Few in the industry want to talk about it, but commercial property developers and owners, as well as insurance companies, can spend millions of dollars to pay for design blunders, inferior materials or faulty, even negligent workmanship.
The issue greatly affects the professionals involved in building design and construction, as well. It has reached the point where architects and engineers will soon see premium hikes on their professional liability coverage. Starting July 1, in the first increase in 20 years, architects -- usually the first up on the insurance claims firing line -- will have to pay premiums increased by as much as four times what they are paying now. In Ontario, architects, as well as engineers, will be required to carry coverage for up to $1-million per claim.
Both professional associations require members in Quebec to have liability coverage. Engineering associations in Manitoba and New Brunswick recently initiated similar mandatory programs. In other provinces, there is no mandatory liability coverage, and property owners are more at risk for having to pay the bill for things going wrong with building structures.
Leaky wall cladding or windows and accidentally torched roofs during construction are a couple of the reasons negotiated payments on insurance claims have skyrocketed.
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But dollar amounts or specific cases are difficult to come by, as settlements are privately negotiated and people in the industry contacted for this article did not wish to discuss details about flawed buildings. Even the Ottawa-based Building Owners and Managers Association of Canada did not want to comment on the issue.
A senior executive in a major Canadian insurance company, who asked to remain anonymous, indicated $70-million to $80-million is paid out every year in Canada to satisfy claims against architects and engineering and contracting (AEC) companies. Architects and engineers alone spend at least $100-million a year on premiums for professional liability insurance (also known as errors and omissions), which most developer/owner clients insist on, he says.
Rick Taylor, partner and a vice-president at Hunter Keilty Muntz & Beatty insurance brokers in Toronto, says a firm billing $5-million in professional fees would probably pay $250,000 in annual premiums.
None of that should be surprising. The perfectly built building has yet to be built; only a one-piece, impermeable, windowless concrete, metal or plastic block would be guaranteed not to leak. It is by far the most common construction deficiency, although such things as improperly fitting walls, doors and windows are not unknown.
Derek Holloway, a senior vice-president at Ottawa-based Encon Group Inc., a major Canadian errors and omissions liability insurance carrier for architects and engineers, wasn't about to breach his industry's practice and talk about specific amounts of claims and payments. He did say claims can "be as little as $2,000 but it's not uncommon to see claims of $1-million and more." Another major insurer in this field is XL Design Professionals (XLDP), a corporate division of Toronto-based XL Insurance Co. of Canada Ltd. Peter Needra, XLDP's vice-president and general manager, says his company pays about 600 claims a year out of about 2,000 policies in force.
Encon issues nearly 5,000 insurance policies a year to clients in the two professions across Canada, and receives roughly 1,250 claims. It can take up to 10 years for claims to be settled, long after owners have corrected the problems at their expense, with no guarantee they will recover the cost because a defendant may have been bankrupted in the meantime or moved away.
Statutes of limitations governing the number of years owners can file claims against AEC companies vary -- for example, in British Columbia it is 35 years, in Ontario it's 15 years, in Alberta, 10 years, he says.
About 1 per cent of claims reach the courtroom; the rest are settled privately and confidentially.
Mr. Holloway says the insurance issue has acquired "a higher profile because there is more litigation, more awareness of design-related exposure and risk, much of it driven by clients who insist on consultants having professional liability insurance. Most commonly, if they can't assign an exact amount of responsibility, everybody will put some money in, including the owner."
Property owners often have to pay up front to correct mistakes before they worsen or someone is injured, and hope that in due course they will recover all or most of it through insurance coverage, Mr. Holloway says.
For example, the B.C. government is investigating possible water damage in more than 500 schools. The provincial government has authorized nearly $20-million worth of repairs and has sent claims to companies involved in the construction of the schools. It estimates claims could reach $60-million. But the Architectural Institute of B.C. says architects are being singled out by the government and says there is no solid evidence architects are to blame.
This highlights the fact that, when mistakes surface -- often wind-driven rain penetrating wall cladding, roofs and windows -- owners expect one or all of the AEC companies involved to correct them. The pressing question then becomes who has responsibility for what aspect of the project.
The documentation of who did what and when is typically based on assorted manual and electronically stored working plans and shop drawings. It can be difficult to trace the origins of a mistake, often resulting in messy disputes, says Brian Gerstmar, director of technology applications for the AEC partnership of Giffels Associates Ltd. and NORR Ltd. Architects and Engineers in Toronto.
In early February, Giffels-NORR will release the latest application of its TIMS3 document management software suite internationally. This new ProjectQueries (PQ) tool, billed as the first of its kind in Canada, is designed to pinpoint responsibility at every step of the construction process, the company says. It will be deployed at Giffels-NORR projects across North America and marketed internationally for about $12,000.
Mr. Gerstmar says PQ documents every exchange of information among owners, professional and contractor consultants and suppliers, freeze-framing every request and response, including preserving messages that might be deleted at either end. Those features are intended to reduce disputes over mistakes, he says.
The largest developer/owners hire AEC companies who they expect won't make any serious mistakes, but nonetheless also insist on high amounts of liability insurance.
David Handley, senior vice-president of project management for Cadillac Fairview Corp. Ltd. in Toronto, says very few architects have the depth of coverage his company requires. He says AEC companies working on the company's mixed-use retail, educational and parking garage development in downtown Toronto, for example, have pooled $25-million in coverage.
Structural engineers working for Cadillac Fairview usually carry $2-million to $5-million coverage per claim; mechanical engineers, $1-million to $2-million.
"It's project-specific coverage, covering an average $100-million to $200-million a year worth of our construction across Canada," he says.
The cost of doing business is high for AECs. Chris Fillingham, president of the Royal Architectural Society of Canada in Ottawa and chairman of OAA's in-house Pro-Demnity Insurance Co. in Toronto, says: "If you're [an AEC company] in business, the chances are there will be a claim against you and you could be sued."
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