CURRENT TRENDS IMPACTING ARCHITECTS & ENGINEERS PROFESSIONAL LIABILTY

1. CURRENT TRENDS IMPACTING ARCHITECTS & ENGINEERS PROFESSIONAL LIABILTY ….or what you don’t know will hurt you! Boston, Massachusetts ~ November 13-15 , 2005

2. Accelerating Financial Pressures Faced by A&E Firms • Project owners face increasing project costs and competitive pressures, and pass those down the line. • Project owners “squeeze the supply chain” to cut costs.

3. Accelerating Financial Pressures Faced by A&E Firms (Cont’d.) • Hyper competition for work among A&E firms. • “Will go anywhere for work” trend. • Larger out of state firms often are chosen to do local larger projects. • Out of state firms acquire local firms as means to enter local market. • Globalization/outsourcing of design services to other countries.

4. Accelerating Financial Pressures Faced by A&E Firms (Cont’d.) • “Irrational underbidding” for work. • Design fees as a percentage of construction values continue to trend downward on the whole. • Correlatively A&E carriers on the whole take on more exposure for less premium. • Increasing use of design technology and “commoditization” of the design process.

5. Accelerating Financial Pressures Faced by A&E Firms (Cont’d.) • Increasingly uncertain and irregular available work and revenue streams for A&E firms. • Harder to stay in business and make a profit. • More difficult to manage firm operations and keep firm intact. • Firms are challenged to be able to retain top talent and key staff.

6. Accelerating Financial Pressures Faced by A&E Firms (Cont’d.) • Underwriting ramifications of financial pressures on A&E firms. Firms may: • Take on marginal or high risk project owners, projects, or work partners. • Be intimidated or “bullied” by project owners and clients. • Take on work which is outside of their scope of expertise.

7. Accelerating Financial Pressures Faced by A&E Firms (Cont’d.) • Underwriting ramifications (cont’d.) • Agree to work in far away, unfamiliar locales. • “Cut corners” or take “shortcuts” in the design and project administration process. • Agree to egregious or overbearing contract terms.

8. Accelerating Financial Pressures Faced by A&E Firms (Cont’d.) • Key underwriting strategies. • Favor well resourced firms with strong long term operational track records and “staying power”. • Important that A&E firm has strong internal management procedures and risk management in place.

9. Design Build and Construction Management Project Delivery Methods • Trends • Ongoing increasing acceptance and usage of both methods. • Higher level of usage within public and industrial sectors (legislative and regulatory barriers being eroded). • D/B’s and C/M’s tend to do a much better job of marketing and “selling themselves” than A&E firms.

10. Design Build and Construction Management Project Delivery Methods (Cont’d.) • Trends (cont’d.) • Architects push for licensing and regulation of D/B’s and C/M’s to “level the playing field”. • D/B and C/M trade associations becoming stronger on national and local levels.

11. Design Build and Construction Management Project Delivery Methods (Cont’d.) • Potential drawbacks. • CM can usurp architect’s traditional “lead role” on the project. • Design component can be de-emphasized or design quality can suffer. • Grave consequences on some projects (collapses, worksite deaths).

12. Design Build and Construction Management Project Delivery Methods (Cont’d.) • Potential drawbacks (cont’d.) • Increasing use of “fast-track” projects (construction phase starts before design has been completed). • Need for Design Build “Best Practices” to be developed/accepted/implemented.

13. Design Build and Construction Management Project Delivery Methods (Cont’d.) • Single point legal responsibility • One party is primarily liable for project delay and cost overrun claims. • Consequential damages can be very substantial. • Creates a potentially huge liability exposure for A&E underwriters. • A&E policy limit claims.

14. Design Build and Construction Management Project Delivery Methods (Cont’d.) • Advent of Fixed Price/Guaranteed Maximum Price Contracts. • Project owner intolerance for any cost overruns. • D/B or C/M guarantees project will come in exactly on time and on budget.

15. Construction Defect Litigation • Locale driven – “Hotbed” states. • Rapid growth as bane of underwriters. • Las Vegas luxury high rise condominiums

16. Construction Defect Litigation (Cont’d.) • “Build it cheaper and faster” as core cause of actual construction defects. • Cheap or inferior building materials and processes used. • Use of substandard contractors, subcontractors, and suppliers. • “Cutting corners” and taking “short-cuts”.

17. Construction Defect Litigation (Cont’d.) • Construction defect litigation as: “growth industry” for plaintiff bar. • Lawyer attendance at construction defect “how to” seminars skyrockets.

18. Construction Defect Litigation (Cont’d.) • High risk project types. • Condominium conversions may now be most hazardous. • Trend towards more high rise buildings being constructed. • Condominiums, townhouses, apartments, low income housing are prime class action targets.

19. Construction Defect Litigation (Cont’d.) • Underwriting “high wire” act. • Is project located in a “Hotbed” state? • Has A&E firm already incurred construction defect claims? • Defensibility – award winning firms doing very high quality construction.

