risk management
DESCRIPTION
risk management for architectural practice in an architectural firmTRANSCRIPT
Risk Management
OFFICE PROJECT MANAGEMENT
GROUP 3: Duran, Espiña, Gatela, Hernani, Ibañez I BS Architecture 4aMARCH 2015
Introduction
RISK
“the possibility that something bad or unpleasant will happen”
“someone or something that may cause something bad or unpleasant to happen”
“to put (something) in a situation in which it could be lost, damaged, etc”
The word “risk” derives from the archaic Italian word “riscare”, which means “run into danger” or to imperil, endanger, or jeopardize.
Introduction
MANAGEMENT
“the act or skill of controlling and making decisions about a business, department, sports team, etc”
“act or art of managing: conducting or supervising of something”
Introduction
Risk Management
”is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities”
Risks can come from different ways
There are two types of events:
positive events
negative events risks
opportunities
Opportunities can lead to rewards
One would want to take maximum advantage of this
Riskscan lead to losses
One would like to avoid and minimize this
Difference of issue and risk
Risk An uncertain future event or condition which if happens affect mission objectivesAssociated with future events which has not happened yet
Issue A risk which has already occurredGenerally regarded as a problemThis is what risk management is aiming to avoid
Risk Appetite and Tolerances
Risk AppetiteAmount and type of risk an organization is prepared to seek, accept or tolerateThe willingness to take risks
Risk ToleranceOrganization’s readiness to bear risk
Why take risk?
“There is a balance between risk and reward”
“Generally, more risks lead to more rewards.
But this is not always true”
One would want more rewards with less risk
Why take risk?
“There is a balance between risk and reward”
“Generally, more risks lead to more rewards.
But this is not always true”
One would want more rewards with less risk
Why take risk?
“There is a balance between risk and reward”
“Generally, more risks lead to more rewards.
But this is not always true”
One would want more rewards with less risk
sources of risks
No. 4 : Negotiation and Contracts
Deal Makers and Deal BreakersWorking without an agreementHeightened standard of careIndemnitiesConstruction means and methodsGuarantees and CertificationsProper ScopeAdministration of the contract for constructionLimitation of liability
Making better
agreementsEstablish standard in-house practicesGetting
professional
supportUse standard
agreement form
sources of risks
No. 3 : Client Selection
Know the firm’s expertise – know the marketKnow the clientCondominium ProjectsRepeat Clients are like GoldGet the Right BuilderImpact of the Project Delivery Method
sources of risks
No. 2 : Project Team Capabilities
Use of TechnologyStaff Continuity on ProjectsOffice standards
sources of risks
No. 1 : Communication
Peer Reviews: Quality Assurance/Quality Control Know the ContractConduct Proper MeetingsDocument ControlWarning Signs of a ClaimSee It FirstHow to Preserve the Client Relationship
Risk Management Principles
Create Value Be an integral part of organizational processes Be part of decision-making processes Be systematic and structured Be transparent Be responsive to change Be capable of continual improvement and enhancement Be continually or periodically re-assessed
Benefits of Risk Management:
“Better decision-making through a good understanding of risks and their
likely impact.”
FEWERSURPRISES
EFFECTIVE USE OF RESOURCES
REASSURING STAKEHOLDERS
Plan riskmanagement
Identify risks
Analyse risks
Plan risk response
Monitor and control risks
STEPS IN RISK MANAGEMENT
Specifies management intent, systems and procedures required for managing risksWill provide the definitions of various risk related terms, roles and responsibilities related to risk, and tools and templatesSpecifies how the next four steps are executed
Plan Risk Management
STEPS IN RISK MANAGEMENT
Plan Risk Management
How to do this…
Risk identification
Risk analysis
Risk response
Risk monitoring
STEPS IN RISK MANAGEMENT
Identify Risks
STEPS IN RISK MANAGEMENT
First key step in the actual management of risksProcess of identifying potential risks, their cause, and consequencesSystematic process
Identify Risks
STEPS IN RISK MANAGEMENT
“Best done in a group environment”
Together with....
