Victor Insurance Managers Inc. - Guide to the Schinnerer ......and Pollution Incident Liability Insurance Policy. The intended audience for this guide includes architects, engineers,

This publicationhas been prepared as a guide to the Risk Mitigation Credit

described under Item E of Section V, Limits of Liability/

Deductible in the 10/05 Edition of the CNA Professional Liabilityand Pollution Incident Liability Insurance Policy. The intended

audience for this guide includes architects, engineers,

environmental consultants, landscape architects, constructionmanagers, and interior designers as well as their insurance

brokers and legal advisors.

IntroductionIntroduction

CNA/Schinnerer’s new Risk Mitigation Credit(RMC) is a unique feature of the program ofprofessional liability insurance commended since1957 by The American Institute of Architects(AIA) and the Professional Engineers in PrivatePractice Division of the National Society ofProfessional Engineers (NSPE/ PEPP). It offerseligible policyholders the option of receiving adeductible credit of up to $25,000 if theyimplement certain “best practices” in theengagement and performance of professionalservices. The RMC is designed to reduce thefrequency and severity of claims, make claimsmore defensible, and provide a mechanism toreward policyholders for their risk mitigationefforts.

Eligibility to participate in the RMC is limited tofirms whose annual gross billings do not exceed$25 million. In addition, certain other restrictionsapply to firms with annual gross billings between$5 million and $25 million. Finally, whileotherwise eligible to participate, some firms willnot be able to take advantage of the RMCbecause the nature of their projects or servicesmay not afford them an opportunity to implementthe minimum number of the best practicesrequired. The RMC is most applicable to risk-intensive projects and services—thoseassociated with project design and construction.

The risk mitigation credit ismost applicable to risk-intensive projects andservices—those associatedwith project design andconstruction.

BackgroundBackground

The RMC was developed as part of a broadinterdisciplinary review and update of the 7/99edition of the CNA Professional Liability andPollution Incident Liability Insurance Policy. Fromthe inception of the Commended Program in1957, the primary goal has been to provideprofessional liability insurance that meets theever-changing needs of design professionals.Toward this end, the basic CNA policy has had11 revisions since 1957. In addition, numerouspolicy endorsements have been developed totailor the basic policy to specific circumstances,requirements, and underwriting considerations.

Generally, credits in insurance programs aredesigned to encourage or reward desiredpolicyholder practices. Once the overall objectiveof the credit is fulfilled, the credit may bedropped and replaced by a new credit toencourage other practices or outcomes. Forexample, the 7/99 edition of CNA’s basic policyform included a mediation credit of up to$25,000 for eligible policyholders. While notappropriate for the resolution of all claims,mediation had proven itself to be generally morecost effective in resolving claims than eitherarbitration or litigation. Industry inertia andresistance to the unfamiliar, however, washindering the use of mediation in circumstanceswhere it would have been appropriate andbeneficial. The mediation credit was designed tohelp overcome this industry inertia andresistance. By 2005, it had served itspurpose—approximately 75 percent of all claimswithin the Commended Program were beingresolved by mediation. As a consequence, the

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Generally, credits ininsurance programs aredesigned to encourage orreward desiredpolicyholder practices.

mediation credit has been dropped in the 10/05policy form and replaced by the new RMC.

As noted above, the RMC encourages the useof a set of best practices, long recommendedthroughout the design and construction industry.Receipt of the RMC is predicated on thepolicyholder’s documented satisfaction of abaseline criterion—the timely execution of awritten professional services agreement—plusany three of six best practices criteria. The policylanguage establishing these criteria, theirrationale, and appropriate documentationdemonstrating compliance are described indetail on the following pages.

The risk mitigation creditencourages the use of a setof best practices,long recommendedthroughout the design andconstruction industry.

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Contracts can helpprevent disputes and canestablish a framework forthe fair resolution of thosethat do occur.

