Architects & Engineers Market Sees Rising Claims Severity Amid Wave of New Projects
The construction industry continues to see a wave of new projects, creating plenty of work for architects and engineers. While design firms experience growth amid an expanding market, insurers providing architects and engineers (A/E) professional liability coverage are becoming more selective in underwriting the industry, as they must account for greater claims severity.
“The community at large is very healthy,” said Jared Maxwell, vice president partner at specialty broker Ames & Gough. “We’re seeing a rise in revenue from the industry, so that rise in revenue always creates an upward trajectory on premium.”
Maxwell says firms are backlogged with projects, noting that construction didn’t experience a significant drop-off in business during the COVID-19 shutdown compared to other industries. Though construction continued to operate during the pandemic, the industry is still experiencing the effects of supply chain issues, as well as worker shortages.
“Firms are having to do more with less,” said Maxwell. “What that does is it creates an issue with service delivery and obviously if you’re stretched, things can be missed. Claims bubble up through that.”
Incidents involving bodily injury, environmental impacts or significant structural issues, or other errors and omissions have led to more multi-million-dollar claims, according to an Ames & Gough survey of insurers of A/E professional liability. Of the 16 leading insurers surveyed, 44% reported paying a claim of between $1 million to $4.9 million, while 38% paid a claim of $5 million or more.
Insurers cited the “backlog of claims litigation, worker shortages, supply chain disruptions, and the effects of both economic and social inflation” on heightened claim costs, Ames & Gough said. Insurers are increasingly seeking early action on claims, including pushing for mediation, conducting litigation analysis and trying to resolve claims before they escalate.
Kevin Collins, design and construction leader, managing director at Victor Insurance Managers, said juries are more likely to see design firms, much like large corporations or banks, as those folks with a deep pocket.
“What may have been a $100,000 award 10 or 15 years ago is now a $1 million award,” Collins said. “What used to be a $1 million dollar award is now a $5 million award. The concept of money or award or amount is not as heavily weighted in that piece of a puzzle, and you start to get that exponential increase around it.”
Victor, a managing general underwriter, relies on its carrier to get the right attorney or in-house claims person to litigate and manage the claim as effectively as possible.
Testing the Limits
Professional liability limits for architects and engineers have remained consistent, but firms are seeking greater capacity to meet project owners’ demands. More than half of insurers surveyed by Ames & Gough said renewing clients opted for higher limits in 2022.
Brokers are forced to be creative in supplying limits, oftentimes going through multiple carriers.
Cady Sinks, assistant vice president and partner, Ames & Gough, said carriers will consistently supply limits in the $1 million-$3 million range. At or above $5 million limits, carriers will either decline to offer coverage or offer it at much higher pricing and with more underwriting review.
“Over the last few years the carriers who were willing to put up $10 million limits, over time they’ve seen claims and they’ve had to adjust their underwriting process,” Sinks said. “They’ve realized that they have to be careful if they’re going to stay in the market long term.”
The trend of higher limits dates back to the 2007-2008 financial collapse, says Collins, when loss of financing projects led project owners to ask for limits of liabilities in E&O policies that were higher than the preceding decade.
The adage in the industry used to be that the average professional liability limit was roughly $1 million, according to Collins. That turned into $5 million or even higher on some projects.
“Since firms make decisions on what the owners are contractually requiring, we started to see an increase for higher limits that has consistently grown at a small angle through the 2010s,” Collins said. “The higher the limits, the higher the premium. The more that the firms are working and the more revenues that they have, the premium goes up as the exposure goes up.”
Collins says the likelihood that a higher limit is going to be paid on a given claim is becoming greater. “You’ve got to capture that increased loss somehow. That’s generally seen in firms that need higher limits which are generally paying a little bit more premium.”
Sound Risk Management
With social and economic inflation driving up costs in a high-risk industry, A/E firms are under pressure to follow sound risk management practices.
Ames & Gough recommends firms implement and leverage new technology solutions to facilitate better tracking and quality control, establish more rigorous documentation procedures and report incidents and claims in a timely manner.
“The data is there that shows that if a firm is prudent in their risk management practices, whether that’s having employees do training on a regular basis, or having companywide meetings, or whatever it might be from a risk management perspective — using your broker to do seminars and contract reviews, those activities lead to less claim activity within a given organization.”
Misinterpretation of contracts can put architects and engineers at risk of assuming a higher level of liability if something goes wrong on a construction site. One way claims occur is when a contractor alleges that the design documents were not clear or consistent enough for the contractor to complete the project in the allotted time and cost. So, architects and engineers often have the responsibility to look at construction in progress to make sure that it’s in compliance with the project’s design document, Collins says.
Communication is key between carrier and broker, he says. “From a broker’s standpoint, this is where you really lean on your carrier in making sure that the carrier you’re utilizing for your clients has support of risk advisory or risk management for firms.”