| Risk Management Basics
Put a claim-response plan in place now, just in case
by James B. Atkins, FAIA, and Grant A. Simpson, FAIA
You don’t have to practice architecture very long before you encounter challenges to your work. These may come in the form of a simple disagreement over your opinions or the performance of your services, or they may come as a direct demand for compensation for alleged damages caused by your actions. Nevertheless, you will find that you are judged not only by what you do, but when, how fast, and why you do it. And the services you provide will be scrutinized by other professionals who almost certainly will disagree with your actions.
To understand this challenging process and defend yourself through it better, it is helpful to understand what a claim is: the vehicle for launching an effort to recover alleged damages. We are protected from claims against our services by our professional liability insurance policy. These policies typically have deductibles that you must pay up front to activate coverage; they contain policy limits, which are the monetary amounts that the policy provides; and they have rules for preserving the coverage, to which you must conform to keep your coverage intact.
Professional liability insurance policies are known as claims-made policies. That is, policy coverage is triggered when you give notice that a claim has been made against you, and you are protected by the policy that is in effect at the time of the claim. This differs from your automobile insurance policy, which is triggered by the date the injury to a person or property occurs. Injuries done through professional services can be caused by an act or a failure to act. These can be caused by a design that may prove to be defective over an extended period of time. The claims-made process is used by insurers because of the potential difficulties in determining the date of origin of the action that precipitated the injury.
Since the claim triggers the policy coverage, it is important that a claim be defined to the extent that it can be sufficiently recognized. Accordingly, in most circumstances, an event must include three necessary elements for it to be considered a claim.
Under the terms and conditions of the typical insurance policy, however, insurance companies are generally content to acknowledge a claim against you if only the first two elements exist.
It is important that you respond quickly and appropriately when a claim is made. Your insurance company may require you to report claims on “first knowledge,” and there are advantages that you have when a claim is first made that may not sustain over time. Therefore, it is advisable to develop a Quick Response Plan that you can initiate immediately when a claim is made.
Seven Steps to a Quick Response Plan
The following scenario is an example of what you may encounter.
You have been sued. You did nothing wrong. Your counsel and your insurance claims supervisor have reviewed your case, and they have determined that it will cost $25,000 to defend, including expert witness costs, time for depositions, preparation for trial, and the trial itself. These costs do not include your time or your coworkers’ time.
Your lawyer has recommended that you offer $15,000 to settle out of the case early. You realize that you can save the $10,000 plus the extensive personnel time required for claims management. This settlement number is known as the nuisance value of the case. It is a bitter pill to take because you are paying money when you did no wrong, but it is less bitter than the alternative of weathering a protracted and expensive legal action. There may be instances such as this when the nuisance value is a good deal compared to the inevitable legal costs. The point is that you should not let your knowledge and belief that you are “in the right” overcome a wise business decision.
It won’t just go away
For many architects, just the potential threat of a problem or a lawsuit causes them to retreat into their shell and hope the matter will just go away. However, clients or contractors who believe they have been harmed by your actions seldom follow this course. For this reason, it is imperative that you keep lines of communications open with the parties, no matter how painful and intimidating it may be. Since claims rarely materialize without warning, a wise and effective claims management technique is to discuss and remain involved with any issues a party may have that could potentially lead to a formal claim. This preventive project management technique should be a part of your work habit rather than just being your risk management reaction.
In discussing disputed issues with a potential claimant, be sure to review possible early actions or remedies with your insurance-carrier representatives and solicit their advice on how to carry on the discussions. It is typically forbidden for you to admit fault or agree to pay a sum of money to avoid a claim without the prior knowledge and approval of your carrier. With that said, claims can sometimes be avoided by talking the matter out and making some form of concession, monetary or otherwise. If the claim turns out to be unavoidable, at least you and the offended party will have comfort in knowing that you tried.
Saving Private Client
The greatest loss that you can experience from a claim is the loss of a repeat client. Firms that depend upon repeat clients, such as developers or large corporations, can be devastated. Therefore, in many cases, it is important that, above all else, you must save the client. Many large clients have their own claims to deal with and they understand what you are going through and the defensive decisions that you are making. However, claims are often very emotional, and your client may choose to believe that you are now their enemy.
To counter this possibility, follow the rules of client care. They are quite simple, to the point of common sense. If you are managing your projects effectively, you may already be following most of them. The rules are:
For old time’s sake
After the battle is over and the smoke has cleared, it is time to get back to business. It is also important to remember the words of George Santayana, “Those who cannot learn from history are doomed to repeat it.” It is wise to remember all of the players and the parts they played in the claim.
If any of your consultants hid under a rock when things got tough, you must ask yourself if you want to work with them again. It is only right that they defend their professional actions. Consultants should be encouraged to understand two basic rules. First, if you get sued, you will sue them for their part. They can count on it. Second, if they hang in there with you, you will be more likely to feel comfortable working with them again.
When it comes to contractors, it is our opinion, after 30-odd years in the business, that there are two kinds of contractors in the industry: those who want to make money constructing buildings and those who want to make money taking names and making claims. These are two distinct groups because of the two distinct mindsets.
When it comes to owners, it is a little more complicated. As you begin to plan your claims defense, the first question that you must ask yourself is whether or not you expect to work with this client in the future. Future work is the ultimate claims-resolution technique. Spending money to make more money is simply not as painful as just spending money. Remember, this is business. If future work is in the cards, then you must consider whether the future work will make up for the loss. Fees for small jobs may never offset a healthy deductible expense. The objective is to make your decision early, and then either do everything possible to save the client or go ahead and declare Armageddon.
An ounce of prevention …
Hopefully, these claims management basics will be beneficial to you should you encounter the big C down the road. You may wish to share this information with your loyal consultants so that they can benefit as well. There is one paragraph that you may wish to share with your contractor friends, if you are so opined.
As we said in our first article, claims management is not a course in architecture school. Many consider it to be foreign to the practice of architecture. But, instead, it is a real threat that you will most likely encounter if you continue to practice architecture. A little information and preparation will go a long way toward assisting you in defending claims, and it is wise to become thoroughly familiar with the claims process.
Meanwhile, be careful out there.