.” David Ericksen says “low bid contractors and inexperienced client staff contribute to claims.” Brian Steward adds, “the low bid environment in public work continues to drive claims.” Benton Barton indicates “the economic pressures have caused architects and engineers to agree to unfavorable written contract terms to get the work. Some of these bad provisions impose a heightened standard of care, which will then be used in lieu of standard jury instructions on reasonable care.”
In the 2014 survey, we have seen a major change from who is filing claims against A/E firms. In 2010, 70% of claims were from private Clients/Owners, however in the 2014 survey, more claims are being filed by public Clients/Owners. We have also seen an uptick in claims filed by contractors against A/E firms.
Who is filing claims against A/E firms?
- 33% Public sector Clients/Owners
- 29% Private sector Clients/Owners
- 29% Contractor
Benton Barton states, “we have noticed an increased willingness over the last decade for government officials to assert claims, where in the past issues might have been more easily resolved among parties. These projects always present very one-sided bidding, contract and disclaimer documents that protect the public entity to the detriment of design professionals. Public officials are also subject to their own money pressures, sometimes motivated to preserve funds by denying change orders, or to recoup ‘taxpayer dollars’ by seeking damages from defect claims, can also drive the process.”
When asked how most claims are being resolved; participants responded:
- 29% Negotiation
- 71% Mediation
- 0% Arbitration
Doug Palandech states, “the majority of claims are being handled through mediation; this is a curse, and is dominating the claim landscape. We need to have vigorous defense representation; there is too great a momentum to compromise in today's dispute resolution environment.” Benton Barton adds, “in most states the statute of limitations for design and construction defects does not begin to run on latent defects that are difficult to discover. Thus, we see endless debates over whether an owner ‘knew or should have known’ of a hidden design defect years before a suit is brought. Since our statute of repose can be extended up to eight years, this long tail period means that we are still getting claims arising from projects that were first designed and built back in 2005 or 2006, well before the recession hit.”
Benton Barton goes on to say “for more recent projects, economic pressures on all parties in the process have given rise to an unreasonable ‘perfection standard’ applied to architects and engineers. Budgets are tighter and do not include money for contingencies. Many times, we have seen a dynamic develop where an owner and its contracting team engage in extensive value engineering, with little or no input from the design team. Perhaps the market to sell the property has gone south, resulting in the dread of lost profits. When things inevitably go wrong – with defects appearing or profits disappearing – owners and contractors are motivated to blame others, and this blame is often cast towards the architects and engineers whose plans contain ‘some’ errors, no matter how trivial. We even had a hotly litigated case a few years ago where the architect was blamed for wasting the owner’s money, since there were high ceilings and rooms with ‘too much square footage,’ which increased the owner’s construction and operating costs. The owner argued that our client should have given better programming advice by recommending smaller spaces!”
Additional Comments:
Related to budget, value engineering and competence, contractors often fail to follow plans and specifications, especially where the design is complex. They don’t ask for clarifications, especially when the architect is not performing construction phase services. While this makes it attractive for the design professional to argue lack of causation as a defense to a claim, these issues trigger very difficult debates about the “constructability” of the plans and pit the design and contracting teams against each other in litigation. This unfortunate dynamic plays right into the hands of the plaintiff’s attorney.
In a tough lawsuit headed for trial, it is very difficult to convince a jury made up of people with little design or construction experience that “some errors” in instruments of service are to be expected, and that plans containing errors can still satisfy the standard of care. This can also be a tough sell to even experienced mediators overseeing the settlement process.
SmartRisk has successfully helped firms improve their practice and risk management efforts. If you have any questions, or are interested in obtaining more information, please contact us.
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