The severity of insurance claims against engineering firms is on the rise, and it’s likely that many firms will see rate increases in the coming months. They will also experience greater scrutiny by professional liability insurance (PLI) carriers in determining coverage.
Those are some of the key findings of the 2023 survey of PLI carriers by ACEC, the American Institute of Architects Trust, and the National Society of Professional Engineers.
There has been an uptick in the severity of claims being made against large engineering firms that work on horizontal infrastructure projects, such as highways and bridges, says Jackie Neal, executive vice president at insurance provider Berkley Design Professional.
“Many of these claims involve parties that have been injured or killed in vehicle accidents,” Neal says. “In today’s legal environment, these matters are impacted by social inflation and other variables that have a dramatic impact on the damages alleged and the dollar amounts required to negotiate a settlement. Further complicating matters is the trend of ‘nuclear verdicts’ being handed down by the courts.”
According to Travelers, a nuclear verdict is a ruling in favor of the plaintiff with a damage award that exceeds $10 million. It can also describe an outcome that is exceptionally higher than expected. Nuclear verdicts can devastate a firm’s bottom line and damage its reputation.
Claim severity is also impacting the availability of capacity and pricing within the design professional business, Neal says. “The availability of project insurance has also diminished, which pushes more exposure back to individual practice policies,” she says. “Insurance providers will have to consider how to manage and price for this additional exposure.”
Travelers has seen an uptick in mechanical engineering claims, says John Rapp, assistant vice president of the Professional Liability-Design Professionals group at Travelers.
“A lot of owners are looking to do sustainable projects, and that adds costs upfront to the mechanical systems,” Rapp says. “Some of the potential issues with sustainable designs are they aren’t as established. They can require more technical ability and expertise related to their operation and maintenance. If these sustainable design systems aren’t operated and maintained properly, it can cause issues with system performance.”
Victor, a managing general underwriter, is starting to see a return to more normal and expected loss trends post-pandemic, says Kevin Collins, managing director/A&E Practice Leader. “Severity continues to be a concern, as loss costs to remediate claims, availability of labor, and physical materials remain elevated and well above historical norms,” he says. “The good news is that the claims are coming more consistently from client and contractor-generated claims that are within firms’ ability to manage.”
Firms with higher loss ratios, higher exposure to condominiums, and higher limits might face challenges in placing their coverage at consistent rates, Collins says.
For carrier AXA XL, residential and large infrastructure projectrelated claims have generally had higher severity than other project types, says Michaela Kendall, manager of strategic partnerships.
“Delay and material cost escalations have driven this trend for both project types, as has stretched capacity, due to many firms experiencing project backlogs and staffing shortages,” Kendall says. “In addition, an increase in personal injury-based claims related to these types of projects, asserted by both project staff and members of the public at large, have driven increased severity.”
A/E firms need to be aware of several factors that can increase risk, says Timothy Corbett, founder and president of SmartRisk LLC and a member of the ACEC Risk Management Committee. One is a lack of staffing, especially at the mid-level. “Firms continue to experience challenges in meeting staffing demands supporting project efforts,” Corbett says.
Other factors include supply chain issues, consisting of delays, substitutions, and design modifications that often result in decreased quality, which can lead to claims and litigation.
It’s expected that many design firms will experience rate increases over the next 12 months due to increased claim severity and other economic factors.
“New and evolving areas of high risk are projects delivered via contractor-led design-build, the impact of catastrophe losses on building codes and standards, a decrease in the weight placed on the professional standard of care when evaluating liability, and the impact of artificial intelligence and other technology advancements on quality control,” Neal says. “Engineering firms need to carefully evaluate the risk they are assuming and will be challenged to find insurance capacity to meet contractual demands.”
In interviews with carriers, conducted as part of the 2023 survey, insurers stressed that it’s important for A/E/C firms to include flow-through provisions in subcontracts, says Brian Welker, senior vice president and chief operating officer at Crawford, Murphy & Tilly, and a member of the ACEC Risk Management Committee.
“Engineering firms need to carefully evaluate the risk they are assuming and will be challenged to find insurance capacity to meet contractual demands.”
JACKIE NEALEXECUTIVE VICE PRESIDENTBERKLEY DESIGN PROFESSIONAL
“A number of claims have occurred where there was inconsistency between prime agreement and subcontracts,” Welker says. He adds that a majority of the carriers interviewed emphasized the need for and importance of continued education with regard to contracts.
Design-build continues to be an area of increased exposure and claim frequency. “Many of the carriers, while concerned with design-build claims from contractors, seemed more optimistic about the potential of owners using a progressive design-build model that promotes additional certainty for the development of a fixed price by the contractor,” says Jim Messmore, senior vice president and infrastructure market principal at Hanson Professional Services and past chair of the ACEC Risk Management Committee.
There are also concerns with mentoring younger engineers and knowledge transfer, related to less in-person interaction because of remote working arrangements or retirement of experienced engineers, Messmore says.
