Red Flags

Liability insurer DPIC Companies of Toronto examined all its files of closed claims by professionals from 1993 through 1999.

Here are some red flags from that study to help signal to consulting engineers when they need to be more diligent in identifying, weighing and managing the risks of practice.

Business practices not technical issues are the key to reducing exposure. The study found that technical issues relate only to the outcome of 20% of all claims. The outcome of the majority of claims relate to everyday business practices.

All types of engineers are susceptible to liability claims. Nearly 70% of claims were against consulting engineers, compared to 30% against architects, landscape architects and interior designers. Among engineers, civil engineers had the most claims made against them (27%), followed by mechanical/electrical (19%), structural (16%) and geotechnical/environmental (5%). Although claims against geotechnical/environmental engineers were less frequent, they were among the most expensive, accounting for 15% of claims dollars paid by DPIC.

Condominiums are by far the riskiest type of project. Claims involving condominiums made up 6% of the closed claims and consumed 20% of claims dollars paid by DPIC. What’s more, an inordinate number of the unresolved claims still open in 1999 involve condos, so the problem appears to be worsening. Single family residences also proved to be risky projects, as did wastewater and sewage treatment plants.

Private sector projects are riskier than public sector ones. Projects owned by private sector clients resulted in 55% of claims and 67% of claims dollars spent. Projects built for private owners who occupied the building had the most claims — 27%. However, projects built for developers were far more expensive, accounting for only 24% of the claims but devouring 35% of claims dollars.

The client is most likely to claim. By far, clients and owners bring the most claims against design firms — about 70% of claims consuming 80% of claims dollars. Next were third parties (11% of claims) and contractors/subcontractors (10%).

Walls are the most frequently defective building component. Walls ranked at the top of the list in defective building components, followed by roofs and plumbing, slabs/foundations/footings and HVAC.

Retaining walls are the most expensive defective building component. Retaining walls topped the list of most expensive defective building component. Other elements near the top of the list that ate up claims dollars included walls, roofs, HVAC, slabs/foundations/footings, electrical, phase 1 environmental site assessments and soil testing.

Property damage leads the list. Property damage was the major loss, sited in 70% of claims and consuming 70% of claims dollars. Economic losses, including cost overruns, were named in 15% of claims and ate up 21% of claims dollars. Business interruption was cited in 9% of claims and resulted in 5% of claims dollars spent.

Leading allegation is design error. More than 35% of the claims involved allegations of design error, and these claims consumed 45% of claims dollars paid by DPIC. Other top allegations, in order of frequency, were errors in specifications, construction observation, inspection services, surveying, building code interpretations, shop drawing reviews and cost/quantity estimations.

Leading outcome of resolved claims – no liability. Of all closed claims, the design firm was assessed to have no liability in 70% of the cases. Yet these meritless claims still accounted for nearly 40% of the total claims dollars spent by DPIC, representing defence costs! Though you might prevail against a claim, there are costs not only for the insurer but for the engineer, who loses time, money and peace of mind.

Lessons learned

Even though you must accept risks as part of your everyday practice you are not powerless to control them. Above all, get properly paid for the risk you assume and make sure that your services are comprehensive to enable you to do a thorough job.

Before embarking on the next project:

Choose your projects carefully, balancing risk and reward. If you are going to be involved in high-risk projects such as condominiums, make sure you obtain adequate fees. Negotiate limitation of liability clauses to minimize inordinate risks.

Choose clients carefully.

Document, document, document!

Insurance provides valuable protection, but improving your business practices are your greatest assets in avoiding risk. CCE

Jean Leveque, FCIP is assistant vice president of DPIC/Security Insurance Company of Hartford in Toronto.