Engineering firms are seeing a rise in expensive claims, higher premiums for professional liability insurance (PLI) policies, and an increasingly competitive insurance market that’s seeing some carriers apply greater scrutiny in determining or denying coverage.
These are among the key findings of the 2022 survey of PLI carriers by ACEC, the American Institute of Architects (AIA) Trust, and the National Society of Professional Engineers (NSPE).
Results show that carriers are seeing a significant increase in claims related to large infrastructure projects, in part attributable to increased material cost and supply chain issues and an increase in verdicts in excess of $10 million.
“We are seeing an uptick in the severity of claims resulting from third-party injuries or deaths from motor vehicle accidents being made against large civil engineering firms working on horizontal infrastructure projects such as roads, highways, and bridges, as well as severe claims involving property losses,” says Lawrence Moonan, executive vice president and COO at Berkley Design Professional. “The root cause appears to be the impact of social and economic inflation, which has heavily impacted the value of damages claimed.”
Travelers is seeing an increase in bodily injury claims, the breadth of pursuit being made by bodily injury claimant attorneys, and the aggressiveness of the pursuit being made, says John Rapp, assistant vice president for Professional Liability-Design Professionals.
“It’s difficult to pinpoint what the root cause is, but we believe that social inflation and inadequate auto insurance limits are factors,” Rapp says.
“Social inflation drives higher insurer claim payouts and loss ratios,” says Timothy Corbett, founder and president of SmartRisk LLC and a member of the ACEC Risk Management Committee. “Ultimately, policyholders pay more for coverage,” Corbett says. “Unlike economic inflation, which carriers can mitigate using pricing models and loss reserves, social inflation can arise from factors that are difficult to foresee such as an increase in outsized jury awards, longer legal proceedings, and the overturn of statutory limits on noneconomic damages. This trend continues to impact the industry with a two to three percent annual impact on severity. Carriers are looking to increase rates as a result.”
The trend of increased claims and outcome severity “touches all service disciplines and project types,” says Michaela Kendall, manager of strategic partnerships at insurer AXA XL. “While residential continues to be a project type with high claims frequency, the number of claims involving apartment projects has increased in recent years. This is in line with the fact that there has been an increase in apartment construction across the nation leading this development.”
AXA XL expects the hard insurance market to remain so for the immediate future. “This is driven by a number of factors, including increasing claim frequency and severity, catastrophic events, and economic uncertainty,” Kendall says.
Social inflation and other variables have had a dramatic impact on the damages alleged and the dollar amounts required to negotiate a settlement, Moonan says. “Further complicating matters is the trend of ‘nuclear verdicts’ being handed down by the courts against insurance companies,” he says. “As a result, we are working to reduce our exposure to claim severity by seeking additional rate, higher policy retentions, and by prudent risk selection. Claim trends are causing us to carefully consider where we can offer capacity and at what terms.”
Claim severity “is impacting the availability of capacity and pricing in our book of business,” Moonan says. “We have also seen the availability of project insurance diminished, which pushes more exposure back to individual practice policies. We will have to consider how to manage and price for this additional exposure.” He anticipates most policyholder rates increasing over the next 12 months.
“We have seen continued demand for high insurance limits for engineering firms,” Moonan says. “We have also seen project owners who are not willing to negotiate contract terms and a greater number of projects being delivered via contractor-led design-build. Engineering firms need to carefully evaluate the risk they are assuming and will be challenged to find insurance capacity to meet contractual demands, in particular on larger infrastructure projects.”
“We have seen continued demand for high insurance limits for engineering firms.”
LAWRENCE MOONANEXECUTIVE VICE PRESIDENT AND COOBERKLEY DESIGN PROFESSIONAL
Berkley Design Professional provides policyholders with continual access to a range of e-learning and free continuing education courses, as well as business consulting tools such as contract review, project templates, and checklists to help improve profitability. Policyholders who complete an e-learning course from the firm’s online training program can qualify for a 15 percent premium rating credit, Moonan says.
