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DESIGN PROFESSIONALS LIABILITY STUDY

Prepared by

DELOITTE HASKINS & SELLS

for

THE AMERICAN INSTITUTE OF ARCHITECTS

and

THE AMERICAN CONSULTING ENGINEERS COUNCIL

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INTRODUCTION

Earlier this year, The American Institute of Architects (AIA) and The American Consulting Engineers Council (ACEC) commissioned a survey to gather information about their members' professional liability problems. The survey was undertaken in response to the concern expressed by many architectural/engineering firms (hereinafter referred to as A/E firms) with the high cost of maintaining professional liability insurance. The primary purpose of the survey, in addition to documenting the extent and magnitude of the professional liability problem, was to measure the utility of federal legislation that would permit A/E firms to establish a tax-exempt professional liability trust for payment of liability claims. A summary of this proposal is included in the questionnaire packet as Exhibit A.

Results of the survey are presented in this report in both summary and detail form. The results are focused on the following issues:

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The survey indicates that the profession is dominated by small firms. Sixty-four percent of the firms surveyed reported fewer than 10 employees and average annual gross billings of $135,000. Seventy-nine percent reported fewer than 20 employees and an average gross billing of $447,000.

The corporation was the predominant form of firm responding (48 percent of firms), with proprietorships second (35 percent of firms). Partnerships accounted for 16 percent of the response.

Because of the size of the 10 largest firms responding to the survey compared with the size of the other responding firms, it was necessary to exclude these 10 largest from the general survey results in order to present the results fairly. The responses of the 10 largest firms are presented in Exhibit C.

Nature of the professional liability problem

Over one-third of all firms reported at least one liability claim durwe found that two-thirds Analyzed further, ing the past five years. of the larger firms (30 - 199 employees) reported at least one claim The number of claims reported shows a general induring this period.

crease as the size of the firm increases.

Seventy-six percent of the firms surveyed reported that they carry Of those firms, 46 percent said they carry it beliability insurance. Insurance premium costs, as a percentage cause of client requirements. of gross billings, appear to decrease as the size of the firm increases. For smaller firms, with one to nine employees, insurance premiums averThis ratio decreases age approximately 3 percent of gross billings. insurance costs to approximately 2 percent for the larger firms with 30- 199 employees. the firms reported that their Sixty-four percent of exceed 2 percent of gross receipts.

Almost three-quarters (73 percent) of those firms surveyed believe that insurance premiums are very high; 22 percent believe them to be someNone responded what high, and 5 percent believe them to be moderate. with the view that insurance premiums were somewhat low or very low. carry liability insurance reported Only 9 Eighty percent of those that do not that its high cost was the major reason for not carrying it. percent said they did not have insurance because professional liability was not a concern.

Views on proposed legislation

create reserves a lack set

Over two-thirds of the firms surveyed indicated that they would be At present, only 4 percent establish a tax-exempt trust. likely to of those surveyed reported that they set aside funds or The major reason for firms expressing for liability purposes. a trust is that they cannot afford to of interest in establishing aside the funds. Almost three-quarters of the firms that viewed the to utilization of the proas a major obstacle availability of funds posal were the smaller firms with one to nine employees.

Many firms reported that they would set aside significantly less than Overall, the firms indicated that they the maximum allowable amount. would set aside an average of between 2 and 3 percent of their present annual gross billings.

In response to an inquiry as to what firms would do about their insur58 percent of a liability trust, ance coverage once they established the firms indicated they would increase the deductible amount on their policy.

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