The AJ and insurance broker Griffiths & Armour gathered a selection of industry experts to debate contracts that cut risk and support innovation
The Old Library, Lloyd’s of London. 9.30am - 11.30am, 6 December 2011.
Steve Bamforth, chief executive, Griffiths & Armour
Jenny Baster, group legal director, Arup
Paul Berg, partner, Griffiths & Armour
Henry Buxton, senior partner, Hopkins Architects
David Cash, director, BDP
Keith Lonsdale, partner, Berrymans Lace Mawer Solicitors
Felix Mara, technical editor, The Architects’ Journal
Lisa Melvin, director, John Robertson Architects Christine Murray, editor, The Architects’ Journal
John Myers, company secretary, Broadway Malyan
Indu Ramaswamy, director, Allies and Morrison
Christine Murray We would like to cover the interesting topic of professional indemnity insurance (PII) in a profession that is changing, with the emergence of BIM – a more integrated way of working – and the focus on international work, with increased litigation in some places that can impact liability. Then there are projects where one firm designs and another delivers. Who is liable for what in that context? It’s an essential conversation, because risk has to be identified and managed before innovation can take place. In an increasingly competitive market, there’s a sense that we must innovate, take chances with design and consider sustainability. But liability makes us hesitate to do so. In many ways, coming from North America, I can be held responsible for this litigious culture, although Canada is less litigious than the States. First, my co-host Steve Bamforth of Griffiths & Armour will introduce the topic of PII for integrated design teams. Then we’ll discuss international work and its impact on PII.
Steve Bamforth For the last 10 years I’ve researched innovative ways of insuring construction risk and liability. In the traditional approach to liability in the British construction industry, a client’s lawyer advises them to turn risks into contractual liabilities. But based on my experience of handling claims, that approach is fundamentally flawed and inefficient. It’s divisive, discourages team working and distorts the procurement process.
With the growing interest in integrated construction, we want to develop first party insurance that insures the design and construction team on an individual project against an agreed specification and timescale.
So how would this work in practice? We would work with an informed client with specific business needs, involving specialists early to create appropriate solutions as a team – almost a virtual company.
The usual practice involves allocating blame if anything goes wrong, which can entail costly court proceedings. But in the case of single project insurance, if the project or its finances go wrong for any reason, the policy will respond. Meaning that we insure an effect, not a cause.
There would be a pre-agreed data sharing arrangement within the project team, and a financial cap beyond which the practical excess, the balance of the financial loss, is passed to the insurer. The benefit of our proposal is the way it would improve teamwork. Under the traditional arrangement, when things go wrong we advise our clients to back off, avoid getting involved or being helpful and cover their backs, which results in them seeking a legal solution to a technical problem.
With our proposal, if something goes wrong during construction, everyone is co-aligned to solve the problem, minimising the cost of a resolution. This involves changing behaviour, so that rather than being stuck with their own adversarial contracts, people work together holistically. The attraction is the saving in time and cost, potentially by 15 per cent and 20-30 per cent respectively.
CM Do you see the need for this kind of change at the moment, Jenny?
Jenny Baster We are very supportive and have worked closely with Griffiths & Armour for several years to make this new approach to insurance happen. I agree with everything Steve said: if we designed a system for insuring construction risk from scratch, we wouldn’t dream of designing the system we have. Steve emphasises changing behaviour and collaborative risk, and we all know we can improve collaborative working when projects are interesting. You would expect the growth of Design and Build to have brought design and construction closer together, which is what we need to do. But it has actually driven them further apart. We need to pull the two together and I think this new approach to insurance would do that very effectively. We would have to insure all parties to the project, not simply the design team, and it would be essential to focus on the outcome. Over the years, there has been a shift towards concern about commercial risks, such as cost and time overrun. Faced with these, people immediately search around for those responsible. A much more sensible approach would aim to get things right in the first place.
John Myers I’m largely in support. The big issue is cultural and involves getting the message across. It’s also about getting the insurance market to understand that this product may well have a take-up. My understanding is that there is a limited supply of single project insurance in the market and that it’s only available on huge projects.
David Cash Fifteen years ago, I was involved in a major contractor-led project where we had a similar arrangement, linked not to insurance but to overall performance. At the outset we, the engineers and the contractors signed an agreement that we wouldn’t sue each other. The contractor initiated this and it worked very well because we all benefited and it generated a degree of camaraderie. At one point, the engineers worked in our office for several weeks to help us get over several hurdles, and they were exposed to things that we might not normally have been so open about. It did change the culture and that’s the sort of thing you’re looking to achieve with something like this.
Christine mentioned international work, which is something I’m particularly involved in at the moment, along with tying in with local consultants, which could work quite effectively with this approach. Working in the international market in many countries, needing local insurance in each, has entailed significant changes for us as far as insurance is concerned. You need an insurer who can link into those places and you need local practices that abide by this arrangement. That might be a solution but it depends on all parties being involved at the beginning.
Paul Berg We find that a lot of risk issues are generated at the interface between different design team members. Many current liability issues aren’t clear-cut and haven’t been seen before, so a review of the whole process is appropriate from our perspective.
CM Henry, where do you stand on the topics of integrated team approaches and international work?
Henry Buxton I’m the financial partner and have overseen the setting up of our new office in the Middle East, which presented certain issues, especially in the last five years. It’s interesting how the insurance side of things hasn’t actually had a big role. In that culture, it’s all about negotiation and working things out, not blame. The finger-pointing hasn’t been as bad as I thought it might be.