“Baseline” Criterion: Written“Baseline” Criterion: WrittenAgreementAgreement

Policy LanguageWe will reduce your Deductible obligation for

a claim by 50%, up to $25,000, if, within 60

days of the date of our request, you provide

us with a copy of the written agreement that

was executed by you and your client prior to

your performance of the agreed-to

professional services giving rise to the

claim and you demonstrate, to our

reasonable satisfaction, the existence of any

three (3) of the following six (6) conditions:

RationaleA written agreement is a fundamental riskmanagement tool. Through a written agreement,the parties can state their goals and theexpectations they have of each other and of thirdparties. They can allocate rights andresponsibilities, risk and reward. Writtenagreements can also help parties deal withfuture changes. Even though it may not bepossible to determine exactly what thosechanges might be, it is usually possible toestablish a process and some procedures fordealing with change. Also, contracts can helpprevent disputes and can establish a frameworkfor the fair resolution of those that do occur.

Compliance DocumentationAppropriate compliance documentation consistsof:

l a written agreement executed prior to theperformance of the agreed-to services givingrise to the claim.

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The risk mitigation creditwill not apply to any claimresulting from servicesrendered prior to theexecution of a writtenagreement.

DiscussionFor a variety of reasons, design and otherprofessionals sometimes decide to provideservices prior to execution of a formal writtenagreement. In those cases, firms should keep arecord of the arrangements they have made withthe client. This can take the form of acommitment letter, sometimes referred to as aletter of intent. It is also advisable to include atime limit for the authorization contained in thecommitment letter. That provides an incentive tonegotiate and execute the formal agreementpromptly. As indicated by the policy language onthe previous page, the RMC will not apply to anyclaim resulting from services rendered prior tothe execution of a written agreement.

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Practice Criterion 1: PaymentPractice Criterion 1: PaymentTerms/InvoicingTerms/Invoicing

Policy LanguageYour written agreement with your client

specified payment terms, including a

schedule of when payments were to be paid

to you, which you consistently followed and

enforced, or documented your attempt to do

so.

RationaleUnclear or unspecified payment terms anduntimely billing and collection of accountscommonly precipitate claims and counterclaimsamong contracting parties. By requiring clients tomake timely payments for services rendered andby taking action to collect accounts whenpayments are overdue, policyholders may havean opportunity to identify and cure problems orunmet expectations. Left unaddressed, suchproblems often result in claims.


l an agreement executed prior to theperformance of the agreed-to services givingrise to the claim (per the “baseline” criterion)containing payment terms and a paymentschedule; and

l dated invoices or a spreadsheet reflectingdated invoices; and

l dated unpaid balance reminders or otherdocuments reflecting the policyholder’sattempt(s) to resolve payment problems, ifany.

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Unclear or unspecifiedpayment terms anduntimely billing andcollection of accountscommonly precipitate claimsand counterclaims amongcontracting parties.

DiscussionGenerally, professional service firms extendcredit to their clients from the time services arerendered until the time the service-related feesand expenses are collected. This aspect of anyprofessional practice is fraught with risk. Firmsthat successfully manage this risk invariably doso by, first, checking the financial capability andpayment practices of prospective clients beforeagreeing to perform services for the client.Second, they insist on written agreements withclear payment terms and conditions, includingthe right to suspend or terminate services fornon-payment. Third, their billings are timely,accurate, and consistent with applicable contractterms. Fourth, they actively communicate withtheir clients so there are no surprises to eitherparty. Finally, when clients unreasonably refuseto make timely payments, the firm follows theapplicable provisions of the contract.

Generally, professionalservice firms extendcredit to their clientsfrom the time services arerendered until the time theservice-related fees andexpenses are collected.

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Practice Criterion 2:Practice Criterion 2:Interprofessional Agreements/Interprofessional Agreements/Insurance CertificatesInsurance Certificates

Policy LanguagePrior to the performance of the agreed-to

professional services giving rise to the

claim, you executed a separate written

agreement with and obtained certificates of

insurance evidencing both Professional

Liability and General Liability from each

architect, engineer, landscape architect, land

surveyor, contractor, or construction manager

you engaged or who engaged you.

