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A/E Claims, Insurance Rates & Construction Defects

We are on the road to recovery from the COVID-19 pandemic with economic forecasts indicating significiant growth in 2021 and beyond for design and construction professionals. However, with this recovery comes new challenges and risks including a shorage of staff, skilled labor, hardening of the insurance market, and the concern of an increase in construction defect claims.  

To obtain insights into claim and market trends, thirteen (13) industry professionals participated in the 2021 SmartRisk Claim & Risk Trend Survey. Ten (10) participants were industry leading Professional Liability (PL) insurance carriers specializing in design professionals, and three (3) law firm representatives that concentrate efforts on design and construction litigation. 

• Increase in severity of claims – 29%
• Increase in frequency of claims – 17% 

• Frequency drop a bit during the pandemic but numbers are ticking back to pre-pandemic levels the last couple months.
• In the past 12 months there was a slow down in settlements so reporting and severity were stable.
• Few settlements that were favorable based on claimants desire to settle due to pandemic shut down and eagerness to resolve litigation.
• Anticipating an uptick in claims defense costs and severity will increase and there will be an uptick in settlements that were delayed in 2020.

• Increase in severity of claims – 43%
• Increase in frequency of claims – 39% 

• We expect claims inflation to continue.
• The majority of firms we have interacted with were very busy and grew in 2020 based on backlog of projects and contracts signed 18 months prior to the pandemic.
• We believe there will be a slow down in projects in late 2021 into 2022 as a result of a slow done of new projects in 2020. 

• Architect – 23%
• Structural – 21%
• Mechanical/HVAC – 19%
• Geotechnical – 14% 

• Condominiums, Multifamily – 21%
• Residential Single Family - 15%
• Bridges, Roads, Tunnels – 13% 

• Technical error or omission – 57% 
• Non-technical – 43%

• Poor project communication and documentation – 17%
• Nonsense claims used as a cost recovery by clients – 12%
• Technical error or omission of design professional – 12%

• Ineffective, insufficient communication and documentation – 20%
• Lack of risk management and business practices training – 14%
• Improper quality assurance, quality controls of design documents – 14% 
• Poorly developed contract agreements – 14% 

• Yes – 54%
• No – 46% 

• Improper, incomplete quality assurance, quality controls – 29%
• Lack of oversight of project team and subconsultants – 19%
• Inexperienced and inadequate number of staff – 14% 

• Private sector Client/Owner – 34%
• Public sector Client/Owners – 28%
• Contractor – 28% 

• Mediation – 63%
• Negotiation - 26%
• Litigation – 5% 
• Arbitration – 5% 

• Finding experienced, qualified staff including PM's – 17%
• Inadequate project scope, compressed schedules, reduced fees – 16%
• Unrealistic client expectations – 16%
• Client selection of unqualified contractors increasing costs and failures – 15%

• Yes – 92%
• No – 8% 

• Yes – 77%
• No – 8%

• Increase 5-10% - 50%
• Increase 1-5% - 21%
• Increase>10% - 14%

• Our "California style" construction defect litigation is partly from western law firms, and partly home grown. It is now moving into the Midwest and further south, and into Texas, with the same law firms and same expert firms.

• Very challenging marketplace and great divide between insured expectations (lower premium cause by lower billings due to COVID) and carrier's reality where exposure is up due to tail nature of coverage where exposure lies with past higher revenues + anticipated uptick in claims due to economic downturn resulting.

NOTE: You are welcome to forward this newsletter to others who may be interested.

NOTICE: This article is for informational purposes only and should not be construed as legal or professional advice. Please consult with a legal or professional in your area for advice regarding your firms individuals circumstances. 

SmartRisk
Risk Performance Strategies

SmartRisk is a leading risk and performance management consultancy for design and construction professionals. Through firm specific risk assessments, training and consulting, services focus on improving overall performance, profitability and reducing insurance costs through tailored risk management solutions.

If you have any questions about our services, or would like dicusss how we could assist your efforts, please contact us.

Thank you,

Timothy J. Corbett, BSRM, MSM, CERG, LEED GA
Founder & President
626-665-8150
tcorbett@smartrisk.biz
www.smartrisk.biz.

Copyright and Information Only. This newsletter is for information purposes only and should not be construed nor relied upon as guidance, regulatory or legal advice. Readers should consult with appropriate counsel regarding their specific situations and circumstances. SmartRisk shall not be liable for any errors in content, or for any actions taken in reliance thereon.

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