There’s no doubt about it: Engineering firms are seeing an increase in professional liability insurance (PLI) claims. But the vast majority of these are resolved through negotiation and mediation. Technical errors and omissions are a significant driver of claims, as are communication breakdowns. And many firms over the past year have turned down work due to possible risk issues.
These are some of the key findings of ACEC’s 2024 PLI Survey of Member Firms for Fiscal Year 2023.
Firms face a growing issue: “The 2024 survey results show that the number of claims increased for over one-third of respondents, while the number of claims decreased in only 1 in 8 respondents. This is a concern,” says Timothy Haener, chairman and corporate risk manager at J-U-B Engineers Inc. and vice chair of the ACEC Risk Management Committee.
“One conclusion may be that increased volumes of work and tight deadlines are putting pressure on staffs, resulting in more claims frequency,” Haener says.
In response, J-U-B is reemphasizing a focus on quality assurance and quality control. The good news, though, Haener says, is that the survey results show that claims are resolved out of court 97 percent of the time, with more than half resolved through negotiation and another quarter through mediation.
The increase in claim frequency shows that “sound risk and practice management procedures are crucial,” says John Rapp, assistant vice president at insurance provider Travelers. “Claims aren’t only costly in terms of money for firms—they can take up a great deal of time as well.”
Why have claims gone up? “Technical errors and omissions continue to be significant claims drivers,” says Karen Erger, senior vice president and director of practice risk management at the insurance brokerage firm Lockton and a member of the ACEC Risk Management Committee.
“One conclusion may be that increased volumes of work and tight deadlines are putting pressure on staffs, resulting in more claims frequency.”
TIMOTHY HAENERCHAIRMAN AND CORPORATE RISK MANAGERJ-U-B ENGINEERS INC.
Both the 2023 and 2024 surveys indicate that this was a factor in 48 percent of claims, Erger says. “This highlights the importance of implementing and following robust quality assurance procedures,” she says.
The survey also indicates that communication breakdowns are a leading factor in claims activity. “This underscores the critical nature of effective communications—and documentation—among all members of the project team,” Erger says. “When firms are very busy, as many ACEC firms are these days, it’s especially important to ensure that quality assurance and clear communication and documentation are taking place.”
The survey findings indicate that firms—and specifically those with $10 million in revenue or more—do not appear to be jumping to higher deductibles to help manage potentially increasing pricing from carriers, says Nick Maletta, client executive and shareholder at insurance broker Holmes Murphy and president of the Professional Liability Agents Network (PLAN).
“This would indicate a softer market trend—in the current competitive landscape, this could mean driving down deductibles and increasing terms,” Maletta says. He also notes a slight trend toward lower limits, “meaning more design firms are managing client limit needs by utilizing project- or client-specific endorsements.”
“When firms are very busy, as many ACEC firms are these days, it’s especially important to ensure that quality assurance and clear communication and documentation are taking place.”
KAREN ERGERSVP AND DIRECTOR OF PRACTICE RISK MANAGEMENT
LOCKTON
Another issue covered in the survey is why firms turned down work over the past year. Over half of this year’s respondents reported that they frequently (7 percent) or sometimes (46 percent) turned down work due to possible risk issues, Erger says. The top three factors cited:
High risk due to issues like safety, project delivery type, or technical sufficiency (67 percent)
Contract terms (61 percent)
Client history (59 percent)
The 2024 survey shows that 15 percent of respondents reduced, dropped, or modified service offerings due to high claims activity or other risk issues, Erger adds. This percentage is unchanged since 2023, though it is up from 12 percent in 2022.
Firms that are doing this are smart, Haener says. “Why hit your finger with the hammer again and again by continuing to work for a client or in a market that generates claims or other problems at a high rate?” he asks. “J-U-B has moved away from some specific clients and even markets that don’t align with our values of mutual respect and win-win solutions.”
One of the most subtle findings from the survey actually has a profound impact on firms’ business strategies, says Stephen Agnew, partner at Foundation Risk Partners Professional Risk Practice.
