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Architects, engineers face more errors and omissions litigation as economy improves

Posted On: Nov. 3, 2013 12:00 AM CST

Architects, engineers face more errors and omissions litigation as economy improves

Steady gains in U.S. construction spending in 2013 have aided architectural and engineering firms' revenue, but experts warn that the resulting rush on new or restarted projects likely will generate greater frequency in E&O claims against designer professionals.

“One of the things that we know that happens is that as the economy improves, claims frequency actually increases,” said Randy Lewis, a Denver-based vice president of loss prevention and client education at XL Group P.L.C. “When the economy went into the tank, it set the stage for claims frequency to start to experience a spike.”

Though the number of active construction projects has increased steadily over the past two years, according to Federal Reserve data (see chart, page 22), experts said the greatest gains have been made in industry sectors that typically pose the greatest liability claim potential against design professionals, including single-family housing and high-rise condominium and apartment buildings.

Across all construction segments, experts said the most common driver of E&O claims against design professionals is their lack of documentation of all communications with contractors and project owners, particularly in cases where material changes are made to final designs or the prescribed building materials.

“Overall, the lack of documentation of decisions — who made them, when they were made and what alternatives were presented to the client — is probably the single greatest challenge we have in extricating clients from a professional liability claim or dispute,” Mr. Lewis said.

Further complicating matters is the extent to which design professionals still face the lingering market effects of the 2007-2009 Great Recession. For example, experts say, increased competition for new work continues to undermine architects' and engineers' footing in contract negotiations with project owners.


“There was so much competition for a very low number of projects, they were much less forceful in their negotiations, and that's generally the most powerful tool for a design firm to protect itself in a professional liability claim scenario,” said Mary Mazza, a Chicago-based senior vice president of property/casualty insurance lines and risk management at Wells Fargo Insurance Services USA Inc.

“As a consequence, she said, “claims don't close as quickly as they used to. They seem to drag out, and that can be very painful for design firms because their defense costs are usually within their E&O deductibles.”

Experts said the severity of claims for this segment, even during and immediately after the economic downturn, did not fluctuate much. “It's always going to be a frequency business,” Ms. Mazza said.

She said it remains to be seen whether architectural and engineering firms' acquiescence to unfavorable contractual risk transfer terms or assuming liability they likely could have refused under better economic conditions will drive an increase in the frequency of E&O claims.

“It's still probably too early to tell, because a lot of projects are only just starting or resuming construction,” Ms. Mazza said. “I'll be very interested to see whether that actually manifests itself as an increase in claims activity, because the insurers have always told us that where they really focus when underwriting these risks is the client's contract and risk management practices when it comes to their professional services agreements.”

By effectively choking off funding for new projects in most construction sectors, the financial collapse also hurt architectural and engineering firms' ability to hire and retain design professionals qualified to perform critical functions, such as on-site reviews of general contractors' work during the build-out phase.

“It's become a problem, as you consider economic conditions in the overall market,” said Tom Gambardella, a White Plains, N.Y.-based partner at Wilson Elser Moskowitz Edelman & Dicker L.L.P. “Many of these projects have been dormant for a period of time because of a lack of funding, so you have the issues related to restarting a project where you have design professionals picking up an existing project that's entirely new to them.”


Mr. Gambardella added that failing to preserve continuity in the design professionals responsible for a specific project — especially following multiyear delays — often generates disputes between project owners and professional services firms over the payment status and schedule, as well as copyright issues regarding the handling of another designer's drawings.

“That has all sorts of implications as far as potential exposure for design professionals, so they need to make sure they're doing their due diligence and, to the extent that they're able, seek contractual safeguards,” Mr. Gambardella said.