20. Construction Defect Litigation (Cont’d.) • Started in CA and has spread like “wildfire” to NV, AZ, TX, FL, etc. • Uninsurable risk for some contractors creates real problems for E&O carriers • Does SB 800 and other like “right to repair” statutes really help? • OCIP’s on Condos…They’re BAACK

21. Claim Handling ChallengesMultiparty Complex Construction Litigation • A&E program loss results are driven by two major factors: • Defense expenses to defend complex multi party construction litigation. • Large damage backdrops, with the amounts often “stipulated” in many situations (cost overruns, structural repairs).

22. Claim Handling ChallengesMultiparty Complex Construction Litigation (Cont’d.) • Multi party complex construction litigation often can be: • Very expensive to defend. • Protracted, unwieldy, time and emotion draining litigation. • Difficult to settle due to the number of parties. • Require costly pretrial discovery. • Require costly (multiple) expert witnesses. • Involve costly “document glut”.

23. Claim Handling ChallengesMultiparty Complex Construction Litigation (Cont’d.) • A&E Claim Departments must be well staffed and resourced. • Claim examiners must be highly proactive on this type of litigation.

24. Claim Handling ChallengesMultiparty Complex Construction Litigation (Cont’d.) • MEDIATION: Is the cure worse than the disease? • Mediator “Brain Drain” on the Bench • Joint Defense can be beneficial or a real nightmare • Creative Assumption of Defense Techniques

25. Trends in the Current Architects & Engineers Marketplace • There is abundant capacity available for most design firms. • There are 20+ markets providing A/E coverage in the current marketplace through specialty agents, retail agents only, or retail and wholesale brokers as well • The marketplace is perceived as softening, but there is some uncertainty about the effect of catastrophic loss from Hurricane Katrina and Rita on capacity as well as rates

26. Trends in the Current Architects & Engineers Marketplace (Cont’d.) • Companies are niche underwriting—declining unprofitable professional disciplines or unprofitable operations within acceptable disciplines • Specialty agents no longer place 90-100% of their book with one carrier

27. Trends in the Current Architects & Engineers Marketplace (Cont’d.) 2. Extremely broad coverage is available in the standard market, but the E & S market has expanded coverage as well. • Carriers have agreed to provide mold coverage on a case-by-case basis • There are options available for first dollar defense • Punitive damages are available • Definition of Professional Services can be amended to include Personal Injury arising out of those services

28. Trends in the Current Architects & Engineers Marketplace (Cont’d.) 3. Agents are required to commit substantial time and resources to providing risk management services for their clients. • Risk management seminars are held for individual or groups of clients to assist them in earning continuing education and premium credits • Contract review is provided on a regular basis. • Analysis of Quality Assurance/Quality Control programs • Claims review and assistance with insurance carrier representatives

29. Trends in the Current Architects & Engineers Marketplace (Cont’d.) 4.There are exposures which continue to be difficult to place regardless of capacity • Structural engineers • Geotechnical engineers • Environmental engineers that hire contractors • A/E firms that have design/build operations including actual construction • Professional markets want to exclude the construction entity • Most general liability for A/E firms is written on a BOP and the construction operations eliminates BOP markets

30. Trends in the Current Architects & Engineers Marketplace (Cont’d.) • Residential work—especially condominiums • Firms are underwritten on the basis of condo work as a percentage of total fees • Some larger firms are limiting condo work or staying away from condo work entirely • Smaller firms see this as an opportunity but can’t afford the premium if it is available

31. Trends in the Current Architects & Engineers Marketplace (Cont’d.) • Agents are seeing condominium development on the rise • Downtown renovation attractive to aging population • Reconstruction due to hurricane damage in coastal areas • Loss Experience has been horrible for condominiums • A problem with one unit is multiplied by the number of units as a potential loss • Developers have dissolved themselves and A & E firms are targets for homeowner claims • Maintenance issues result when dues aren’t paid and properties begin to deteriorate

32. Trends in the Current Architects & Engineers Marketplace (Cont’d.) • Projects of any kind • No such thing as coverage for condo projects • Carriers limiting project coverage to those firms for which they write practice coverage • Capacity for projects is limited • OPPI has been marketed to fill the void • Protects the owner in the event the the A/E’s coverage is not available or is insufficient • Requires certificates of insurance be provided by the A/E firms for the practice professional liability • Carrier may waive right of subrogation against the A/E firm maintains practice professional liability

33. Trends in the Current Architects & Engineers Marketplace (Cont’d.) • Large firms with frequency and severity • Have been re-underwritten and in many cases non-renewed by standard markets • Placing them in the E & S market causes coverage issues for the agent which puts pressure on E & S carriers

34. Trends in the Current Architects & Engineers Marketplace (Cont’d.) • Non-traditional firms • Small operations with professionals who have split away from larger firms • Trying to come up with new ways to make money by specializing in the less desirable areas of practice that are also challenging from an insurance coverage perspective • Don’t have enough fee revenue to pay for the E & S coverage and don’t qualify for standard markets • Municipality work—firms whose practice includes a high percentage of municipal work are being required to carry higher limits