Study Identifies Danger Zones for Consultants

Even being right can cost a firm a lot of time, energy and wasted effort when faced with a professional liability claim.

Claim statistics compiled by XL Design Professionals in Canada show that design firms — architectural, engineering or environmental consulting — had no liability in 70 percent of the claims filed against them during the years 1993 to 1999.

The cost of defending those claims, however, consumed nearly 40 percent of the claims dollars spent by XL Design Professionals in Canada during those years. In addition to those direct costs paid by XL Design Professionals, are the less tangible costs incurred by the insured: hours and days devoted to the claims investigation and defense, billable hours lost, aggravation and frustration.

A more detailed look at the Canadian claim information can provide some guidance on how firms can avoid the high costs of needless claims.

Choose your projects carefully. Several types of projects stood out as notable claim generators. Condominiums were the highest risk by far. While they made up just 6 percent of the closed claims, they ate up 20 percent of the claims dollars spent by XL Design Professionals. Single-family homes and wastewater treatment plants also had higher frequencies of claims.

Private sector projects were more likely to generate claims than public sector projects: 55 percent of the claims — and 67 percent of the claims dollars spent — came from private sector projects. While private owners who occupied the building had the most claims (27 percent), claims from developers were far more expensive: 24 percent of the claims, but 35 percent of the claims dollars.

Of note: Geotechnical/environmental engineers had the distinction of having the most expensive claims, accounting for 15 percent of the claims dollars paid out by XL Design Professionals in Canada.

None of this should scare a design firm away from lucrative projects, but a firm needs to balance the risk and the reward. Make sure you are getting adequate fees for high-risk projects and include limitation of liability clauses in your contracts.

Choose your clients carefully. If someone is going to file a claim, odds are it will be your client or the project owner. About 70 percent of the claims — and 80 percent of the claims dollars — involved clients or owners. Third parties were a distant second at 11 percent while contractors and subcontractors filed 10 percent of the claims. Looking at the numbers in a different way, more than 90 percent of the claims were generated by parties to the construction process while just 10 percent came from third parties — purchasers, users, passersby.

Practice good business management. When it comes to reducing exposure to potential claims, consistently good business practices are key. The study found that design errors were the most common allegations that triggered claims (involved in 35 percent of the claims), followed by errors in specifications, construction observation, inspection services, surveying, building code interpretations, shop drawing reviews and cost/quantity estimations. However, when it came to settling matters, technical issues were involved in 20 percent of all claims while everyday business practices related to the majority of claims.

The Canadian claims analysis shows that being an architectural, engineering or environmental consulting firm means facing professional liability risks on a daily basis. It also shows, however, that risk-conscious firms can find ways, through good business practices and careful project and client selection, to significantly reduce their chances of facing a claim. That makes sense in Canada as well as the United States.