RationaleInterprofessional agreements are often oral, notwritten. Putting pen to paper encourages theparties to address and memorialize the completeterms of their agreement. It also helps the partiesavoid uncoordinated contracts and mismatchedexpectations. Insurance certificates helpdemonstrate and confirm financial responsibilityand compliance with applicable contract terms.


l interprofessional agreements executed priorto the performance of the agreed-to servicesgiving rise to the claim; and

l certificate(s) of insurance evidencingprofessional liability (PL) and general liability(GL) coverages (or a spreadsheet reflectingall such certificate information) obtained priorto the performance of the agreed-to servicesgiving rise to the claim.

Putting pen to paperencourages the parties toaddress andmemorialize thecomplete terms of theiragreement.

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DiscussionInterprofessional or subcontract agreementsshould describe in detail the duties andresponsibilities of the prime professional and theconsultant. Virtually all design and constructionprojects involve multiple contracts—design andconstruction, prime, and sub—so they should betailored to avoid conflict and ambiguity.The AIAand the Engineers Joint Contract DocumentsCommittee (EJCDC) both publish families ofcoordinated documents. Generally, theseagreements require the consultant to provideservices to the prime professional in the samemanner and to the same extent as the primeprofessional is bound by the prime agreement toprovide such services to the client.

From a professional liability risk managementperspective, in addition to a written agreement, itis important to obtain certificates of insuranceevidencing both PL and GL coverage. But why,from a professional liability risk managementperspective, should we concern ourselves withGL coverage? When PL or GL coverage isunavailable or inadequate, plaintiffs’ attorneystypically assert legal theories that they hope willcomport with the coverage available under theother policy. And, because the carriers’ defenseobligations are broader than their indemnityobligations, a considerable sum of money canbe spent before the issues are sorted out. Onthe PL side, this is particularly problematic forpolicyholders because the defense of a claimmay not only trigger deductible obligations, butthe cost of defense is within the limits of thepolicy. As a consequence, inadequate ornonexistent GL coverage can erode the limitsavailable under the PL policy.

Inadequate or nonexistentGL coverage canerode the limits availableunder the PL policy.

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Practice Criterion 3: Pre-ProjectPractice Criterion 3: Pre-ProjectPlanningPlanning

Policy LanguageYou engaged with your client in a

structured, contemporaneously documented,

pre-project planning process that produced a

project definition document or package that

substantially addressed the following project

parameters (only “a” through “c” are required

to satisfy this condition for study-and-report-

only contracts):

a. project objectives (e.g., business,

economic, aesthetic, other);

b. project constraints (e.g., budget,

schedule, regulatory, other);

c. the bases for the design/investigation

(e.g., site data/requirements, utilities

data/requirements, facility programming/

requirements, equipment/technology

requirements, alternatives to be

considered);

d. project execution approach (e.g.,

staging, procurement strategy, delivery

method, other); and

e. project monitoring and control

procedures (e.g., quality, cost,

schedule, other).

You engaged with yourclient in a structured,contemporaneouslydocumented, pre-project planningprocess...

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RationaleResearch by the Construction Industry Institute(www.construction-institute.org) and others hasclearly demonstrated the benefits of pre-projectplanning. These include better definitions ofrisks, increased predictability of cost andschedule, better achievement of business goals,improved operational performance, and fewerchanges and disputes.


l project definition document(s) addressing theapplicable parameters (“a” through “c” or “a”through “e”); or

l agreements annotated to address theapplicable project definition parameters; or

l reports prepared as deliverables addressingthe applicable project definition parameters.

DiscussionBoth the AIA and EJCDC have long attemptedto address the need to define the project and itsenvironment by including provisions in theirstandard client-design professional contractforms that require the client to provide “fullinformation” (i.e., a program, schedule, budget,survey, geotechnical report, or other necessaryinformation) before proceeding. In addition,under the AIA and EJCDC documents, thedesign professional should respond to the initialinformation provided and advise the client ofapparent conflicts, or the need for additionalinformation or consultant services. PracticeCriterion 3 supports the fulfillment of theserequirements.

Both the AIA and EJCDChave long attempted toaddress the need todefine the project and itsenvironment...

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Practice Criterion 4: Internal/Practice Criterion 4: Internal/External Peer ReviewExternal Peer Review

Policy LanguagePrior to delivery to your client of the

instruments or deliverables of your

professional services, a documented,

independent peer review was completed,

internally or externally, by a qualified

professional to assess the likelihood that such

instruments or deliverables would satisfy

your client’s objectives and would be in

conformance with good professional practice.

