Insuring the future
The state of professional liability insurance in the Province of British Columbia is rapidly deteriorating to a crisis point where architects will not be able to provide the service that is their mandate under the Architects Act, a provincial statute.
The insurance industry worldwide has been struck with a rapid succession of very damaging incidents: major acts of terrorism, the effects of wars and conflict in the Middle East, serious losses on equity investments (especially in the high-tech industry) and the recent tsunami devastation in Southeast Asia. The impact of these events on the insurance marketplace is profound, resulting in increased costs with serious limitations on availability and coverage.
Closer to home in British Columbia, an unfortunate sequence of events that began in the late 1980s included changes to the Building Code, the introduction of unproven materials, an accelerated pace of construction in response to demand, complicated building forms, and a lack of worker knowledge, all of which contributed to a widespread incidence of building envelope failure. In addition to the international incidents affecting the insurance market, these local events, in combination with the associated legal claims for damage have had a direct and very serious impact on design professionals. Architects, engineers and allied professionals have all been directly affected.
Even as building envelope repair continues and new instances of premature failure decrease–arising in no small measure from improved education, practices and regulation–the impact of this systemic problem on the practice of architecture in the province of British Columbia is escalating dramatically. Nowhere is this phenomenon more evident than in the realm of professional liability insurance. The attack began early in the process when it became clear that developers and contractors could legally avoid ongoing responsibility for more serious envelope problems by operating through companies that were stripped of assets and dissolved at the completion of each project. With the corporate participants excusing themselves from long-term insurance issues and with no individual owners remaining accountable, the insurance of municipalities and the design professionals became the targets for compensation in the event of building failure.
As a result of the Riverwest case in Delta (where there was no architect, no field review by any party and no inspection by the municipality), municipalities recognized that they held legal and financial responsibility because of joint and several legislation. Riverwest is a multi-unit residential building owned by a strata corporation. The strata sued the developer, the contractor, the designer (not an architect), and the municipality for damages resulting from premature building envelope failure. This is the only such case that has come to trial in BC. The developer, the contractor and the designer settled out of the case in various ways. Although the court apportioned fault among all parties, the municipality found itself responsible for the payment of virtually the full amount of the judgment under the laws of joint and several liability, which mandates that the defendant with resources is responsible for those without. Following that outcome, the municipalities quickly moved to amend their building bylaws in an attempt to avoid such exposure.
Professional liability insurance was never conceived as a product warranty, much less a source of restitution for a systemic failure resulting from the coincidence of many factors including those noted previously. When it became clear that architects and their insurers would be the last ones standing, the insurers became much less willing to provide coverage, with most electing to leave the province entirely.
Response to the widespread building envelope problems has also created many regulations that conspire to marginalize the role of architects in the design and construction industry. In addition to clients and warranty providers, many municipalities now require proof of professional liability coverage prior to accepting permit applications. Increasingly, due to either limitations on coverage or the inability to obtain coverage at any cost, architects are finding that they cannot provide service for certain types of projects, or in many instances, any project that requires the services of an architect, notwithstanding their province-wide license under statute of a much higher authority than existing regulations or local bylaws. This effectively restrains trade, limits growth, diminishes opportunities, or causes firm closure. For those individual architects so affected, it also raises the question of continuing as a member of the AIBC. The startling reality is that professional liability insurance is renewed annually on a claims-made basis and hence the coverage that is in place at the time a project is permitted, let alone constructed, may not be there when it is needed. The current municipal system provides false assurances to all involved, including the public. In addition, firms are put out of business and the success of projects is jeopardized.
In this environment, it is frustrating and extremely disappointing that the provincial government in BC has concluded that no amendments to the civil liability legislation are necessary despite the submissions of the British Columbia Municipal Insurance Association (BCMIA) and other organizations to make changes to the Civil Liability Legislation in BC.
