Construction is inherently challenging. The perfect set of plans has yet to be drawn and the error-free construction project has never been built. In the building industry, it’s not if there will be a problem, claim or litigation, it’s when.
How companies manage risk, and specifically how they handle the inevitable claims that will occur, will significantly impact company operating results.
First and foremost, risk control strategies should be aimed at lowering the frequency of claims. After all, if there are no claims, then the protocols to manage those claims don’t matter. Unfortunately, even if a company does everything right, it can still get sued. Knowing what to do when a claim happens is important in controlling the severity of that claim. Equally important is knowing what not to do.
1. DON’T overreact
No matter how a company is notified of a claim – whether it’s a phone call, an attorney’s letter or legal process papers served by a court officer – remain calm and do not overreact. If the company may be at fault, the tendency may be to immediately apologize and promise to make it right. If it is totally bogus, company executives may be upset and suggest the other party do something anatomically impossible. Neither reaction will help. It is imperative not to offer opinions and stay objective.
2. DON’T make any statements until conferring with insurers and/or attorney
Though it seems obvious, making what seems like an innocuous statement (e.g., “I was wondering when I’d hear about this”) to the other party becomes part of the record and later could be interpreted as an admission of liability. This could not only hurts the company’s case, it could impair insurance coverage. Prior to consulting with those in the business of protecting the company, the less said to anyone about the claim, the better.
3. DON’T wait to contact the broker or insurer
The earlier these parties are notified, the sooner they can help. Let them know about the situation and discuss initial steps. Most quality insurance companies will immediately begin investigating the potential liability involved and deciding the best course of action to take (e.g., retaining an expert to evaluate the claim) to defend the company. The company and the insurance company share the same interests when it comes to claims.
4. DON’T wait to compile project documents
The claim may be related to a project that’s years old and the records may have been stored offsite. Getting started right away means those records can be quickly passed on to those defending the company’s interests.
5. DON’T destroy documents related to the project in question
As soon as there is any inkling that there’s a dispute on a project, even if it doesn’t appear the company is involved, preserve all documentation. If the firm has a policy of routinely destroying documents after a certain period of time, then circulate a “litigation hold” memo within the firm. The memo should go out to staff as soon as company executives learn about the possibility of litigation. Don’t wait until the company is served with a summons and complaint. If documents are mysteriously destroyed, courts get skeptical.
6. DON’T tell the other side there are no documents
Many people assume that if no relevant documents exist, the claim can’t proceed. The reality is that not only can the claim proceed, but by telling the claimant’s representative there are no documents, it gives the opposition a leg up in the case. Their attorneys now realize that, absent a project file, their own proofs will form the basis for much of the case, leaving the company to defend itself with nothing but sketchy recollections.
7. DON’T sign or accept releases from anyone
In fact, don’t sign any document related to a claim unless advised to do so by the attorney and insurance company. Otherwise, the company could end up releasing the party actually responsible for a problem from any liability, leaving it as the sole defendant. The company may also be presented with only an incomplete release, exposing it to liability for additional components of the claim.
8. DON’T agree to make any payments or provide any services
It might seem to make sense to just write a check or offer to fix a problem. After all, it doesn’t appear to be a big deal and it’s probably within the deductible. This can create several problems. First, it could be considered a tacit admission of fault and secondly could be opening up a new statute of limitations period or giving the owner an argument for continued services. Bottom line, do not agree to provide a service or make a payment – even if it falls entirely within the deductible – without the advice and consent of the insurer. Acting independently could jeopardize insurance coverage.
9. DON’T offer free advice post-project
It is not uncommon for a client or another stakeholder on a project to ask the company’s opinion in response to a problem that has arisen on a project long after completion. Recognize that the other party may be on a fishing expedition, trying to determine if in fact the company should be involved in resolution of the problem. Avoid providing the other party with ammunition that they can use against the company later in a claim. This doesn’t mean to never to offer assistance, but be circumspect when someone asks for help in solving their problem.
10. DON’T use color commentary
Things are not always as they seem. Avoid pointing fingers or speculating on what happened or what could have been done differently. Also, recognize that communication is an imperfect science. What the company says may not be what the other person hears. Stick to the facts.
The importance of proactively managing the claims that the company is going to face cannot be over-emphasized. Unlike a first-growth Bordeaux, problem situations rarely get better with age. Make certain the company has a comprehensive claims management protocol and that the appropriate people in the company understand their roles and responsibilities.