Getting to ‘yes’ with underwriters on design liability accounts

The most important thing a broker can do to advance an underwriting deal for an architects and engineers professional liability account is to understand how insurers vary in their rating.

Insurers do not all approach design or construction liability the same way and each has its own red flags, according to Dana Brown, specialty underwriter for architects and engineers for Beazley Insurance Co.

“If you understand the company — how they think, how they process the works — then you have a better idea of what areas you might want to focus on,” she told the audience at this spring’s 2007 E&O Symposium sponsored by the Professional Liability Underwriting Society (PLUS) in Philadelphia.

Before joining Beazley, Brown was northeastern A&E underwriting manager for Lexington Insurance Co., specializing in large firms. She also previously served as the vice president of industry relations and managed the A&E division of XL Insurance Co.

Brown wants brokers to appreciate that underwriting is both a science and an art.

“I want to break the myth that underwriters use a dart board to come up with the premium. We just don’t do that. We may intuitively have an idea of where we think a risk should be, limit, deductible and premium-wise, but the reality is that we have something a little more scientific than the dart board,” she said.

“The reality is that there is a science, and then an art, to underwriting and how we come up with our premiums. The scientific part, that’s the actuaries in the back room coming up with, ‘OK, if you’re structural, you should start at this rate. If you’re an architect or interior designer, here’s your other rate.’ And then there’s an art. The art part is the schedule rating factors. What things does a particular company feel is going to make a risk different or a better risk versus a bad risk?”

Many of the key factors individual insurers consider can be viewed in their ratings plans. Some can mean 25 percent, even 40 percent savings on premiums if brokers are paying attention. Any broker can obtain a copy of an insurer’s rating plan for an admitted product from his or her state insurance department. “You could know exactly how they’re rating and how they’re pricing,” Brown noted.

Risk factors to weigh

Getting from no deal to a deal requires that brokers understand how different insurers weigh factors such as the risk management philosophy of the client A&E firm; the firm’s location and branch offices; its size; number of years in operation; whether it has been involved in any mergers with other firms; the types of operational risks and services offered and, of course, its loss history.

For example, Brown sees larger firms as higher risks than smaller firms. “[T]he best claim history is the smaller firms, and that is traditionally the firms that are under $1 million in billings. There are thousands of those in the United States. I think that’s why you see so many carriers vying to try to get that market share — because you make the most money there,” she noted.

“[T]he worst claims history, traditionally, has been the firms that are over $20 million. As a result of that, you’re going to find very few carriers that are, what they call, ‘playing’ in that marketplace. ”

As for location, certain states — notably California and Florida with New Jersey in the mix — are more difficult states in which to write A&E liability, according to Brown.

Branch locations are a red flag for her. “We have found that most companies that have branch office locations end up having a lot of claims,” Brown noted.

Brown also takes a closer look at firms involved with mergers and acquisitions. “Why would it be considered higher risk? Because you’re now bringing into the fold a company that maybe doesn’t have the same cultural history, the cultural perspectives, or the same processes. To me, it often takes a lot more time out of that particular firm that’s buying them; that they’ve got to focus on getting that firm up to speed and into their world.”

In addition to understanding how insurers come up with prices, smart brokers adhere to a few other rules as well, according to Brown. They accurately report their client’s revenues and fully explain any losses the client may have experienced.

They are “proactive” in explaining what Brown calls the “tough stuff” — accounts that will raise the eyebrows of most underwriters who consider them the higher risk classes of business. Firms involved in geo-technology or civil-road-bridge type work are on her “tough stuff” list.

Residential projects rate high in difficulty. “Residential is probably one of the worst project types, right up there with condominiums, within the subclass. But then single-family construction, believe it or not, is probably one of our worst areas where we are seeing claims. That and schools. And for the large firms, bridges. I have a lot of bridges, I can tell you all about the wonderful claims that we’ve got on those,” shared Brown.

Explain and mitigate

On higher risk classes, brokers should be prepared to explain to the underwriter any factors that might mitigate the risk.

Contract protocol is perhaps the most important mitigator to discuss. “A firm that has a 100 percent written contract and has limitation of liability to maybe their fee or to some dollar amount, is better than a firm that says, ‘Uh, yeah, I don’t really use contracts,’ or ‘I use POs, purchase orders.’ It’s something that sets them apart, makes them a better risk.”

Brown stressed the importance of brokers explaining any losses, pointing out, “This is probably one of an underwriter’s biggest pet peeves. We get in a loss run and we have absolutely no idea as to what the heck the claim was all about.”

The Beazley underwriter told the tale of a risk with a very serious school claim and some loss frequency whose broker had the client meet with each competing insurer’s underwriter. “I was really surprised when I went there. The gentleman who was in charge of their QA/QC program had a sheet for each of the claims and then went through the top 10 lessons that they learned from each of those claims. That was fabulous, and one of the things for them, they’re no longer doing school work. That was their largest claim. That pretty much mitigates any future claims resulting from that area. In fact, it was the only project, the only school project that they ever had done.”

How the broker or the A&E firm selects its clients could be another mitigating factor. “[M]aybe they have a 16-year relationship, like this gentleman that I underwrote. That’s important. Maybe it’s 95 percent repeat clients. It’s things like that that could help the underwriter.”

Or what quality assurance and quality control the A&E firm practices. “[D]o they have a process? Is it something that they update?”

The firm’s training and professional development might also be a mitigating factor worth noting. “Do they take the time, spend the money on their individuals to try to get them to a different level?” she asked.

Brown’ s final bit of advice to brokers was for them to carefully evaluate deductibles and coverage options, including credits for multiple policies with the same insurer or for long-time clients. “Just keep in mind that the decisions that a firm makes about the deductible, particularly first dollar defense, is likely to impact that claim history and also ultimately the viability of the future competitors that are willing to put a program out there,” she added.