RationaleOne of the best ways to minimize clientdissatisfaction, anticipate problems, and controlthe quality of design documentation is throughinvesting in a documented internal or externalpeer review. By definition, an “independent”review cannot be conducted by the persontechnically responsible for the services ordocuments being reviewed.


l documents reflecting peer review activities,such as meeting minutes, memoranda,reports, completed checklists, and notationson design documents (at the conceptual/schematic and final design phases); and

l for external peer reviews, a peer reviewagreement or engagement letter anddocuments evidencing the completion of anysuch external peer review.

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By definition, an“independent”review cannot be conductedby the person technicallyresponsible for the servicesor documents beingreviewed.

DiscussionWhile external peer reviews initiated by projectowners have become more common in recentyears, internal peer or “QA” reviews have longbeen a mainstay in firms committed to thedelivery of services that satisfy clientrequirements and protect the public health,safety, and welfare. Whether internal or external,the factors that are critical to the success of apeer review include the following:

l First, the reviewer’s qualifications in terms ofeducation, training, and experience shouldbe appropriate to the design or otherdeliverable being reviewed and the reviewershould have some degree of independencefrom the person who initially prepared thedeliverable.

l Second, the scope of the review should beclearly defined, and review activitiesaddressing that scope should be carried outin a systematic, logical process. Ideally, thereview should occur throughout the designprocess.

At a minimum, reviews should be carried out atthe conceptual/schematic phase and final designphase of a project. Also, while checklists are nota substitute for experience, they can assist inminimizing oversights. Finally, review comments,responses, and the agreed-to resolution ofidentified issues should be clearly documented.

At a minimum, reviewsshould be carried out at theconceptual/schematic phaseand final design phase of aproject.

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Practice Criterion 5: ConstructabilityPractice Criterion 5: ConstructabilityReviewReview

Policy LanguageYou engaged with representatives of the

project owner, entities responsible for

construction and any other project

stakeholders you deemed appropriate in a

structured, contemporaneously documented

constructability review process that provided

for the timely integration of construction input

into project planning, design, and field

operations.

RationaleResearch by the Construction Industry Instituteand others demonstrates that incorporatingconstruction knowledge and experience into theplanning and design of a project can reducecosts and schedule time and improve the safetyof field operations.


l documents reflecting participation inconstructability review activities byrepresentatives of the client and the designand construction teams, such as meetingminutes, memoranda, reports, and notationson design documents, during the pre-construction phase of the project orapplicable portion of the project.

Incorporatingconstructionknowledge and experienceinto the planning and designof a project can reducecosts and schedule time andimprove the safety of fieldoperations.

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DiscussionFor the purposes of this criterion, “entitiesresponsible for construction” shall includecontractors, construction managers, orconstruction consultants engaged by or onbehalf of the client to advise on theconstructability of the subject project. The key tomaximizing the value of the constructabilityreview process, however, is to understand andrespond to the fact that the most importantconstructability input often comes from tradecontractors and suppliers—the people who buildthe project. And because opportunities toinfluence cost, schedule, and quality diminishduring the course of design, trade contractor andsupplier input is most effective when it occursearly in the planning and design process.Regrettably, low bid procurement strategies workat cross-purposes to timely constructability input.

The most importantconstructabilityinput often comes fromtrade contractors andsuppliers—the people whobuild the project.

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Practice Criterion 6: SubmittalPractice Criterion 6: SubmittalManagementManagement

Policy LanguageYou maintained a contemporaneously

documented construction phase submittal log

indicating the as-planned and actual dates

you received and responded to every

submittal and the action taken.

RationaleA submittal log that tracks as-planned and actualsubmittal dates is a powerful projectmanagement tool that can be used to mitigatethe policyholder’s exposure to contractor delaydamage claims. It also reflects the AIA/EJCDCcontractual mandate that the contractor submit asubmittal schedule, coordinated with thecontractor’s construction schedule, for thedesign professional’s approval.


l a contemporaneously documented submittallog or spreadsheet reflecting as-planned andactual receipt and response dates andactions taken.

