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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


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?

© 2013, X.L. America, Inc. All rights reserved. I MAKE YOUR WORLD GO

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


Risk Management Fundamentals

Avoid

• Project evaluation

• Client selection

• Go/No-Go decision

Transfer

• Insurance

• Contract

Assume

• Deductible

• Self-insurance

Control

• Loss prevention

• Risk management


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


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


SECTION 2:Transferring Risk via Insurance


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


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


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


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


Key Parts Professional Liability Insurance Policy

• What is insured ?• “Professional services” of an architect, engineer,

construction manager



• 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



• 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



• What is included ?

• What is excluded ?

• Key definitions

• Who is insured ?• Principals, partners, all employees including temporary and

retired personnel• Not 1099 personnel


Underwriting

• Based on gross fees

• Areas of discipline

• Types of projects

• Types of services

• Contracts

• Claims experience

• Loss Control Measures


SECTION 3:Risk Drivers and Your Business


Claim Statistics


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%


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%


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

24

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)


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


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


Project Team Capabilities

• A primary factor in:• 25% of claims count



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


Communication Issues

• A primary factor in:• 39% of claims count



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



Technical Claims Statistics


Comparative Claims Experience


Architects and Engineers


Who Sues A/Es?


Types of Damages


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


Frequency & Severity (by major category)


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


Commercial Projects (≤ 9 Stories)

Claim Trigger

• 49% E&O


• 9% Bodily Injury – 3rd Party, Post-

Construction

• 6% Budget Overruns

Elements Involved

• 11% Other

• 10% Walls

• 9% HVAC

• 6% Foundation / Footings

• 6% Roofs


School/University Projects

Claim Trigger

• 51% E&O



• 7% Construction Delays

Elements Involved

• 17% HVAC

• 14% Walls

• 9% Roofs

• 4% Floors

• 4% Storm Water


Residential Projects

Claim Trigger

• 49% E&O

• 23% Construction Defect (highest)

• 7% Suit for Fees (nearly 2x overall)


Elements Involved

• 14% Foundation/Footing

• 9% Grading

• 9% Surveying

• 8% Walls

• 5% Beams/joists


Civil Engineers


CIVIL ENGINEERS

Who Sues Civil Engineers?


CIVIL ENGINEERS

Types of Damages


CIVIL ENGINEERS

Claim Trigger


CIVIL ENGINEERS

Frequency & Severity (by project type)


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


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

52

© 2013, X.L. America, Inc.. All rights reserved. I MAKE YOUR WORLD GO

Questions?

[email protected]

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.


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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