Sunday, February 17, 2008

AIA, NSPE and ACEC conduct Annual Design Professional Liability Insurance Survey


Professional liability insurance is increaingly critical to the successful design professional. Today’s Architect and Engineer has more choices in coverages and insurance options then ever before. Better still, those choices come at competitive prices. To assist their members in negotiating the complex and ever changing professional liability insurance market, the AIA Risk Management Committee, in collaboration with the American Council of Engineering Companies (ACEC), the National Society of Professional Engineers (NSPE), and the AIA Trust conduct an annual survey of those companies providing liability insurance coverages for the practicing design professional. Written surveys were completed by each company where standard questions are answered. The process culminated with a joint meeting in Chicago in October of 2007, where representatives from each company were interviewed to determine not only the unique and specific aspects of their particular coverages, but also to identify emerging market trends. Those findings are discussed hereafter. An overall summary of the survey results can be found on the AIA national website at

The Market in General

Market Health All of the carriers interviewed indicated that the overall market is generally healthy. The influx of capital seen in prior years has continued, which has engendered competition. Premiums are generally declining, and most carriers concentrate on retaining their current insureds. As most carriers also indicated a desire to expand their business, the expectation is that overall premiums will continue to trend downward, although no substantial drop in rates is expected. Since the design professionals have many options today, carriers are placing more emphasis on the accuracy of their underwriting and reserves.

Claims Trends Most carriers reported that the incidence of claims continues to remain relatively flat. However, the severity of claims continues to rise, albeit at a relatively small rate. When the severity of claims is adjusted for inflation, the actual rise is very small. Some areas of the market (housing and public buildings in particular) have seen a rise in both the incidence and the severity of claims. Most carriers reported an increase in claims arising out of geo-technical issues.

Carrier Health AM Best financial ratings (a leading indicator of the financial health of an insurance carrier) held steady over the past year. Those carriers who shared information concerning their profit models generally adhered to the proposition that they must generate a profit on their underwriting. In years past, some carriers had relied on investment income for profits while operating their underwriting at a loss. As certain types of risks derivative of specific types of work mature, some carriers are open about their intention to manage those risks by reducing the number of firms which perform that type of work in their book of business. Since overall market health depends on maintaining a number of healthy carriers, this business focus likely bodes well for the long term.

Developing Trends

Building Information Modeling (BIM) While building information modeling is a concern, claims exclusively derivative of the BIM project delivery system have not yet emerged. Most carriers admit that the insurance industry generally plans for the worst. In its infancy, CADD presented some of the same concerns inherent in BIM. Not only did the worst CADD fears never develop, CADD has actually made the industry much more efficient and better. The normal approach - stay at arm’s length and blame someone else - likely will not work with BIM since the A/E involvement by definition must be much more immediate. Generally, most carriers believe that the traditional issues (standard of care, scope creep, contract language, etc.) will eventually present again as the technology develops, albeit from a BIM perspective. Most carriers are already addressing the easier questions (damage from viruses, hardware and software compatibility, electronic transfer of documents, etc.) in their current policies.

Sustainability / Green Design As with BIM, claims that are exclusively derivative of sustainable design principles have not as yet materialized. However, with owners investing
heavily in sustainable features on the strength of promises that the investments will pay dividends, carriers are concerned that the claims will eventually develop if performance projections do not materialize.

Housing With the market squeeze on the hosing sectors, most carriers report an up-tick in residential claims. While the exact causes are unclear, the belief is that builders and owners are seeking to recoup losses the see from the general tightening of the residential market. Residential issues have become the principal source of claims for some carriers. As the housing market difficulties continue, claims in this sector are expected to do increase.

Cost Re-Allocation The drive to quantify the standard of care by contract is increasing. Public owners in particular are now insisting on contract clauses that allocate fault to the design professional where cost overruns exceed a specified level. Worse, the levels at which owners are seeking cost recovery has dropped to almost zero. For some carriers, the onset of this cost recovery mentality has elevated public work above condominiums (a traditional claim hotbed) as a claims generator.

Aging Infrastructure As the infrastructure ages and deteriorates it commands an increasing level of attention. The need for inspection and evaluation of those aging buildings and systems has created a new market for some firms. However, conducting an inspection may carry with it liability for conditions that were the subject of the inspection, but which were not detected.

The purpose of the survey is to provide the design professional with basic information necessary to make an informed choice from the myriad of carriers and insurance products available in today’s market. The design professional should ask;

Does my insurance broker have access to a range of carriers and products so that I can take best advantage of the choices the competitive market provides?

Am I receiving competitive premium quotes that reflect the level of competition inherent in today’s market?

Does my carrier have a loss prevention / risk management program, and, if so, does it provide me with appropriate value in exchange for the investment?

The A/E liability insurance market is more varied and dynamic than ever before. While that circumstance creates opportunity, it also demands careful attention to, and evaluation of the numerous options available such that the opportunity is fully realized.

Frederick F. Butters, FAIA, Esq. co-chairs the AIA National Risk Management committe and serves as Board of Directors liaison to the AIA Trust. For more information about this issue, contact him at Keranen & Associates, P.C., 6895 Telegraph Road, Bloomfield Hills, Michigan 48301, Tel: (248) 647-9653.