A submittal log thattracks as-planned and actualsubmittal dates is a powerfulproject management tool...

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DiscussionExperience demonstrates that a well-definedsubmittal process that allocates responsibilitiesto the appropriate parties is vital to a successfulproject. Claims resulting from project delays andfaulty construction are the alternative. The AIAand EJCDC documents require the contractor toprovide a schedule for submittals thatincorporates the required time for review andresubmittal, if necessary. Since part of thisschedule affects the services of the designprofessional, the contract requires the designprofessional to approve this schedule, in contrastto the construction schedule, which the designprofessional merely reviews. The AIA andEJCDC documents also require that thesubmittal schedule be prepared in conjunctionwith the construction schedule so that submittalsare made in logical sequence and in a timelymanner so they can be reviewed and approvedwhen called for by the construction schedule.

Contractors often claim that they cannot providethe required submittal schedule because theyhave not yet “bought out” the job. That is aspurious argument. The contractor hascontractually committed to provide coordinationand superintendence of all of the work. If thecontractor can contractually commit to acompletion date for the project and furnish aconstruction schedule for the project reflectingthat completion date, it is axiomatic that thecontractor can and should provide allowancesfor submittal review and approval in thatconstruction schedule—notwithstanding that thecontractor may not have executed purchaseorders or contracts for all labor, materials, andequipment necessary to complete the work.

Experience demonstratesthat a well-definedsubmittal processthat allocates responsibilitiesto the appropriate parties isvital to a successful project.

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Policyholder Eligibility andPolicyholder Eligibility andParticipationParticipation

As was the case with the mediation credit,policyholder participation in the RMC is optional,with no underwriting penalties for notparticipating. Also, like the mediation credit, theeligibility of Large firm policyholders (defined ashaving annual gross billings of $5 million ormore) is subject to restrictions.

Large firm restrictions applicable to participationin the RMC are as follows:

l As noted previously, firms with annual grossbillings in excess of $25 million are noteligible to participate in the RMC. In thosecases, the credit will be deleted byendorsement.

l Firms with annual gross billings between $5million and $25 million are not eligible toparticipate in the RMC if (1) they haveretention or deductible obligations equal toless than one (1) percent of their annualgross billings or (2) they have aggregatedeductible options. In those cases, the creditwill be deleted by endorsement.

l For eligible firms with gross annual billings of$5 million to $25 million, the policy languagequoted above, under the section titled,“‘Baseline’ Criterion: Written Agreement,” willbe amended by endorsement to read asfollows:

Firms with annual grossbillings in excess of $25million are not eligible toparticipate in the riskmitigation credit.

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Your Deductible obligation as shown in Item

5. on the Declarations is reduced to $________

for a claim where, within 60 days of the date

of our request, you provide us with a copy of

the written agreement that was executed by

you and yourclient prior to yourperformance of the agreed-to professional

services giving rise to such claim and youdemonstrate, to our reasonable satisfaction,

your compliance with any three (3) of the

following six (6) conditions:

The consequence of this endorsement foreligible firms with gross annual billings of $5million to $25 million is that the credit applies totheir deductible obligation on a “top down” basis,rather than on a “50-50, bottom up” basis as isthe case for firms with annual gross billingsbelow $5 million. From an underwritingperspective, this change is necessary due to thedifference in claims frequency and severitybetween smaller and larger firms.

Administration of the Risk MitigationAdministration of the Risk MitigationCreditCredit

If there is a claim against a policyholder, thepolicyholder has an obligation to notify CNA orVictor O. Schinnerer & Company promptly and inaccordance with the provisions described underPolicy Item E of Section VI, titled, “Your Duties ifthere is a Claim.”

Following a policyholder’s written notice of aclaim, CNA will confirm that a claim file hasbeen opened and will ask whether thepolicyholder intends to apply for the RMC. If thepolicyholder advises CNA that it intends to doso, CNA will request that the policyholder

If there is a claim against apolicyholder, thepolicyholder has anobligation to notifyCNA or Victor O.Schinnerer & Companypromptly

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complete the “Application for Risk MitigationCredit” and submit the application and thefollowing documentation to CNA, within 60 days:

l a copy of the written agreement that wasexecuted by the policyholder and client priorto the performance of the agreed-toprofessional services giving rise to the claim;and

l documentation demonstrating, to CNA’sreasonable satisfaction, that the policyholderhad implemented three of the six bestpractices criteria described under Policy ItemE of Section V, titled, “Limits ofLiability/Deductible.”