AXA XL Design Professional offers loss prevention and education resources to its insureds, partnering with its brokers and industry groups to create and deliver content that addresses the current needs of design professionals, Kendall says. Firms may receive a premium credit by completing one or more pre-approved courses, by attending a live webinar, viewing a recorded session, or attending an in-person educational event.
Travelers is continuing its risk management podcast series in 2023 due to popular demand, Rapp says. “We also support our insureds through risk management webinars, contract review services, risk management website, and risk management newsletters,” he says. “Part of our underwriting process is reviewing an insured’s risk and practice management procedures, which may impact the premium.”
Aside from premiums, why would a firm consider changing insurance carriers? There are several key reasons, according to brokers.
“The number one reason that causes our team to recommend a change in insurance carriers is inadequate claim handling,” says Stephen Agnew, principal at Nexus Professional Risk and board member of broker network a/e ProNet. “A claim handled well allows an insured firm to continue its other operations with limited disruption and preserve relationships with key stakeholders in the claim where possible, all while proceeding through the claim process to a successful resolution as expeditiously as possible.”
“It’s difficult to pinpoint what the root cause is, but we believe that social inflation and inadequate auto insurance limits are factors.”
JOHN RAPPASSISTANT VICE PRESIDENT FORPROFESSIONAL LIABILITY-DESIGN PROFESSIONALSTRAVELERS
A carrier that is unable or unwilling to provide this level of service should be reevaluated at renewal, or even sooner, if necessary, Agnew says.
A lack of overall service is another factor. “Whether it’s recurring coverage questions, high turnover among claims representatives, or a lack of risk management resources, service from your insurer should not be an exception, but a rule,” says Roger Guilian, J.D., senior vice president at Greyling Insurance Brokerage & Risk Consulting, a division of EPIC.
“Insurers can differentiate themselves by providing service throughout the policy year that results in reduced frequency and less severity, which is good for everyone involved,” Guilian says.
The service issue extends to the relationship between the insurer and the client. “When it comes to something as personal and important as professional liability insurance to an engineering firm, relationships matter,” Guilian says. “Modest rate increases at annual renewals are a lot easier to stomach when you and your firm have a partnering relationship with your insurer’s underwriter and claims representatives.”
Another common reason for changing insurance carriers is a change in underwriting appetite—the incumbent carrier no longer has a desire to underwrite the operations of the firm in a competitive manner, Agnew says. Yet another is when the carrier no longer offers terms that meet the firm’s contractual requirements.
“Examples might include an unwillingness to offer the limits required by contract, the inability of the carrier to meet specified financial strength ratings, or a reluctance to offer specific coverages related to exposures like pollution, asbestos, or intellectual property,” Agnew says.
Firms should also consider factors such as whether the new carrier has policy forms and better financial strength, says Ken Estes, senior vice president and risk consultant at Cadence Insurance and a member of the board of directors of Professional Liability Agents Network (PLAN).
If firms select insurance carriers based primarily on premium, “they can be in a situation where coverage and claims handling aren’t as good,” Estes says.
The legacy carriers have kept rates fairly stable over the years, but they will adjust up or down based on the loss history and quality of the firm, he says. “Generally, new carriers are trying to obtain critical mass, so they start with very aggressive pricing. They then have to adjust once claims start hitting their book,” Estes says.
Newer entrants often choose a “sweet spot” and underwrite aggressively within it, so their rates are typically lower if the risk fits within their appetite, Agnew says. “Legacy carriers often have a broader underwriting appetite because they can support it with more premium on the books, but they may exhibit less flexibility on rates, particularly on renewals of firms with claims.”
In this competitive insurance market, brokers see a greater scrutiny being applied by certain carriers in determining and/or denying coverage.
“When insurers’ programs are more profitable, they can be more lenient in their coverage analyses and provide coverage even in the gray areas,” Agnew says. “As their profitability erodes, insurers respond in a variety of ways. Some tighten up their underwriting requirements, some restrict their limit deployment, and others scrutinize their policy forms more closely and issue more coverage denials and reservations of their rights. Sometimes we see a combination of all those approaches from one insurer.”
