Health insurance company Humana recently filed a lawsuit against multiple firms involved in the construction of its 27-story corporate headquarters in Louisville, Kentucky, which was built between 1983 and 1985. According to WDRB News, the company first found “latent defects” with the building during a renovation project in 2019, and the removal of drywall and other construction components eventually revealed faulty welds connecting the building’s structural columns.
For a lawsuit to be filed nearly 40 years after construction is highly unusual, said Matt Baxter, Vice President, Broker, Professional Liability, Burns & Wilcox Brokerage, Atlanta, Georgia. Depending on the circumstances, expenses related to this type of claim could be covered under a design firm’s Architects & Engineers Professional Liability Insurance.
That is just an incredible amount of time that has gone by for a claim to arise. … You could likely run into problems proving fault after that amount of time.
“That is just an incredible amount of time that has gone by for a claim to arise,” Baxter said. “I have seen things pop up after five or 10 years, but never after more than 30 years. You could likely run into problems proving fault after that amount of time.”
This case demonstrates the importance of maintaining proper insurance coverage well past the design/construction completion date of the project, said Richard Morehouse, Broker, Professional Liability, Burns & Wilcox, Morehead City, North Carolina. “Most design/build contracts will require the provider to confirm that their professional liability policy, or an Extended Reporting Provision, will be in place to at least the statute of limitations in the state.”
‘Continuous’ insurance coverage crucial for design companies
Humana’s corporate headquarters building, located at 500 W. Main Street in downtown Louisville, was designed by the late famed architect Michael Graves and is considered an “icon of postmodern architecture,” World-Architects reported on March 14. The structure is said to be safe for use while repairs are made, according to reports.
The lawsuit is a clear example of why design professionals should always carry continuous Architects & Engineers Professional Liability Insurance, also known as Errors & Omission Insurance, Baxter said. This type of policy can cover legal defense, regulatory penalties, rectification costs, settlements, and other expenses.
“If they have prior acts coverage going back to when they designed this building, those policies should react to this lawsuit — at least from a defense standpoint, until they figure out who is at fault,” Baxter explained.
Professional Liability Insurance policies are generally “claims-made policies,” meaning claims must be made during the time period in which the policy was in force in order to be covered.
It is very important to continuously buy coverage. You are buying not only a policy for what is happening right now, but also you are buying a policy for everything you have done in the past.
“On the policy, they can have a retroactive date, which is the date they first started buying the coverage and it follows the policy as long as they continuously buy coverage,” Baxter said. “If you first put a policy in place in 2005 and you have renewed it every year, the retro date stays the 2005 date. A wrongful act — in this case, the design — has to occur on or after the retro date and the claim has to be brought during the policy period. If these companies were buying coverage back in the ‘80s and continued to do so, then they technically could still have coverage if there is a policy in place with that retro date on it.”
This is a point that could get overlooked by newer design professionals or those who are unsure about maintaining coverage when business is slow, Baxter said. “It is very important to continuously buy coverage,” he said. “You are buying not only a policy for what is happening right now, but also you are buying a policy for everything you have done in the past. You lose that retro date when you stop buying coverage.”
Understanding extended reporting periods for post-construction claims
In April of 2022, the New York Times reported on a rise in complaints and legal claims related to alleged construction defects in pandemic-era new housing developments, including a 46% increase in complaints per building. Construction defect claims were also on the rise in some areas as of 2019 following a boom in the construction industry, with defect complaints in Florida increasing from 31 in 2008 to nearly 1,000 in 2017, Daily Business Review reported in 2019.
In addition to maintaining continuous insurance coverage while actively engaged in work, design professionals must also understand the importance of coverage after operations slow down or stop completely, Baxter said.
“If a firm closes or the design professional passes away and operations are shut down at that point, what becomes available is an extended reporting period,” he said. “There are different lengths available, and this just gives extra time to report a claim that may arise that would have fallen within that policy period.”
Wrongful acts must still occur on or after the retro date, he pointed out.
“The advice is always to buy the longest period you can for the extended reporting period,” Baxter said. “Every business is different, and everybody has different concerns that factor into that decision, but you want to protect yourself even after the business is gone. Once the extended reporting period ends, there is no coverage anymore. There is no going back to the policy. The owners would be left holding the bag for any claim that arises after that point.”
The cost of correcting design errors
According to World Construction Today, design errors comprise more than half of all claims against engineers. When design errors occur, they can be exceedingly expensive to correct. Last fall, an engineering firm in Florida was sued for $11 million over allegations of breach of contract related to design errors in a five-story student housing building, Daily Business Review reported in October 2022. According to the lawsuit, repairs cost $6.9 million and the owners faced $4.3 million in economic losses since the apartments could not be occupied during repairs. In late 2021, home buyers in Canada filed an $8 million lawsuit against more than a dozen design firms and other entities involved in a housing development in Meaford, Ontario, alleging structural problems and other issues, CBC News reported last year.
“It can be really expensive,” Baxter said of rectifying design errors. “It really comes down to the type of projects the firm is working on. The potential cost for a catastrophic loss on a commercial building is going to be a larger exposure than if you are designing a single-family home.”
Some design errors can be fixed “relatively inexpensively,” he said, while others could be a “full-limit loss.” Replacing all the welds on the Humana headquarters building, for instance, could be “very costly.”
When costly repairs are identified, building owners are going to look to all service providers involved in the design/build project for recovery, regardless of fault, explains Morehouse. “This underscores the importance of the “duty to defend” provision of the Professional Liability Policy as it is often a very lengthy process to sort through all the potentially responsible parties to pinpoint the cause of the loss.”
On an Architects & Engineers Professional Liability Insurance policy, the two main categories of covered expenses are defense costs and indemnity costs. “In this particular case, assuming they had coverage going back prior to the loss, the defense costs would kick in immediately. You turn the claim over to the insurance carrier, they get attorneys involved, and they work to determine whether the firm is at fault or not,” Baxter said. “That is what the legal defense is there to do. Sometimes, you find out they had nothing to do with it.”
The main advice I would give for design firms is that at the beginning of their business operations, they put a Professional Liability Insurance policy in place right away before they start working on anything and they keep that policy in place throughout the time they are in business.
With litigation costs on the rise, legal defense coverage is increasingly important for companies. According to Statista, large companies in the U.S. spent $22.8 billion on litigation in 2020 and were estimated to spend $23.71 billion in 2021. Canadian companies have steadily increased legal spending over the past five years, according to the Thomson Reuters 2023 Canadian Legal Market Update, and 40% of companies surveyed planned to increase their legal spending in 2023.
In some cases, defense costs alone could exceed policy limits before indemnity payments, or settlements, are even factored in.
“The main advice I would give for design firms is that at the beginning of their business operations, they put a Professional Liability Insurance policy in place right away before they start working on anything and they keep that policy in place throughout the time they are in business. Even though it is a cost to them, it can protect themselves in the long run for unforeseen exposures that could pop up down the road.”