The descriptions of “appropriate compliancedocumentation” are meant to assistpolicyholders in implementing best practices andin demonstrating their compliance with the RMCcriteria. From an evaluation standpoint, thesubstantive content of the documentation, ratherthan its specific form, will determine compliance.However, the documentation should be wellorganized and clearly keyed to each applicableRMC criterion.

How to Obtain Additional InformationHow to Obtain Additional Information

To obtain additional information concerningCNA/Schinnerer’s new risk mitigation credit or toobtain other information about the CNA/Schinnerer professional liability insuranceprogram, call 301/961-9800 or visit our websiteat www.PlanetAEC.com.

From an evaluationstandpoint, the substantivecontent of thedocumentation, rather thanits specific form, willdeterminecompliance.

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Compliance Document ChecklistCompliance Document Checklist

The following checklist includes the submittals ineach category. Once the “Baseline” Criterion of awritten agreement is met, three of the sixPerformance Criteria need to be included in theapplication for the RMC. The application isavailable from the CNA claims offices or fromwww.PlanetAEC.com.

“Baseline” Criterion (Written Agreement) Documentation Submitted:

o A written agreement executed prior to theperformance of the agreed-to servicesgiving rise to the claim.

Practice Criterion 1 (Payment Terms/Invoicing) Documentation Submitted:

o An agreement executed prior to theperformance of the agreed-to servicesgiving rise to the claim (per the “baseline”criterion) containing payment terms and apayment schedule;

o Dated invoices or a spreadsheet reflectingdated invoices; and

o Dated unpaid balance reminders or otherdocuments reflecting the policyholder’sattempt(s) to resolve payment problems, ifany.

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Practice Criterion 2 (InterprofessionalAgreements/Insurance Certificates) Documentation Submitted:

o Interprofessional agreements executed priorto the performance of the agreed-toservices giving rise to the claim; and

o Certificate(s) of insurance evidencingprofessional liability (PL) and general liability(GL) coverages (or a spreadsheet reflectingall such certificate information) obtainedprior to the performance of the agreed-toservices giving rise to the claim.

Practice Criterion 3 (Pre-Project Planning) Documentation Submitted:

o Project definition document(s) addressingthe applicable parameters (“a” through “c” or“a” through “e”);

o Agreements annotated to address theapplicable project definition parameters; or

o Reports prepared as deliverablesaddressing the applicable project definitionparameters.

Practice Criterion 4 (Internal/External PeerReview) Documentation Submitted:

o Documents reflecting peer review activities,such as meeting minutes, memoranda,reports, completed checklists, and notationson design documents (at the conceptual/schematic and final design phases); and

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o For external peer reviews, a peer reviewagreement or engagement letter anddocuments evidencing the completion ofany such external peer review.

Practice Criterion 5 (Constructability Review) Documentation Submitted:

o Documents reflecting participation inconstructability review activities byrepresentatives of the client and the designand construction teams, such as meetingminutes, memoranda, reports, and notationson design documents, during the pre-construction phase of the project orapplicable portion of the project.

Practice Criterion 6 (Submittal Management)Documentation Submitted:

o A contemporaneously documentedsubmittal log or spreadsheet reflecting as-planned and actual receipt and responsedates and actions taken.

Victor O. Schinnerer & Company, Inc.Two Wisconsin Circle

Chevy Chase, MD 20815-7022

Phone: 301-961-9800Fax: 301-951-5444

E-mail: [email protected]

www.Schinnerer.comwww.PlanetRiskManagement.com

© 2006 by Victor O. Schinnerer & Company, Inc. Statementsconcerning legal matters should be understood to be generalobservations based solely on our experience as risk consultants andmay not be relied upon as legal advice, which we are not authorized toprovide. All such matters should be reviewed with a qualified advisor.