The design and construction industry in BC is in desperate need of a statute of limitations that is a fair and reasonable replacement of joint and several liabilities with proportionate liability. A framework of full accountability for every participant in the process should be introduced. Why does BC continue with antiquated legislation when other provinces, certain states in the US, and international jurisdictions have adopted more acceptable approaches?
Since contractors and developers, and now municipalities, have limited or no liability, the architect’s liability insurance has often been the last source from which to extract a settlement because of the limitless liability faced by design professionals.
The professional liability insurers have responded to the continuing pursuit of design professionals as “the last ones standing” by imposing increasingly limiting exclusions on policy renewals, increasing premiums, decreasing coverage limits, or refusing coverage entirely. Currently in BC, there is no coverage for mould, and water ingress coverage is limited and provided only under very specific contract conditions with the involvement of specialist consultants and warranty provision. Over the past two years, premiums have risen dramatically–in some cases by 500 percent and in other cases representing 15 percent of gross revenues–and are quickly becoming unaffordable, resulting in many new or small practices that are not able to obtain any insurance from any source at any cost.
The situation is untenable in a province of some 1,350 architects in 750 practices where the majority of these practices are small. Architects and their families are being forced to move out of the province, retire or declare bankruptcy. The adverse impact on clients, projects, municipalities and the economies of the industry is enormous.
Architects also face public and private sector clients who require that all consultants working on their projects have liability insurance coverage. Similarly, municipalities who found themselves without insurance for water ingress as of January 2002 and the subject of joint and several liability exposure as demonstrated by the Riverwest decision have enacted new building bylaws requiring liability insurance coverage from architects applying for building permits. Further pressure comes from the warranty providers offering insurance for multi-unit housing as required by the Homeowner Protection Act. Such warranty coverage will not be offered unless all consultants on each project have professi
onal liability insurance. It is clear from these requirements that each insurer wishes to have another source of funds to pursue by way of a third-party claim, if a claim against the policy provided by that insurer should ever arise. As more and more architects become unable to secure the necessary coverage, fewer projects will proceed. Not only will architects fall short of fulfilling their mandate under provincial statute but more importantly, the public will not be afforded the professional assurance and insurance protection it deserves.
It is not in the public interest that design professionals are unable to obtain professional liability insurance. The BC government can encourage the insurers to return to the province. The liability insurance coverage required from architects of public buildings should be reduced to reasonable minimum levels with any excess requirements provided on a project-by-project basis with government backing. In view of the claims-made aspect of professional liability insurance and the extent of exclusions within the policies in effect, the claims currently being pursued by governmental agencies should be carefully analyzed for their cost-effective use of public funds. Municipalities that continue to review plans for building permits must assume their appropriate share of responsibility with suitable insurance coverage. Current insurance demands are often impractical and ineffective, and as such self-defeating.
The health and vitality of the design and construction industry is essential to the provincial economy. For stability in the longer term and consistency with other jurisdictions, the reforms contemplated in the Civil Liability Review initiated by the Attorney General must proceed. It is the strongly held position of the AIBC that the Statute of Limitations must contain a ten-year ultimate limitation period, that several or proportionate liability must replace joint and several, and that there must be a mechanism for full accountability whereby each player in the design and construction process (clients, designers, developers, contractors, municipalities) all remain liable for the same period of time and with appropriate ongoing financial resources.
The AIBC continues the search for short- and long-term solutions to these active BC insurance challenges, and these include:
* the availability of professional liability insurance (only two insurers remain in BC from six a few years ago)
* the cost of insurance
* the quality and extent of insurance coverage
* the emergence of insurers as de facto licensing agents
* the unreasonable exposure created by the statute of limitations and joint and several liability
* the imposition of other individuals/groups on architects’ decision-making authority
* the reduction of new members jeopardizing the health of the profession and public safety
It is critical that these factors be addressed now, as they have the real potential of becoming national practice issues.
John Davidson, MAIBC, FRAIC is currently the chair of the Architectural Institute of British Columbia’s Liability Insurance Committee.