Management-Architect/designer
Staff/employees
Owner/client
Other stakeholder
Risk register – list of all the risks identified
Analyse Risks
STEPS IN RISK MANAGEMENT
Process of quantifying the risk events documented in the previous stepRisks are analysed to set prioritySets focus on high priority risks
Plan Risk Response
STEPS IN RISK MANAGEMENT
How to decrease the possibility of negative risksHow to increase the possibility of positive risks
Monitor and Control Risk
STEPS IN RISK MANAGEMENT
Regularly review identified risks and ensure that these are still relevant
- identify new risks- eliminate risks no longer relevant
Unexpected risks
“risks that occur which were not
identified in the earlier steps”
“PREVENT DISPUTES BEFORE THEY START”
“The best way to resolve a dispute is to prevent the dispute from ever beginning, or at least to prevent it from
gaining any serious momentum.”
The three most powerful tools in doing so are the successive steps of:
client selection; client education; and contract documentation
DISPUTE RESOLUTION METHODS:
MEDIATIONARBITRATIONLITIGATION
Note: “There are also countless variations to each path, and even some which blend them in some ways. However, understanding the basic process, advantages, and disadvantages of each is really the first stepping stone in the successful and
strategic use of the options. “
“a process in which a neutral person or persons facilitate communications
between the disputants to assist them in reaching a mutually acceptable
agreement”
MEDIATION
MEDIATION
Favoured by the AIA that it is the default first step in the dispute resolution process
Proved to be so useful in efficiently and cost-effectively resolving design professional claims that many professional liability carriers provide significant financial incentives to architects and engineers who can resolve their claims by this means
One rule that generally apply to all mediations is that it is a confidential and privileged process such that any statements made in mediation cannot be cited, quoted, or otherwise used against a party in any subsequent proceeding or elsewhere
MEDIATION
Four factors that can be most influential toward the potential for success in mediation:
Party Participation and AuthoritySelection of Mediator
important considerations for the selection of a mediator:
Adequate Advance Exchange of Information and PositionsTiming
Expertise Energy Empathy Perspective and Persuasion
Settlement The goal of mediation is a “settlement” resolving the dispute. Whether as a result of mediation or direct negotiation, it is critically important that this settlement agreement be reduced to a written agreement as soon as possible, to avoid differing recollections and “buyer’s remorse.”
ARBITRATION
“The process whereby the parties voluntarily submit their disputes for resolution by one or more impartial third persons instead of by a judicial
court process.”
ARBITRATION
4 characteristics of Arbitration resolution mechanism:
1. A private/third-party decision maker chosen by the parties or by a service provider chosen by the parties
2. A mechanism for ensuring neutrality in the rendering of the decision
3. An opportunity for both parties to be heard4. A binding decision or result
ARBITRATION
Parties can be included in and bound by arbitration only if they have agreed to do so.
Most design and construction disputes are not isolated to a single party, but may also include multiple other parties such as other design professionals, contractors, subcontractors, and supplier/manufacturers.
Although there may be very isolated strategic exceptions, it is generally critical for efficiency and fairness that all such parties and disputes be resolved in a single arbitration.
ARBITRATION
“Arbitration has many fans. It is included in many public works agreements and private developer
agreements.”
Most common perceived advantages to arbitration are:
Private—the dispute is not confidential, but arbitration awards are not published. Limitations on this privacy may exist on public projects.
Greater control over selection of decision maker, and better-qualified and experienced decision makers.
Faster due to avoidance of court congestion and timing and more limited prehearing procedures and discovery.
less costly, due to little or no discovery and shorter path to hearing. However, the arbitrator(s) themselves must be compensated.
Avoidance of lay juries
LITIGATION
“The public court system provided by local, state, and federal governments and it is
subject to the rules and procedures adopted by those
governments.”
LITIGATION
Is the default resolution venue
Absent an agreement, this is where nearly all disputes involving architects end up.
Can be slow (years), expensive, distracting, time-consuming, and public.
Generally the out-of-pocket costs to access the courts can sometimes be less than arbitration, and the procedures are time tested and well known.
EARLY NON-FACILITATED RESOLUTIONS
Mediation, arbitration, and litigation contemplates the involvement of third parties to assist in or resolve
the dispute. However, others may rightly suggest that what may be needed is merely for
the participants to just talk to each other and to listen…
EARLY NON-FACILITATED RESOLUTIONS
Ideally such a process is a rapid, phased, and escalating process with limited rounds.
Often, such processes will resolve issues before they escalate into a genuine dispute.
If that is the happy result of such a process, it is important that the resolution be memorialized in writing and signed by both “sides.”
