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1© 2013, X.L. America, Inc.. All rights reserved. I MAKE YOUR WORLD GO
RISK DRIVERSUnderstanding the Dynamics of Risk in the A/E Industry
Insurance and Loss Prevention Education from XL Design Professional and Oswald Companies
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO 2
Learning Objectives
• Develop an understanding of the nature of risk
• Acquire strategies to manage and respond to risk
• Learn about business practices that mitigate risk
• Explore the technical aspects of design and project delivery that influence risk
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Workshop Outline
• SECTION 1 – The Nature of Risk
• SECTION 2 – Transferring Risk via Insurance
• SECTION 3 – Risk Drivers and Your Business
4© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
SECTION 1:What is Risk?
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What is Risk?
• Derives from the old Italian word riscare: to dare
In this sense risk is a choice rather than a fate (Bernstein, Against the Gods)
• In quality terms, the consequences of variance outside the tolerance limits
• Chance of loss
“Consequences” can be financial, legal, moral or societal
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Risk Management Fundamentals
Avoid
• Project evaluation
• Client selection
• Go/No-Go decision
Transfer
• Insurance
• Contract
Assume
• Deductible
• Self-insurance
Control
• Loss prevention
• Risk management
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The Cost of Risk is Like an Iceberg
Direct costs to your firm
Revenue required to offset losses = 10 x amount of loss
Principals’ time in dealing with the problem
Other problems resulting from lack of attention by principals
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More Evidence
Annual ACEC survey
• Number of personnel hours spent defending claims
• Averaged 80 hours for three years
• Now almost 200 hours
Cost calculation
• 80 hours x $100 per hour = $8,000
• $80,000 of revenue is needed*
• Typical fee per job is $5,000
* Assuming a 10% profit margin
2008 2009 2010 2011 20120
50
100
150
200
250
Hours Defending Claims
ACEC Survey - Year Published
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SECTION 2:Transferring Risk via Insurance
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Transferring Risk via Insurance
• One way to transfer risk
• No product covers everything
• Must be a fortuitous loss and must adhere to indemnity principle
• Contract between you and carrier (not your client)
Liability Insurance Policies
Professional (PL)•Claims made•Covers “professional services”•Expense within limits
General (GL)•Occurrence form•Excludes “professional services”•Expense outside the limits
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Claims Made Policy
Date Allegedly Faulty Service
Rendered
Date Claim is Made and Reported to Carrier
Firm Established
Firm
Purchases Insurance
Policy Expires and is Not Renewed
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
No Coverage Coverage No Coverage
Coverage: Coverage Would Apply, Subject to Limits and Deductible for Policy Year 3
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Project PL Insurance
• Guarantees limit of coverage
• Guarantees length of time of coverage
• Covers all professionals on project
• Promotes better claims handling
• Dispute resolution encouraged
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Project PL Policy
Design Period Construction Period Discovery Period
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
Coverage Begins Coverage Ends* *At This Point, the Project Policy Expires and Coverage Reverts to the Design Team’s Practice Policies
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Key Parts Professional Liability Insurance Policy
• What is insured ?• “Professional services” of an architect, engineer,
construction manager
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Key Parts Professional Liability Insurance Policy
• What is insured ?
• Key Definitions• “Professional Services”- every carrier has a different
definition• “Claim(s)”- always a demand for money or service• Loss Prevention Assistance – anything that a reasonable
person believes will turn into claim
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Key Parts Professional Liability Insurance Policy
• What is insured ?
• Key Definitions
• What is excluded?• Better covered in another insurance product, • i.e, Workers Comp• Uninsurable, i.e. nuclear• Clarifies intent of insurer, i.e. contractual construction
activities
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Key Parts Professional Liability Insurance Policy
• What is included ?
• What is excluded ?
• Key definitions
• Who is insured ?• Principals, partners, all employees including temporary and
retired personnel• Not 1099 personnel
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Underwriting
• Based on gross fees
• Areas of discipline
• Types of projects
• Types of services
• Contracts
• Claims experience
• Loss Control Measures
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SECTION 3:Risk Drivers and Your Business
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Claim Statistics
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What percentage of claims actually go to trial?
A. Approximately 5%
B. Less than 10%
C. 12-15%
D. Approximately 25%
E. Less than 50%
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When Do Claims Happen?
