E&O: Errors & Omissions
Supplemental Information
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Industry Profile
Of the estimated 115,000 licensed architects, approximately 86% practice in architecture firms. These architects work or own approximately 15,000 architectural design firms, which bill their clients an estimated $14.5 billion annually. Nationally, architects' revenue can be linked to project type as follows:
- 58% is new construction
- 42% is rehabilitation/renovation projects
Architectural firms are approximately divided by size as follows:
- Solo practitioners make up about one third of all firms
- Small firms with two to four employees comprise about one third of all firms
- Firms with more than four employees make up a third of all firms.
However, in terms of industry billings the estimated profile is different:
- Solo practitioners account for 4%
- Small firms with two to four employees account for 6%
- Firms with five to nine employees account for 13%
- Firms with 10-19 employees account for 16%
- Firms with 20-49 employees account for 23% of all industry billings
- Firms with 50-plus employees account for 38% of all industry billings.
Other professional statistics include the following:
- Nearly a quarter of U.S. architecture firms are located in the Pacific Southwest. The market share of billings by region closely follows the distribution of firms.
- California leads the nation in number of firms (2,852) and dollar volume of billings ($1.9 million), virtually double that of second-place New York in both categories.
- Nearly three quarters of all firms have annual billings of less than $500,000, and collectively their billings account for 20 percent of the industry. In comparison, less than 2 percent of the firms-those with annual billings of $10 million or more-account for 25 percent of the billings nationally.
- About two thirds of the total of 17,315 firms are set up as corporations; about a quarter (4,787) are individual proprietorships. The balance are partnerships.
- More than 40 percent of architecture firms have been in business at least 20 years, 35 percent were established in the 1980s, and nearly 10 percent were established since 1990.
- In terms of billings by client type, local, state, and federal governments collectively are responsible for the largest share of architects' billings-nearly 30 percent. Businesses generate a quarter of architects' work, and private institutions produce nearly as much.
- Distribution of billings by building type reveals 40 percent from institutional buildings, 30 percent from commercial buildings, and 15 percent from residential work. Education facilities make up the single largest market sector, followed by office buildings and health-care facilities.
Much of the above information is from the U.S. Department of Commerce 1992 Census of Service Industries, which was issued in February 1996 and is the most recent statistical survey of the industry.
Forensic Engineers
Forensic engineering is a small but increasing segment of the A&E insurance market. Professionals in this highly specialized area use their engineering skills to provide professional analysis of accidents of all types. The analysis is used by attorneys and insurance companies in accident litigation.
The specific work performed by forensic engineers varies widely. The work is highly specialized even within the forensic engineering segment. For example, a particular engineer or engineering organization may focus on one area, such as electrical accidents, and perform only specific services, such as expert witness.
Services include the following types of work:
- Accident Investigations
- Expert Witness
- Code Compliance
- Failure Analysis
- Testing
- Patent Infringement
- Legal Consulting & Litigation Preparation
Forensic engineers typically specialize in a specific area of the engineering world that they know very well. For example, there are a few forensic engineers that specialize in recreational activity accidents. Not only do they provide expert witness work, but they also assist with accident investigations, testing, failure analysis and litigation preparation.
As accident litigation continues to grow there is a growing need for forensic engineers on both the plaintiffs' and defendants' side of the bar. The area is quite lucrative for those forensic engineers who have built a reputation as straightforward and effective experts in their areas of specialty. These specialists are also excellent professional liability prospects.
If you have an unusual engineering exposure that includes challenging professional services such as forensic engineers, contact Mercator Risk Services Inc. ("Mercator" or "Mercator Risk Services") for assistance in placing your client's coverage. Contact us at info@mercatorpro.com or use our web mail form.
Architects & Engineers Risk Management
Professional liability claims are expensive in both time and money even when the professional ultimately wins. As with many professional classes, claims made against architects and engineers (A&E) can be avoided with creative and aggressive risk management. The following few suggestions may assist in reducing or avoiding A&E claims. Many of these suggestions involve the most important risk management suggestion of all: document, document, document.
A Contract
A signed contract is critical for the defense of a professional liability claim, yet many architects and engineers do not utilize a contract. Sometimes a contract is forwarded to the client but never signed. The contract should clearly explain in writing what is and is not being done, and then should be signed. In appropriate situations, the standard AIA forms can and should be used.
Never Assume
Assumptions can lead to inconsistent expectations, even with parties where there is an ongoing relationship. For example, while the architect or engineer may correctly assume that a builder might not want a more expensive material, the builder is not the ultimate customer. The homebuyer or owner is usually the customer and initiates most lawsuits. Putting assumptions in writing provides a method of establishing expectations and preventing a lawsuit.
Renovations
Claims can be prevented by explaining in writing that the plans do not contemplate any extra work that may be discovered in demolition. If variations arise, all parties have a clear understanding of how they are to be handled. Taking pictures of the original conditions may also be helpful.
Confirm Changes
Confirm changes in writing with clients, particularly when contractual duties change. For example, if the client notes that billings for site inspections are too high and requests a reduction, confirm this change in writing.
Insurance
Check that contractors have appropriate insurance by including insurance requirements in specifications and requesting certificates of insurance. Ask to be named as an additional insured on each contractor's insurance policy. Use caution when working with moonlighters. Moonlighters can present significant insurance risk since they may not be covered for the work they are performing on the side even when they do have insurance.
Fee Claims
Before pursuing a claim for unpaid fees, other aspects of the project should be considered. Many claims for professional liability are initiated after a claim for unpaid fees is made. To reduce the need to pursue unpaid fees, stay current on outstanding fees.
There are many other specific suggestions that can be provided to reduce or avoid A&E claims. These few are a strong start to reducing claims and claims cost, and ultimately reducing your client's A&E professional liability costs.
Contact us at info@mercatorpro.com or use our web mail form.
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