THIS PROCESS would start with a mandatory meeting between the
project managers within five business days. If they cannot
resolve the issues, it would then “escalate” to the principal level for
a second discussion within five business days based on written
summaries provided by the project managers to both principals.
EFFECTS OF CONSTRUCTION METHODS IN DISPUTE RESOLUTION
“The advent of the new approaches to construction brings more uncertainty into the construction process, since many specifics are not determined at the time the contracts are signed. These uncertainties inevitably lead to
more disagreements, which in turn increase the
need for some satisfactory means of resolution.”
TRADITIONAL CONSTRUCTION ARBITRATION
Traditional ConstructionVoluntary, Binding Arbitration
NEW CONSTRUCTION METHODS
Fast TrackingDesign-Build
The Construction Manager
MODERN CONSTRUCTION SYSTEMS' IMPACT ON DISPUTE RESOLUTION
• May be subject to unknown, contingent liabilities that could impose a higher degree of risk
• Fast track procedures eliminate certain precautionary stages in the evolution of the construction process.
• Design-build eliminates the dispute resolution role of the independent architect.
• Construction management eliminates certain traditional checkpoints.
I N S U R A N C E
“The equitable transfer of the risk of a loss, from
one entity to another in exchange for payment.”
“A form of risk management primarily used to hedge against the risk of a contingent, uncertain
loss.” IS LIKE A LIFE SAVER…..
Insurer or Insurance Carrier •Is a company selling the insurance
The insured or policyholder•Is the person or entity buying the insurance policy.
Premium•The amount of money to be charged for a certain amount of insurance coverage
I N S U R A N C E
RISKS FOR ARCHITECTS
must protect their firms against:litigation alleging negligence;
theft or destruction of property; personal risks ranging from health and disability to life and
retirement
Should share similar concerns regarding their own employees.
Newer, lesser-known virulent risks:
unproven sustainable products and designchanging standard of carehidden electronic “metadata” contracts that imply fiduciary duty
ARCHITECTS
2 Types of Insurance Applicable to Architectural Firms
Professional Liability Insurance
Commercial General Liability Insurance
“A professional liability insurance policy agrees to defend and pay on behalf of the
architect for claims alleging an error or negligence in the performance of
professional duties, in exchange for the premiums paid to the insurance
company.”
PROFESSIONAL LIABILITY INSURANCE
PROFESSIONAL LIABILITY INSURANCE
“Some firms decide not to purchase professional liability insurance, a business decision usually based on the cost of
the coverage that could ultimately put the firm and its
architects in jeopardy.”
NOTE : Even with professional liability coverage, a firm continues to retain some risk.
PROFESSIONAL LIABILITY INSURANCE
Reasons why an architect should consider the purchase of professional liability insurance:
Business survival
Continuing operations
Contract requirementsSocial responsibilit
y
PROFESSIONAL LIABILITY INSURANCE
Basic considerations for selecting professional liability insurance for a firm:
The coverage limitsDeductiblesCost of the insuranceEndorsement optionsExclusionsCore policies themselves
PROFESSIONAL LIABILITY INSURANCE
“The stability of the insurance carrier is paramount”
it is good practice to evaluate all the potential insurance carriers available
PROFESSIONAL LIABILITY INSURANCE
Broker
help firm owners evaluate the basic policy forms and endorsements and how suitable they are to their practice
architects rely heavily on their insurance broker in the selection of a professional liability insurer. Therefore, a critical step in choosing the best insurer for professional liability exposure is in the selection of the broker to access the marketplace.
COMMERCIAL GENERAL LIABILITY INSURANCE
“Covers liability from incidents that occur on or off the policyholder’s premises or that arise from nonprofessional aspects
of the insured’s practice.”
The three basic coverage areas
property damage, bodily injurypersonal and advertising injury
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
Immediately protects the firm from injury and property damage claims that could seriously and detrimentally impact the business
Protects a business from lawsuits
General liability policies set limits on the amounts an insurance company is obligated to pay for each type of claim
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
helps to protect against claims brought by employees, such as:
Discriminationsexual harassment wrongful terminationEtc.
Coverage pay damages and defense costs.