Statute of Limitations Bill Passes the Senate

On Thursday February 14, 2008, Senate Bill 865 came up for vote in the Michigan Senate. When it became apparent that a last minute effort to tie the bill to Senate Bill 445 (which would reverse recent Michigan Supreme Court decisions concerning the threshold standard for bringing suit under the Michigan no-fault insurance act) would fail, the backers of that effort withdrew and SB 865 proceeded to a vote. The bill passed with 31 votes in favor, 7 against. It now heads to the Michigan House.

Sponsored by Senator Alan Sanborn, SB 865 reverses the Michigan Supreme Court decision in Ostroth v. Warren Recengy GP Limited Partnership. The Ostroth decision upset nearly 15 years of settled jurisprudence, and had the effect of extending the statute of limitations for most claims against design professionals and construction contractors from 2 or 3 years to 6 years.

The governing statue of limitations for claims against design professionals and construction contractors is found at MCLA 600.5805. Simply put, a statute of limitations provides a time window within which a claim that has accrued must be brought, or it becomes time barred. In addition, a statute of repose is found at 600.5839(1). By contrast, pursuant to a statute of repose, if a claim has not accrued after a specified period of time, it can never accrue. Together, the two statutes create an outside limit for claims against design professionals and construction contractors.

The Court of Appeals in Witherspoon v. Guilford read those sections harmoniously such that the end result gave meaning to both statutes. The traditional statutory scheme set out in MCLA 600.5805 governed, but in no instance could the claim window run past that time specified in MCLA 600.5839(1).

That state of harmony reigned until the Ostroth decision in July of 2004. In the Ostroth case, the Court concluded that the 6 year period set out in MCLA 600.5839(1) was a period of both limitations and repose, and that controlled all claims to the exclusion of MCLA 600.5805. The net effect was a substantial increase in the statutory time limits. Since most claims accrued at completion of the construction or shortly after, the 2 or 3 year periods set out in MCLA 600.5805 usually controlled their disposition. The 6 year period of MCLA 600.5839(1) represented a marked departure from and increase in those time limits.

As yet, the effect of Ostroth has not manifested in the form of higher insurance rates. However, as we move into the extended claims period it permits, reasonable expectations suggest that will begin to occur. SB 865 would effectively reverse Ostroth and restore the statutory balance the Witherspoon court struck. As such, SB 865 is not a reduction in the statutory limitations period, but is instead simply a return to settled law pre-Ostroth.

With bi-partisan support in the Senate, SB 865 will hopefully receive favorable treatment as it moves into the House such that design professionals and construction contractors will see a return to the pre-Ostroh law, and the reasonable statutory time frames it reflects.

For more information about this issue , contact Frederick F. Butters at Keranen & Associates, P.C., 6895 Telegraph Road, Bloomfield Hills, Michigan 48301, Tel: (248) 647-9653.

Wednesday, February 13, 2008

Michigan Legislature Enacts "Owner Built Residence Transfer Act"

On Februray 13, 2008, the Michigan Legislature enacted SB 0577. The "Owner Built Residence Transfer Act" (PA 6 of 2008) is designed to protect homeowners who buy homes from unlicensed builders. The Act takes effect in 180 days.


Michigan law contains various provisions requiring a residential builder to be licensed, but this requirement does not aply to someone who is building their own home. Article 24 of the Occupational Code, however, permits an unlicensed property owner to act as a residential builder when building a home for their own use and occupancy. The exception has led to abuses by unlicensed builders, who build several homes per year "for their own use" and decide the sell them as soon as the house is completed. Effectively, such persons are acting as (unlicensed) residential builders.


The Owner Built Residence Transfer Act --
  • requires that an "owner-builder" who intends, at the onset of construction, to live in a "residential structure" either to live in it or place it for sale if he or she is unable to live there;
  • allows an owner-builder to sell only one owner-built residence per year;
  • prohibits an owner-builder who lives in a new residential structure from selling it or transferring ownership for at least 120 days;
  • requires an owner-builder, when offering a residential structure, to supply a notice that the structure was built by an owner-builder who was not a licensed builder;
  • specifies that an owner-builder who fails to comply with the disclosure requirements is liable for repair costs and the buyer's temporary shelter costs;
  • allows the buyer of an owner-builder residential structure to bring an action within 18 month for damages resulting from a violation of the disclosure requirements.
The Act includes the following definitions:
  • "Owner-builder" means an individual who is not a licensed residential builder and who builds, or acts as a general contractor for the construction of a residential structure in which that person, or a member of his or her family, actually resides or intends to occupy for his or her own use upon the issuance of an occupancy permit.
  • "Residential structure" means premises used or intended to be used for a residence purpose and related facilities appurtenant to the premises used or intended to be used as a adjunct of residential occupancy.
For more information about this issue, contact Peter Cavanaugh at Keranen & Associates, P.C., 6895 Telegraph Road, Bloomfield Hills, Michigan 48301, Tel: (248) 647-9653.

Friday, February 08, 2008

MDOT Implements New Claims Procedures

The Michigan Infrastructure & Transportation Association (MITA) reports in their current newsletter that the Michigan Department of Transportation (MDOT) has updated its claims procedures.

"On January 30th, after almost two years of collaboration and work by the Department and MITA, MDOT leadership signed into policy their new procedure for review of contractor claims. This new procedure, formally issued as Bureau of Highway Instructional Memorandum 2008-02, Review of Contractor Claims, replaces an outdated and organizationally archaic process defined in MDOT documents dating back to the mid 90’s."

For the rest of the story, follow this link.

For a copy of MDOT's January 30, 2008 Memorandum outlining their new claims procedures, following this link.