Insurers Broadening Architects, Engineers Liability Coverage: Survey

While the market for architects and engineers professional liability insurance remains intensely competitive, many insurers providing this coverage are weighing new policy enhancements that offer expanded protection.

A new survey by insurance broker Ames & Gough finds some insurers are going beyond limited coverage for cyber liability and drone exposures and considering protection to address certain risks related to public-private partnerships and design-build project arrangements, among other issues.

According to the Ames & Gough survey of 17 insurance companies (which, on a combined basis, represent a significant percentage of the overall marketplace providing professional liability insurance to architects and engineers in the U.S.), 76 percent are exploring new or expanded coverage for cyber liability; 53 percent, for drone usage; 18 percent, for certain risks associated with public-private partnerships, and 12 percent for design-build exposures. While 24 percent expressed interest in providing protection for duty to defend third parties where the insured agrees to do so by contract, the insurers reported making more progress in addressing the other risks they cited.

“Even as some insurance companies have consolidated or withdrawn from the market for architects and engineers professional liability insurance altogether, there’s still intense competition benefiting design firms purchasing this insurance,” said Dan Knise, president and CEO, Ames & Gough. “Along with generally favorable claims experience that’s helping insurers maintain profit levels, competition is fueling innovation in the market to address the expanding array of risks design firms face today.”

Yet, even with the added available protection under some professional liability policies, Knise said design firms should remain vigilant in evaluating their risks and assessing the options available for protection. For instance, they may want to compare the limited cyber insurance available under their professional liability policies with that provided by stand-alone cyber insurance policies. The stand-alone insurance typically offers more robust protection against first-party exposures, such as notification and credit monitoring requirements, business income losses, ransomware, and network and data damage.

Professional liability insurance rates remain flat, according to the survey. Premium rates remained flat in 2017 for 53 percent of the insurers responding while 18 percent saw rates decrease and 29 percent reported higher rates. By contrast, in 2016, 16 percent had rate increases and 32 percent reported lower rates. The year-over-year findings may suggest a slight uptick in rates. Nonetheless, any increases achieved by insurers in 2017 were modest.

Only three insurers surveyed this year saw an actual rate increase of 3 percent or more and two insurers reported an increase in 2017 of up to 2 percent. Further, no insurers in the 2018 survey attained overall increases above 5 percent, nor did any insurers surveyed last year expect to see such increases at the start of 2017.

Even under the stress of competitive market conditions, underwriters generally have continued to prudently evaluate exposures. For instance, although several factors come into play in underwriting a particular risk, insurers are now placing greater emphasis on an A/E firm’s project mix. This year, 88 percent of those surveyed identified type of project (e.g., condominiums, schools, transit, tunnel, water/ wastewater) as one of the top factors for raising a specific firm’s PLI premium rates.

Other key factors include: recent claims experience (past two years), cited by 71 percent of the insurers surveyed, down from 95 percent in 2017; 71 percent cite historic claims experience, up from 63 percent in 2017, and 53 percent, type of work/service, up from 47 percent in 2017.

Insurers surveyed this year reported carefully monitoring a number of emerging risk trends from an underwriting perspective. When asked about their top concerns, the most prominent were: evolving project delivery methods (e.g., design-build and public-private partnerships), cited by 82 percent; judicial rulings that are eroding protections for design firms under state statutes, such as economic loss doctrine (76 percent); innovation, such as new construction materials/methods (47 percent), and the use of BIM and technology (18 percent).

In 2017, 76 percent of the insurers surveyed reported no change in their overall claim activity compared to prior years; meanwhile, 12 percent saw their claims experience improve while the same percentage saw it worsen.

With respect to individual insurer claim patterns or trends, 38 percent of insurers observed an increase in claim severity, while 31 percent experienced an increase in claim frequency. An identical percentage reported certain types of projects causing more claims. Meanwhile, 25 percent pointed to increased defense costs as contributing to greater claim severity. On the flip side, 13 percent saw lower claim frequency and 6 percent, lower claim severity.

When asked to provide the amount of their largest single professional liability loss paid in 2017, insurers gave the following responses: The majority (59 percent) paid a claim of at least $1 million or higher, including two insurers that reported their largest claim paid was between $5 million and $9.9 million and two that paid a single claim between $10 million and $19 million.

“Given the potential for larger professional liability claim payments, it is becoming more common for A/E firms to purchase higher limits,” said Joan DeLorey, senior vice president and partner, Ames & Gough. “Much of the impetus for this relates to contractual requirements. In past years, design firms were required by clients to purchase liability limits of $2 million or $3 million, but now many face requirements for limits of $5 million or $10 million.”

Ames & Gough, based in Boston, is a specialty insurance brokerage and risk consulting firm serving architects, engineering firms, and other construction professionals.

Source: Ames & Gough