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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 during the past five years. Analyzed further, we found that two-thirds of the larger firms (30 - 199 employees) reported at least one claim during this period. The number of claims reported shows a general increase as the size of the firm increases.

Seventy-six percent of the firms surveyed reported that they carry liability insurance. Of those firms, 46 percent said they carry it because of client requirements. Insurance premium costs, as a percentage of gross billings, appear to decrease as the size of the firm increases. For smaller firms, with one to nine employees, insurance premiums average approximately 3 percent of gross billings. This ratio decreases to approximately 2 percent for the larger firms with 30- 199 employees. Sixty-four percent of the firms reported that their insurance costs 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 somewhat high, and 5 percent believe them to be moderate. None responded with the view that insurance premiums were somewhat low or very low.

Eighty percent of those that do not carry liability insurance reported that its high cost was the major reason for not carrying it. Only 9 percent said they did not have insurance because professional liability was not a concern.

Views on proposed legislation

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

Many firms reported that they would set aside significantly less than the maximum allowable amount. Overall, the firms indicated that they 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 insurance coverage once they established a liability trust, 58 percent of the firms indicated they would increase the deductible amount on their policy.

Estimate of tax savings

approx

It is estimated that members of the A/E profession will save imately $50 million in federal income taxes for 1981 by establishing professional liability trusts.

DETAILED ANALYSIS

Survey population and responses

A sample population of 2,366 firms was randomly selected from the membership lists of The American Institute of Architects and The American Consulting Engineers Council. Limited testing was performed on this sample population to detect any bias in size and location of the members selected. None was found. Questionnaires, together with a cover letter and an explanation of the proposed liability fund, Exhibit A, were sent to all those in the sample. Strict control was maintained in all phases of the survey to ensure the confidentiality of the respondents and their replies.

Five hundred and ninety-eight questionnaires were returned prior to the survey deadline. Thus, the response rate was just over 25 percent. Replies were summarized in a table, Exhibit B, to facilitate analysis of the results.

To

ensure that the firms replying to the survey were representative of the memberships of their associations, the results were compared with known characteristics of those memberships. From this analysis we discovered that several quantitative results, such as average number of full-time employees and average annual gross billings, were higher than previous surveys had found. An investigation of the individual replies disclosed that there were 10 firms, five architectural and five engineering, which, because of their size, significantly influenced the results of the survey. Exhibit C provides a separate summary of the information received from the 10 largest firms. The disproportionate effect of the information supplied by these 10 largest firms distorted the characteristics of the majority of the firms plying to the survey. Therefore, in order to give a more representative picture of the survey replies, the information received from those firms has been excluded from all tables and information presented in the text of this report.

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Profile of the profession

Form of organization

The following table gives an overall breakdown of the business form of the firms replying to the questionnaire.

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