“Social inflation drives higher insurer claim payouts and loss ratios. Ultimately, policyholders pay more for coverage.”
TIMOTHY CORBETTACEC RISK MANAGEMENT COMMITTEE FOUNDER AND PRESIDENTSMARTRISK LLC
“This is driven by a number of factors, including increasing claim frequency and severity, catastrophic events, and economic uncertainty.”
MICHAELA KENDALLMANAGER OF STRATEGIC PARTNERSHIPSAXA XL
“All of the carriers try to diversify their portfolio of firms to manage their risk. This tells me that A/E firms need to work closely with their brokers to closely match up the needs of the firm with the capabilities, capacity, and criteria that the carriers are looking for.”
JIM MESSMOREACEC RISK MANAGEMENT COMMITTEESENIOR VICE PRESIDENTHANSON PROFESSIONAL SERVICES
“Generally, new carriers are trying to obtain critical mass, so they start with very aggressive pricing. They then have to adjust once claims start hitting their book.”
KEN ESTESSENIOR VICE PRESIDENT AND RISK CONSULTANT CADENCE INSURANCEBOARD OF DIRECTORSPROFESSIONAL LIABILITY AGENTS NETWORK (PLAN)
“The number one reason that causes our team to recommend a change in insurance carriers is inadequate claim handling.”
STEPHEN AGNEWPRINCIPALNEXUS PROFESSIONAL RISKBOARD OF DIRECTORSA/E PRONET
“When it comes to something as personal and important as professional liability insurance to an engineering firm, relationships matter.”
ROGER GUILIANSENIOR VICE PRESIDENTGREYLING INSURANCE BROKERAGE & RISK CONSULTING
The most important advice for firms is to report all claims in a timely manner, Agnew says. “Read your policy’s definition of ‘claim,’ and review it with your staff,” he says. “Send out intermittent reminders to staff that all claims must be reported to the insurer or else the firm risks a denial of coverage.”
A second recommendation Agnew makes is to discuss any merger or acquisition activity with the firm’s broker early in the process. “There are multiple options for handling the transition on the insurance side, and your broker can help you evaluate those options to choose the one that’s best for your firm,” he says.
Each carrier has its own specific criteria and risk profile for clients, including size of the firm, size of coverage they are willing to underwrite, and specific project types they are willing to underwrite, says Jim Messmore, senior vice president at Hanson Professional Services and a member of ACEC’s Risk Management Committee.
“All of the carriers try to diversify their portfolio of firms to manage their risk,” Messmore says. “This tells me that A/E firms need to work closely with their brokers to closely match up the needs of the firm with the capabilities, capacity, and criteria that the carriers are looking for.”
Firms also need to be aware of cyber threats and how they can protect themselves from liabilities. “Professional service firms remain a top target for cyber criminals,” says Brian Welker, senior vice president and COO of Crawford, Murphy & Tilly and a member of the Risk Management Committee.
The majority of A/E professional liability policies provide some level of cyber coverage. “However, it is limited, with some carriers reducing coverage based on the increased risk and exposure,” Corbett says. “The cyber coverage included in the PL policy is not adequate for the market risk today. It is recommended that firms obtain a standalone cyber insurance policy.”
Firms need to understand that the largest nontechnical risk driver for professional liability claims is ineffective communication, Agnew says.
“Consider the appropriate means—email, phone, or a face-to-face meeting—to communicate each time, and give some thought to what may be discoverable in the event of a claim,” Agnew says. “Involving too many parties in the communication and overcomplicating the decision-making process or, conversely, leaving out a key party in the process could cause the difference between a small problem and a policy limits claim. Good brokers and strong insurance carriers can help with training in this area, including real-life examples of claims.”
A firm should also work with its broker to build a relationship with the insurer, Guilian says. “Get to know your underwriter and your claims team,” he says. “Stay in contact with them throughout the policy year and, working alongside your broker, keep your carrier in tune with what’s going on at your firm. The more your insurer can be a business partner, the better.”
Bob Violino is a business and technology writer based in Massapequa Park, New York.