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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.
- Identifiable injury to a person or
property. If
injury cannot be proven, legally there is no cause for claim.
- An allegation of wrongdoing. It must be alleged that you caused
the damages by your actions.
- A demand for money or services (sometimes
referred to as “damages”) as compensation for the alleged injury.
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
- Report
the claim to your insurer in accordance with the notice requirements
of your professional liability insurance policy. Policies have
specific claims reporting procedures, and you should become aware of
your policy requirements and give notice to your insurer accordingly.
Although insurance companies may accept a verbal notice of claim, it
is advisable to document your notice in writing so that there will
be no misunderstanding later.
- Contact your preferred legal counsel
and request that they represent your firm in the claim. If
you do not know a lawyer who specializes in architect and engineer
errors and omissions defense, your insurance company will provide
you with a “panel” attorney. This is a lawyer
who has been pre-selected by your insurance company based on qualifications.
If you wish to use counsel that has not been pre-approved by your insurance
company, you must get your insurer’s prior consent. Lawyers with
experience in architect E&O defense are relatively rare, so it
is important that you secure your representation early before someone
beats you to the punch.
Visit
the project site, if appropriate. Gather necessary information and
document relevant conditions. Conditions that give rise to
claims often mysteriously disappear or are corrected within a short
time following an incident. It is wise to take photographs, make
notes, and gather documents relating to the claim or circumstance
while they are available. If necessary, have a third-party expert
inspect the conditions, and in some cases, and file a report. At
a minimum, your own photographs can be beneficial. Wherever possible,
you should coordinate these efforts with your legal counsel or insurer.
- Hire an expert. For a claimant
to prove that you have breached your professional duty, that party
must generally hire an expert witness who has appropriate credentials.
Likewise, for you to defend against the expert’s testimony,
you will need a similar expert. In some cases, it may be appropriate
for you or a member of your firm to serve as an expert in defense
of the claim. If you do not know an architect who is qualified to be
your expert, your legal counsel or your insurer can help you find one.
- Assemble your project team and plan
how you will manage the claim within your office. Someone
in your office must be in charge of the claims management activities.
These can include:
- Assembling in-house documents
- Reviewing in-house documents
- Reviewing documents in other offices (owner, contractor, subcontractors,
subconsultants)
- Developing a written chronology of events that led up to the
claim
- Communicating with the insurance claims supervisor, your legal
counsel, and your experts
- Attending depositions
- Giving depositions
- Making your documents available for review by others
- Being the “corporate representative” for
your firm in legal proceedings.
Designate who will serve as the primary
contact within your office. If this person did not work on
the project, he or she will need the assistance of project team members
for knowledge of facts and to review and manage documents.
People who worked on the project that have since left your firm must
be contacted to obtain their knowledge of facts. You should maintain
a good relationship with them even if you have to pay for their
time spent giving testimony or providing information.
- Contact subconsultants and advise
them of the claim. Your consultants
will be required to defend claims made against their portion
of the work, and it is important that they follow a response
plan as well. You must be certain that their insurance carrier
is involved early to assure that they are managing their portion
of the claim effectively.
- Assemble your documents, develop
the chronology, and organize your defense effort. One
of the greatest expenses in claims management is the expenditure
of personnel time. A large, complicated claim can absorb many
labor hours that otherwise would be billable, and usually these
expenses cannot be counted against your deductible. The more
efficient you are with your claims-management effort, the less
it will cost you in time.
Nuisance value
There can be times when you have been sued on a project and you did no
wrong. Your insurance policy is a juicy target, and you may have been
named in the lawsuit just because you worked on the project.
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:
- Frequent contact. Call the client as soon as you are served
legal papers. It may be difficult at first to stroke a mad dog, but think
about the future. Good client contact during a claim can also go a long
way toward an early and more beneficial settlement.
- Be candid. Don’t
play games with your client. Sure it’s
war, but tricks will only get you in trouble and cause them to distrust
you. In this case, honesty is the best policy.
Join forces. If at all possible, mount a joint defense. If the
claimant happens to be the contractor, it is logical to join up with
the owner. Defense costs can be shared, and you are both in the trench
together shoulder to shoulder; war buddies ready to do another project.
By the way, it is also advisable to join forces with your consultants
for the same reasons.
- Be reassuring. Emphasize to the client that you
are not running from the problem and that you will uphold your rightful
obligations. Don’t
forget that you cannot admit fault or offer money without the prior
consent of your insurance carrier. Such actions can void insurance
coverage in some cases.
- Don’t hold a grudge. What
good is it to pay money and save the client through a difficult claims
process if you are going to stay ticked off over it? If the client
senses that you are harboring ill feelings, they may choose to work
with someone else. Get over it and move on.
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.
Copyright 2005 The American Institute of Architects.
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This series
will continue next month in AIArchitect when the subject will be
Basic Documentation Requirements. Find out how to document your
project effectively and what minimum documentation is required
on a project.
Read last month’s article, “The
importance of Risk Management.”
Visit the AIA Risk Management Resource Center.
If you would like to ask Jim and Grant a risk- or project-management
question or request them to address a particular topic, contact
the AIA General Counsel’s office.
James B. Atkins, FAIA, is a principal with HKS Architects. He
serves on the AIA Documents Committee and the AIA Risk Management
Committee.
Grant A. Simpson, FAIA, manages project delivery for RTKL Associates.
He serves on the AIA Practice Management Advisory Group.
This article is intended for general information purposes only
and does not constitute legal advice. The reader should consult
with legal counsel to determine how laws, suggestions, and illustrations
apply to specific situations.
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