Claims Against Architects on the Rise

Professional liability claims against architects took an up-tick over the past five years, according to a XL Design Professional study of 8,687 claim files for architects and engineers from 1996 to 2000, including 3,796 architect claims. The study represented $396 million in claims payments made by XL Design Professionals on behalf of its insureds. It measured relative risk of design work by design discipline, project type, and other factors and revealed claims trends since XL Design Professional’s last major claims study covering the years 1989 to 1995.

According to the Risk Drivers Study, architects are higher-than-average risks compared to the total group of XL Design Professional policyholders. XL Design Professionals paid out 44% of its claims dollars, or $176.2 million, on behalf of its architect policyholders, yet these architects only represented 39.6% of the fee base generated by all XL Design Professional policyholders. What’s more, architects experienced the greatest increase in claims expenses since the previous XL Design Professional study, when they accounted for 35% of fees and 37% of claims dollars paid.

For purposes of the study, XL Design Professional defines an "average" risk as one where percent of fee dollars earned by the design discipline (a measure of the total work volume that creates risk exposure) and percent of claims dollars paid out by XL Design Professional on behalf of that discipline are roughly equal. When percent of fee dollars is higher than percent of claims dollar, the discipline is considered a lower-than-average risk. When percent of claims dollars is higher than percent of fee dollar, then it is considered a higher-than-average risk.

"It appears the increase in claims against architects is largely a reflection of an increase in professional liability claims overall," said Steve Mauck, XL Design Professional’s Chief Claims Officer. "Because architects are most often the prime design firm on projects, they are subject to claims even when the specific problem might have been caused by a subconsultant. So, in times when claims are on the increase, architects take a larger-than-average hit."

Mauck said the robust economy of the late nineties was a contributor to the rise in claims activity.

"Since our last study in 1995," said Mauck, "the design industry has evolved in ways that make architects more vulnerable to disputes and claims. The growth in available projects far outpaced growth in the number of firms and number of experienced professionals. As resources were stretched by increased workloads, inexperienced staff was assigned to tougher challenges and details were missed. Our Risk Driver study showed that problems with non-technical factors such as project team capabilities, communications, client selection and contract negotiations contributed to 70 percent of claims."

The Risk Driver study also revealed:

By project type, residential condos proved to be the riskiest for architects. While these projects represented 10% of claims dollars paid by XL Design Professionals on behalf of architects, they bring in only 1% of fees for these architects. Low-risk projects included malls/retail (8% of fees and only 3% of claims dollars) and commercial/industrial projects of less than nine stories (26% of fees and only 9% of claims dollars paid by XL Design Professionals).

Among the specific design elements, walls were involved in 10.6% of claims by count and 16% of claims dollars. Roofs were involved in 10% of closed claims and 11% of claims dollars; floors were involved in 5% of claims and 4% of claims dollars; HVAC was a factor in 7% of claims and 5% of claims dollars paid.

Economic loss was the most typical type of damage, accounting for 54% of claims dollars and present in 46% of claims. Property damage was reported in 36% of claims and consumed 35% of claims dollars while bodily injury made up 16% of claims and 11% of claims dollars.

The owner/client sued the architects in 62% of claims. Third parties were the claimant 23% of the time and contractors/subcontractors in 11% of the cases.
"These findings reinforce our longstanding belief that paying attention to the quality of business practices is paying attention to loss prevention," said Mauck. "And the level of success an architects firm has with risk management, has a direct bearing on the firm’s bottom line."