One decision we did make was to stay there, and I think that’s a good way of dealing with these matters in different cultures. It’s hard work having to change the way you deal with people in cultures that differ in every sense.
Felix Mara I am going to make one suggestion and, to an extent, play devil’s advocate. The question I would ask about the model Steve suggested is ‘how do we monitor this?’ How do we measure it and demonstrate that this is in everyone’s best interest? I’ve worked on many projects where the partnering approach has been used, but I am also interested in a conflict model of society, where everybody pursues what they want and somehow they try to resolve that, rather than taking a collaborative approach. Arguably, competition is at the heart of the way construction has been carried out since the mid-19th century and it’s essential to the competitive tendering process. Is there still a role for competition? To what extent does it keep prices down and lower costs?
SB Competition does have a place in this brave new world, but competition on quality rather than price.
Lisa Melvin Your question is very interesting, Felix. I work in a medium-sized London practice, dealing with finance and PII. In my view, the less contact I have with my insurers, the better. We have done some overseas work, so I have had a taste of insurance in other countries. Insurance is very complex and difficult to apply to design because the design innovation that drives certain projects can be very detached from what insurance tries to achieve. When I look at certain architects, I think risk is essential to drive architecture forward. Any approach to collaborative working is extremely useful and should be encouraged by everyone. I don’t know of any instances of single project insurance, but I would be interested to know if the idea has been tested and developed overseas. But what you would tie the single project insurance into may not be resolved until the end of the project, so it would be very difficult to set up at the outset.
SB You’re absolutely right. The design process is dynamic.
LM It seems you would need to finalise the design and specification for single project insurance to work, but that often doesn’t happen until quite late in projects.
Indu Ramaswamy We recently had a seminar with the president of Autodesk to introduce the idea of BIM, because we are now being asked to work with it on projects and we have clients interested in it. When they developed their own offices in the US, where the BIM market is five years ahead, they also decided to set up an agreement between the parties involved that they wouldn’t sue each other. The project came in on time and under budget and was incredibly successful. This led to the issue of single project insurance because to make an agreement that you’re not going to sue each other, there has to be an envelope of insurance so people can get on with the work in hand.
We’re working on a project with a European architect and our PII doesn’t marry up with theirs. The client won’t pay us until we’ve signed the appointment documents and wants us to have joint and several liabilities. Single project insurance would solve a lot of issues. Our European partners looked into single party insurance, but the market has completely closed and they can’t get 12 years’ coverage; it’s only available for six.
Keith Lonsdale I’m a solicitor specialising in construction disputes, so my firm is involved when things go wrong. Adjudication and certain protocols help to an extent, but the process of resolving contractual disputes and the costs incurred are ridiculous. Costs on the claims side are going through the roof at the moment. Anything that eases the burden and cuts out that process will save millions of pounds that are wasted in disputes.
IR Recently we are seeing pure indemnities creeping into our contracts and are being asked to indemnify the client, third parties, the world and his wife! What has prompted this?
KL Lawyers will always try to make contracts as beneficial as possible to their clients and as onerous as possible for suppliers. It’s because of the economic climate and is part of the cat and mouse game of trying to tie your consultants down to the most ridiculous, onerous terms, thinking this is doing clients a favour, but in reality, this simply isn’t the case.
HB The whole cap on liability question is extraordinary. What use is it for us to have unlimited liability? If we make an honest mistake, it costs us a lot of money and puts us out of business. That’s no use to anyone.
KL If it goes lawyer to lawyer, it won’t get anywhere. What we need is principle-to-principle conversations. There are some ridiculous clauses and obligations floating around.
IR The principles go back to the lawyer and no decisions are made without their backing. It goes round and round.
HB With one client, we got to a point where we just couldn’t agree on lots of things, so we just went back to them and said, ‘This isn’t getting us anywhere’ and, interestingly, we’ve managed to resolve many of these issues.
In the good times, nothing is an issue. You can get much better terms and fees, whereas in the bad times, you get no fees and increasingly ridiculous and onerous contracts.
PB We share the views of the panel. When our clients are involved in contracts where onerous terms are proposed they think because they are told that everyone else has signed up for them so should they. From our perspective, we’ve been in positions where, advising several design team members, we know it has been suggested that the others have signed when none of them actually have. That’s a deliberate attempt to divide and rule, exploiting the shortage of work. We fear that people are accepting obligations now purely to maintain their financial standing and keep the wolf from the door. It’s a dangerous time. The other aspect of the debate is that if you’re in a situation where you’re paralysed by the fear of getting something wrong, you won’t innovate. If you sat down and designed the construction process, what would it look like? It wouldn’t look like this.
JB Problems arise where this focus on insurance, risk, liability and contracts starts to distort, drive and obstruct the process. We need to put our energy into collaborating with everyone interested in a project, aiming for the best possible result. Henry’s comments about working in the Middle East are interesting. How can you develop a relationship with people in a very different culture, work with their system, get paid and deliver a project there? I think the more we all look outside Britain for work, the more we will grapple with these issues, seeing what we can bring to them and how we can adapt and work within them.
In a way, I find it quite refreshing because suddenly we aren’t talking about contracts that are obsessed with liability, focusing instead on the exact scope of services we are providing, the payment procedures and other, much more important things. What we want is the underpinning of insurance and contracts to be there to support the way we want to work. We don’t want them to get in the way or drive the way we act.
Many thanks to Griffiths & Armour for organising and taking part in the debate. www.griffithsandarmour.com