Professional liability claims are always costly. They dissipate financial and time resources. They damage a firm’s reputation and prospects for future projects. And, they drive up professional liability insurance rates.

According to statistics compiled by the CNA/Schinnerer professional liability insurance program, average claim reserves—the insurance funds set aside in anticipation of paying a claim—and average costs for claims closed with an indemnity payment continue to rise.

All claims generate significant costs—The average paid structural engineering claim in the CNA/Schinnerer program for 2003, the most recent year analyzed for closed claims, was $231,000. This included defense costs and indemnity payments above deductible obligations. While the top 10 percent of claims with an indemnity payment averaged $664,000 and the top 25 percent of claims averaged $429,000, these numbers indicate that the difference between payments to solve "major" problems and those attempting to rectify "average" disputes is not that great. All structural engineering claims are expensive.

Large claims do not just involve large firms—Of the top 20 largest claims in which insurance indemnity payments were made in 2003, five of them were made for firms reporting less than $500,000 in annual receipts. It is true that larger structural engineering firms have more claims each year. But the frequency of claims against smaller firms is close to eight times that of larger firms when the claims frequency is based on an equal dollar volume of professional services. And, as indicated by the severity numbers, smaller firms can be held responsible for very large losses.

Many claims are interprofessional—Structural engineer firms are similar to other engineering disciplines when it comes to the source of claims. Project owners bring the majority of claims.

However, the percentage of claims brought against structural engineers by other design professionals—usually architects—is high, representing about half of the claims. Other design firms bring about 23 percent of claims against structural engineers (as compared to only 10 percent for civil engineers).

They represent the interprofessional allocation of losses. This presents a strong argument for shifting the risk of structural engineering problems to the prime design firm through waivers of rights and limitations of liability.

Contractually forcing the prime design professional to absorb a greater percentage of the risk for problems alleged to have been caused by negligent structural engineering services could reduce the exposure of structural engineering firms significantly by shifting the possibility of loss to the design firm that serves as the conduit for structural engineering services. It is more difficult to force other design team members to share the risk. But through contractual language limiting exposure—and compelling the prime to take the risk of the structural engineer—losses can be shared with or simply transferred to the prime design firm.

Less easy to deal with are claims brought by contractors and their subcontractors. Although in many states the claims for "delays and extras" must be brought through the project owner, thus accounting for a significant percentage of owner-based claims, in some states and in some situations, contractors can file claims directly against a structural engineer. These claims account for approximately 11 percent of all claims against structural engineers.

Residential projects are sources of frequent claims—While large projects can create large claims, smaller commissions on residential projects create the most claims against structural engineers.

The frequency of claims does not seem to match up with the percentage of income from residential projects.

With some residential projects, the number of claims may be more significant than the actual payment for those claims. For instance, house and townhouse projects are responsible for 23 percent of all claims, but only 12 percent of paid claims. Firms, therefore, spend time and deductibles fighting off claims that tend to be smaller or less likely to cause an insurance indemnity payment.

Condos, on the other hand, represent 9 percent of claims and 11 percent of all claim payments; a greater percentage of condo claims result in payment and the indemnity payments for condo claims tend to be higher.

Design phase services produce claims situations—And while some structural engineers attempt to reduce their services during construction to avoid allegations that their negligence in performing observations or inspections proximately caused the problem, only 13 percent of claims come from on-site services. Allegations of negligent design services, including improper specifications, account for more than 70 percent of claims against structural engineering firms insured in the CNA/Schinnerer professional liability insurance program.

Realizing the size of claims and their sources should assist structural engineering firms in their client selection and risk management procedures.

Frank Musica is a risk management attorney with Victor O. Schinnerer & Company, Inc., the underwriting manager for the CNA/Schinnerer professional liability insurance programs. He can be reached at frank.d.musica@schinnerer.com. More information on professional liability exposures can be obtained at www.planetaec.com, the CNA/Schinnerer program website.