Years from SubstantialCompletion of Project
Percentage ofClaims
CumulativePercentage
Prior To Completion 26.3% 26.3%
1 –2 Years After 34.5% 60.8%
3 – 4 Years After 16.9% 77.7%
5 – 6 Years After 8.9% 86.5%
7 – 8 Years After 4.5% 91.0%
9 – 10 Years After 3.0% 94.0%
More than 10 Years After 6.0% 100.0%
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Risk Drivers:Classification of Causes
• TechnicalError and/or omission of a technical nature that results in a loss prevention file or claim
• Non-technicalBreakdown in project management processes or business practices that leads or contributes to a loss prevention file or claim
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Negotiation and Contracts
Client Selection Project Team Capabilities
Communication
2001
2012
Percentage of Claims Affected
Top 4 Non-Technical Risk Drivers
13%
16%
24%
27%
6%
23%
25%
39%
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Negotiation and Contract Issues
• A primary factor in• 6% of claims count (frequency)
• 13% of claims dollars (severity)
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Negotiation and Contract Issues
38% - Unclear or inappropriate scope
16% - No formal project evaluation
12% - No contract before work started
8% - Lack of construction phase services
8% - Other
6% - Lack of mediation clause
5% - No contingency fund
3% - Deal Breakers in contract
2% - Client agreement not reviewed by lawyer
2% - Field staff didn't have/understand contract
1% - Client agreement not reviewed by senior management© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Client Selection Issues
• A primary factor in• 23% of claims count
• 18% of claims dollars
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Client Selection Issues
44% - Client inexperienced in design issues
22% - Client has history of claims / litigation
17% - Client in Poor Financial Condition
7% - Client behind in fee payments
4% - Contractor selection
4% - No Formal Review of client
3% - Other
1% - Client not receptive to ADR
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Project Team Capabilities
• A primary factor in:• 25% of claims count
• 34% of claims dollars
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Project Team Capabilities
51% - Inexperienced design staff
20% - Inexperienced on-site staff
18% - Inexperienced project manager
4% - Other
3% - Firm inexperienced in project type
2% - Unqualified back-up staff
2% - Outside firm's normal territory
1% - Insufficient number of staff
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Communication Issues
• A primary factor in:• 39% of claims count
• 29% of claims dollars
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Communication Issues
51% - Lack of procedures to identifyconflicts, errors and omissions
17% - Project issues and potentialdisputes not handled correctly
13% - Scope of services not explained to client
9% - Lack of documentation re: changes in scope, budget, etc.
6% - Project staff not aware of responsibilities
3% - Other
1% - Regular progress reports regarding changes not approved
© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
34© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO
Technical Claims Statistics
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Comparative Claims Experience
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Architects and Engineers
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Who Sues A/Es?
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Types of Damages
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Claim Trigger
49% - Design Error
16% - Construction Defect Detected
7% - Construction Budget Overruns
5% - Bodily Injury -Post Construction, 3rd Party
5% - Construction Schedule Delay
4% - E&O Alleged by Owner in Response to Suit for Fees Owed
4% - Product Failure
3% - Unrelated 3rd Party Action
7% - Other
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Frequency & Severity (by major category)
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Infrastructure Projects
Claim Trigger
• 40% E&O (lowest of all)
• 15% Construction Defect
• 8% Bodily Injury – 3rd Party, Post-Construction
• 7% Bodily Injury – Construction
Elements Involved
• 15% Pavement / Curbs / Sidewalks
• 11% WWTP / Sewage
• 10% Surveying
• 6% Storm Water
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Commercial Projects (≤ 9 Stories)
Claim Trigger
• 49% E&O
• 13% Construction Defect
• 9% Bodily Injury – 3rd Party, Post-
Construction
• 6% Budget Overruns
Elements Involved
• 11% Other
• 10% Walls
• 9% HVAC
• 6% Foundation / Footings
• 6% Roofs
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO 43
School/University Projects
Claim Trigger
• 51% E&O
• 14% Construction Defect
• 10% Budget Overruns
• 7% Construction Delays
Elements Involved
• 17% HVAC
• 14% Walls
• 9% Roofs
• 4% Floors
• 4% Storm Water
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO 44
Residential Projects
Claim Trigger
• 49% E&O
• 23% Construction Defect (highest)
• 7% Suit for Fees (nearly 2x overall)
• 5% Budget Overruns
Elements Involved
• 14% Foundation/Footing
• 9% Grading
• 9% Surveying
• 8% Walls
• 5% Beams/joists
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Civil Engineers
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CIVIL ENGINEERS
Who Sues Civil Engineers?
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CIVIL ENGINEERS
Types of Damages
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CIVIL ENGINEERS
Claim Trigger
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CIVIL ENGINEERS
Frequency & Severity (by project type)
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CIVIL ENGINEERS
Elements Most Often Involved
Risk Management Cycle
Client Selection
Contract
Communication
MatchCapabilities
ProjectObjectives
Staff
Increased Profit
Internal Investment
Improved Project Management
Improved Quality
51© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
What direction will your firm take?
• Identify practice or project management weaknesses that expose your organization to risk
• Use the Risk Drivers data
• Contact your XL Group agent or broker, and take advantage of our A/E industry expertise
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© 2013, X.L. America, Inc.. All rights reserved. I MAKE YOUR WORLD GO
Questions?
xldp.educ@xlgroup.com831-657-2524
Course EvaluationsIn order to maintain high-quality learning experiences, please access
the evaluation for this course by logging into CES Discovery and clicking on the Course Evaluation link on the left side of the page.
© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO
Legal Disclaimer
• In the US, the insurance companies of XL Group plc are: Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Insurance Company of New York, Inc., XL Select Insurance Company, and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions.
• This presentation is intended for informational purposes only and does not constitute legal advice. For legal advice, seek the services of a competent attorney.
• Any descriptions of insurance provisions are general overviews only. THE INSURANCE POLICIES, NOT THIS PRESENTATION, FORM THE CONTRACT BETWEEN THE INSURED AND THE INSURANCE COMPANY. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. All coverages are subject to individual underwriting judgments and to state legal requirements.
• XL Group is the global brand used by XL Group plc’s insurance subsidiaries.
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