Disputes happen. Dissatisfied clients, construction firms with cost-recovery programs, injured third parties and other claimants often try to tap into the assets of professional service firms—and their insurers—to solve a real or perceived problem.
It is important for policyholders to report any circumstance that could lead to a claim so that claims specialists work to head-off potential claims and litigation. Some policyholders remain concerned that reporting a circumstance will create an adverse loss experience that will increase their insurance rate. Defense costs incurred in defending policyholders in pre-claim situations may be paid by the insurer. In addition, pre-claim assistance costs and circumstances reported are often not viewed as part of the loss experience during the underwriting process. An additional benefit to early circumstance reporting is that the design professional locks in the limit of liability and deductible in force at the time the circumstance is reported should the circumstance or incident later develop into a situation involving a demand for money or services (if the incident or circumstance becomes a claim).
For example, historically under the CNA/Schinnerer program, early involvement by expert CNA claims personnel and legal counsel experienced in claims and potential claim situations has shown that early involvement lessens a design firm’s exposure. Design professionals receive free pre-claims assistance under the CNA/Schinnerer program and claims specialists are available at no charge to insureds to discuss potential claim situations. Additionally, costs and circumstances reported to CNA are not viewed as part of the loss experience during the underwriting process. Defense costs incurred in defending policyholders in pre-claim situations are paid by CNA at no charge to insureds. Since circumstance reporting is “invisible” to the underwriters, design professionals are urged to err on the side of caution and contact CNA with questions involving pre-claim circumstances and incidents.
Compared to the billings for residential design projects, architects and other design professionals experience a large number of claims. Although some firms seem to find residential design services—either for single-family or multifamily or rental projects—profitable, from a claims perspective they are not. That is why at least five of the 50 or so insurers providing professional liability insurance exclude residential projects from coverage.
One way to look at projects as being profitable is to look at the percentage of claims generated by the project type compared to the percentage of reported billings for that project type. Profitable projects have a ratio where the percentage of billings is greater than the percentage of claims. Unprofitable projects have a ratio where the percentage of claims exceeds the percentage of billings. The ratio for some types of projects such as educational facilities is about an equal comparison of percentages. But projects for any type of residential projects have ratios that show that the percentage of claims is significantly higher than the percentage of billings.
In a recent study over a five-year period, single-family housing projects had about a 1.7 to 1 ratio—the percentage of claims to percentage to billings. Apartments and other “lodging” projects had about a 2.8 to 1 ratio while the worst of all project types—multifamily housing including condominiums had a percentage of claims that was about 4 times the percentage of reported billings. Clearly all residential design as a category represents a segment where claims are frequent.
Although the Schinnerer program with CNA insures firms with large residential practices—including those that design condominiums—profitability issues are noted. Prior to the recession, just over 16 percent of all income reported by CNA/Schinnerer policyholders represented billings on residential projects; however, these projects represented nearly 42 percent of all claims brought against their policyholders.
The CNA/Schinnerer program provides Professional Liability and other Business Owners’ coverage to AIA member firms through the AIA Trust. For more information, go to www.TheAIATrust.com.