“Choosing an insurance carrier based primarily on premium, or on premium alone, runs the risk that the firm will not receive more sophisticated claims assistance and risk management resources offered by other carriers.”
ROGER GUILIANSENIOR VICE PRESIDENT AND CLIENT EXECUTIVEGREYLING
In this competitive insurance market, certain carriers are applying greater scrutiny in both determining and denying coverage to firms.
“We have seen carriers begin to take a keener approach to coverage analysis, especially with respect to large alternative delivery projects” such as design-build, says Roger Guilian, senior vice president and client executive at Greyling Insurance Brokerage & Risk Consulting, a division of EPIC. Greyling is the program administrator for the ACEC Business Insurance Trust.
When insurers’ programs are more profitable, “they can be more lenient in their coverage analyses and provide coverage even in the gray areas,” says Stephen Agnew, principal at Insurance Management Consultants Inc. and association president at a/e ProNet, a network of independent insurance brokers specializing in the professional liability insurance and risk management needs of design professionals.
“As their profitability erodes, insurers respond in a variety of ways,” Agnew says. “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.”
The greater scrutiny does not just involve firms that might have difficult claims, but those that are being pressured by clients to increase their base practice policy limits, says Nick Maletta, client executive/shareholder at brokerage Holmes, Murphy and Associates and president of the Professional Liability Agents Network.
“The increased demand on firms for higher limits, coupled with the pressure carriers are feeling in the reinsurance marketplace, has really increased the pressure on primary insurance carriers,” Maletta says. “This has driven carriers to be more selective in those firms that are able to increase their policy limits to match that of client requests, even if done on a per client or project basis.”
Newer entrants to the A/E/C insurance market 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,” he says.
Greyling has seen indications that newer market entrants are more willing to aggressively price opportunities, seemingly in an attempt to build a book of business, Guilian says.
While premiums are an important factor in selecting an insurer, they should not be the primary reason, according to brokers.
“There’s an old adage that ‘You get what you pay for,’” Guilian says. “Choosing an insurance carrier based primarily on premium, or on premium alone, runs the risk that the firm will not receive more sophisticated claims assistance and risk management resources offered by other carriers. The propensity to have claims and coverage denied may be higher as well.”
Maletta says he always recommends looking for a carrier partner who isn’t just a transactional partner, but who does much more for a firm to provide value far beyond the transaction.
“While the transactional piece is the necessary evil in our world, the competition in the A/E/C marketplace really drives the need for carriers to become innovative and to drive additional value for insureds,” Maletta says. “We strongly believe carriers who have a vested interest in the A/E/C community and a long-term presence are those who should be given more consideration in the placement process.”
Strong claims advocacy and focused resources such as educational content, contract review assistance, and a presence at industry-specific events are proof of the true dedication a carrier has to the marketplace, Maletta says.
“Pure price shopping is not an effective way to procure professional services because quality and experience often come with a slightly higher price tag to support that,” Agnew says.
There are multiple reasons why brokers would advise firms to change insurance carriers.
“The number one reason that causes our team to recommend a change in insurance carriers is inadequate claim handling,” Agnew says. “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.”
“Firms must focus on building a risk management-driven culture to truly impact the risk profile of the firm.”
NICK MALETTACLIENT EXECUTIVEHOLMES, MURPHY AND ASSOCIATESPRESIDENTPROFESSIONAL LIABILITY AGENTS NETWORK
He adds that a carrier who is unable to provide this level of service should be reevaluated at renewal, or even sooner if necessary.
Another common reason for changing insurance carriers is a change in underwriting appetite, when the incumbent carrier no longer has a desire to underwrite the operations of the firm in a competitive manner, Agnew says.
Yet another reason is that 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.
“The number one reason that causes our team to recommend a change in insurance carriers is inadequate claim handling.”
STEPHEN AGNEWASSOCIATION PRESIDENTA/E PRONETPRINCIPAL, INSURANCE MANAGEMENT CONSULTANTS INC.
Firms should leverage educational materials provided by insurers. For example, Berkley Design Professional offers education and risk management resources that provide policyholders with access to a range of e-learning continuing education courses and hundreds of articles, guides, templates, and checklists to help reduce exposure to risk.
Firms should 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.”
It’s also a good idea to discuss any merger or acquisition activity with a 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,” Agnew says.
Firms should consider buying “split limits,” where the annual aggregate limit is higher than the per claim limit on your policy, Agnew says. “That way, one claim doesn’t exhaust your entire policy, and you still have limits available to cover a second claim in the same policy year.”
Perhaps most important, 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 call, face-to-face meeting—to communicate each time, and give some thought to what may be discoverable in the event of a claim,” he 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,” Agnew says. “Good brokers and strong insurance carriers can help with training in this area, including real-life examples of claims.”
Better risk management can keep claims down. “Firms must focus on building a risk management-driven culture to truly impact the risk profile of the firm,” Maletta says. “This can be done many ways, but focusing on a culture of openness in internal communication and education likely leads to the best results.”
Bob Violino is a business and technology writer based in Massapequa Park, New York.