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
provide wage replacement and medical benefits to employees
injured in the course of employment
designed to ensure that employees who are injured or
disabled on the job are provided with fixed monetary awards, eliminating the need
for litigation
also provide benefits for dependents of those workers
who are killed because of work-related accidents or illnesses
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
Protects companies for copyright, trademark, or patent infringement claims arising out of the company’s operation
Generally, this insurance will pay defense costs and any judgment up to the policy limits
Protects the firm from suit by a competitor for infringing on an idea belonging to someone else.
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
reimburses the architect for ongoing expenses and loss of profits in the event of a fire or other casualty that interrupts normal business operations
can be written to cover fire, windstorm, extended coverage perils, computer crashes, and other hazards
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
this policy agrees to defend and pay claims on behalf of the architect for claims arising out of an alleged negligent act in managing the security of a computer system
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
should also be considered since architects are also exposed to auto claims,
the architect or the firm can be liable for auto accidents while the autos are operated within the scope of employment
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
covers losses due to a bonded employee's theft of business property and money
is appropriate for all persons involved with the custody or disbursement of funds, management of firm finances, authorization of payments, purchasing,and other activities requiring the use of funds
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
Insurance that covers liability of the insured assumed in a contract
It is important tolearn to understand contracts and their importance toinsurance and risk management
Business contracts may contain a hold-harmless provision that will contractually transfer another’s legal liability to the architect
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
Professional, general, automobile, and other liability policies are interrelated
It is important to verify insurance coverage and amounts to avoid gaps in protection or duplication of coverage, as well as to correlate insurance limits
COMMERCIAL GENERAL LIABILITY INSURANCE
General liability coverage
Employment practices liability coverage
Workers’ compensation insurance
Intellectual property insurance coverage
Business interruption insurance
Technology liability coverage
Business automobile liability
Coordination of liability insurance
Umbrella or excess liability policies
Fidelity bond
Contractual liability
provide higher limits in conjunction with underlying general liability, automobile,and employer’s liability policies
COMMERCIAL GENERAL LIABILITY INSURANCE
Builder's Risk Insurance
Ordinance or Law Insurance
Tenant's Insurance
Crime Insurance
Product Liability Insurance
Health Insurance
COMMERCIAL GENERAL LIABILITY INSURANCE
Builder's Risk Insurance
Ordinance or Law Insurance
Tenant's Insurance
Crime Insurance
Product Liability Insurance
Health Insurance
covers theft, burglary, and robbery of money, securities, stock, and fixtures from employees and outsiders.
Tenant's Insurance
Product Liability Insurance
COMMERCIAL GENERAL LIABILITY INSURANCE
Builder's Risk Insurance
Ordinance or Law Insurance
Tenant's Insurance
Crime Insurance
Product Liability Insurance
Health Insurance
Builder's risk insurance covers buildings while they are being constructed.
COMMERCIAL GENERAL LIABILITY INSURANCE
Builder's Risk Insurance
Ordinance or Law Insurance
Tenant's Insurance
Crime Insurance
Product Liability Insurance
Health Insurance
covers the costs associated with having to demolish and rebuild to code when your building has been partially destroyed
COMMERCIAL GENERAL LIABILITY INSURANCE
Builder's Risk Insurance
Ordinance or Law Insurance
Tenant's Insurance
Crime Insurance
Product Liability Insurance
Health Insurance
Commercial leases often require tenants to carry a certain amount of insurance.
A renter's commercial policy covers damages to improvements you make to your rental space and damages to the building caused by the negligence of your employees.
COMMERCIAL GENERAL LIABILITY INSURANCE
Builder's Risk Insurance
Ordinance or Law Insurance
Tenant's Insurance
Crime Insurance
Product Liability Insurance
Health Insurance
covers claims that arise from defective products that cause injury or harm
coverage vary with the type of product that is made
COMMERCIAL GENERAL LIABILITY INSURANCE
Builder's Risk Insurance
Ordinance or Law Insurance
Tenant's Insurance
Crime Insurance
Product Liability Insurance
Health Insurance
most businesses need to offer their workers health insurance
this insurance offers a health coverage benefit to the employees
References:
• The Architect’s Handbook of Professional Practice, American Institute of Architects
• Dispute Management Under Modern Construction Systems, Robert Coulson
• Introduction to Risk Management, QualityGurus.com
• Wikipedia
• Merriam-Webster Dictionary
• smallbusiness.findlaw.com
• businessinsurance.org