When a Problem Becomes a Claim
Design and construction projects rarely go exactly as planned. Changes occur, unexpected conditions are discovered, schedules slip, costs increase, and disagreements develop over who was responsibility. Most of these issues are resolved during the normal course of a project. Occasionally a seemingly routine project problem begins to develop into a dispute and potentially a professional liability claim.
For architects and engineers (A/E) recognizing that transition is an important part of their risk mitigation effort. A firm does not have to receive a lawsuit or formal demand for damages before involving its professional liability insurance carrier. In fact, waiting too long can reduce the opportunity to resolve a matter before positions harden and a formal claim is filed.
Warning Signs
A potential claim may begin with something as simple as an unhappy client, contractor allegation, unexpected construction cost, design change, or disagreement over responsibility. The key is recognizing when an ordinary project issue is changing into a potential dispute.
Warning signs may include a client withholding payment because of an alleged design problem; a contractor submitting a significant number of requests for information (RFI’s) requiring additional compensation attributed to the design; repeated allegations of errors or omissions; demands that the design professional pay for corrective work; significant project delays allegedly caused by design issues; or communications suggesting that attorneys, insurers, or claims consultants have become involved.
None of these situations necessarily means the design firm was negligent. A professional liability claim can arise even when the design professional ultimately did nothing wrong. Defense costs alone can be substantial, which is one reason early recognition and proper handling are so important.
Potential Claim or Circumstance
One of the most important distinctions is between a potential claim or circumstance and a formal claim. A circumstance may exist when the firm becomes aware of facts that could reasonably result in a claim, even though no lawsuit or formal demand has been made. Depending on the policy, reporting such a circumstance during the applicable policy period can be important to preserving coverage if the matter later develops into a claim.
When a significant project dispute emerges, the firm’s designated risk manager or senior management should promptly review the situation and consult its insurance broker or professional liability carrier regarding reporting requirements. Information provided with a notice of circumstance will typically include:
* Known facts surrounding the problem or dispute
* Parties involved or potentially affected
* Relevant dates and project events
* When the firm first became aware of the problem
* Allegations being made against the firm
* Reasons the firm believes the situation could develop into a claim
The firm should review their actual insurance policy. The policy will identify the reporting process and required information.
Should and Should Not’s
Once a potential claim has been identified, the firm’s response can significantly influence the outcome. The first priority should be preserving project records and establishing a clear chronology of events. Relevant contracts, drawings, specifications, submittals, RFIs, meeting minutes, emails, field reports, photographs, schedules and other project documentation should be maintained.
Project personnel should be instructed not to alter, delete, supplement, or “clean up” existing records. Internal communications concerning the dispute should also be carefully managed.
The firm should continue to perform its contractual responsibilities unless advised otherwise. However, project personnel should avoid making statements assigning blame or admitting that the firm made an error. An effort to maintain a client relationship by saying, “This was our mistake—we’ll take care of it,” can create significant problems later.
Similarly, the firm should not voluntarily agree to pay damages, make a settlement offer, assume another party’s liability, or enter into an agreement resolving the dispute without first consulting its carrier and, when appropriate, legal counsel. Professional liability policies commonly contain provisions requiring insurer consent for settlements and certain expenditures.
Available Resources
Early reporting does not necessarily mean that a claim will be opened or litigation will follow. Depending on the carrier and policy, pre-claim assistance may be available to help the firm evaluate the situation and determine an appropriate response.
Professional liability carriers commonly work with attorneys experienced in defending architects and engineers. Their involvement can help the firm evaluate contractual responsibilities, understand the allegations, develop an appropriate communication strategy and explore opportunities for early resolution. This can be particularly valuable while the project is still underway. Resolving a dispute during construction may prevent the problem from expanding into delay damages, additional construction costs, withheld professional fees and ultimately litigation.
Problems Just Don’t Go Away
Perhaps the biggest mistake a design firm can make is assuming that a project problem will simply go away. Project managers and principals should be trained to recognize claim warning signs and know the firm’s internal reporting procedures. They do not need to determine whether negligence occurred. Their responsibility is to recognize when a situation has moved beyond normal project management and should be elevated to firm leadership.
The objective is not to report every routine disagreement as a claim. It is to identify significant circumstances early enough that the firm, its broker, insurer and counsel have options. If a formal demand or lawsuit arrives, many options that could have corrected the matter may already be gone.
Recognize the warning signs. Document the facts. Report the circumstance appropriately. Avoid admissions or unauthorized settlements. Most importantly, act early. Effective claims management does not begin when a lawsuit is filed. It begins when the firm first recognizes that a project problem may be turning into something more.