“Firms with a higher frequency of claims are not only dealing with immediate financial payouts but are also making substantial modifications to their service offerings and strategically turning down high-risk projects,” Agnew says. “This behavior reflects a calculated trade-off, where firms opt for a more conservative approach to mitigate future risks.”
This finding highlights an often-overlooked consequence of frequent claims: strategic risk aversion, Agnew says. “It’s not just about the direct costs associated with claims. It’s about the broader impact on a firm’s growth and market positioning,” he explains.
Another finding from the research was an increase in the use of progressive design-build as a contracting method on design-build projects.
“This aligns with what we are seeing in the marketplace: that the difficulty and challenges of design-build projects require a need to modify and update the approaches firms take in delivering these projects effectively,” says Kevin Collins, design and construction leader and managing director at PLI carrier Victor.
Cybersecurity risks remain a key concern in the industry. The research shows that in 2024, there has been an increase in the adoption of stand-alone cyber liability policies. “Firms are becoming more aware of the importance of managing cyber risks, with a higher percentage of firms purchasing cyber coverage compared to 2023,” Agnew says. “This shift indicates a growing recognition of cyber threats and the need for standalone products to mitigate these risks more effectively.”
What types of policy terms are influencing firms to keep or change PLI carriers?
“Outside of strong competitive terms—pricing and structure of limits and deductibles—I have found many firms are influenced by the claims experience they’ve had in the prior policy period,” Maletta says. “With a strong claims experience, many firms are willing to maintain a carrier relationship, even with more competitive pricing that may be offered from another carrier.”
Conversely, “with poor claims experience, a move to make a change cannot come quick enough,” Maletta adds. “Due to the influx of mergers, acquisitions, and private equity entrance into the professional services space, terms relating to extended reporting periods, change of control provisions, insured definitions, and anything related to potential transaction hurdles have come under greater scrutiny in the past 12 months.”
More than half of survey respondents (55 percent) cite claims handling experience as a top factor considered when selecting a PLI carrier.
Pre-claims assistance is also important. “I really appreciate choice of counsel with respect to claims handling,” says Peter Moore, president and CEO of Chen Moore and Associates and an ACEC vice chair. “We typically have our outsourced general counsel review our contracts to begin with. We have them involved in all the pre-claim work.”
Moore values “a relationship where people understand that pre-claim discussion just happens as a course of business, and not to treat our employees like anyone made an error. It’s already stressful enough for people in their first claim or two to be included, so additional guilt doesn’t help.”
“Firms with a higher frequency of claims are not only dealing with immediate financial payouts but are also making substantial modifications to their service offerings and strategically turning down high-risk projects.”
STEPHEN AGNEWPARTNERFOUNDATION RISK PARTNERSPROFESSIONAL RISK PRACTICE
Pre-claims assistance programs “are a powerful tool for averting PLI claims and minimizing the impact of claims that do develop,” Erger says. “But these programs are effective only if policyholders know they exist, understand how they work, and make use of them.”
For example, firms may be reluctant to report pre-claims matters because they fear that doing so will have a negative impact on their renewal premiums, Erger says. “Typically, this is not the case. In fact, many carriers view pre-claims reports in a positive light because they enable them to take early, proactive steps to prevent or at least lessen the impact of claims.”
Risk management also has a major impact. “Insurance carriers can be an important source of risk management resources and education programs,” Erger adds. “The survey suggests that ACEC members value these offerings.”
Twenty-one percent of respondents ranked risk management services as one of the top three factors considered when choosing a PLI carrier. And 58 percent said they were very satisfied or satisfied with their carrier’s risk management programs.
Online sessions can be a strong option for firms with remote or hybrid workers. “One risk management trend I’ve observed is increasing interest in on-demand education programs, likely because they enable individual learners to take these courses when their schedules permit,” Erger says. “The confluence of a robust economy, hybrid workspaces, and asynchronous work can make it difficult for firms to gather everyone in a conference room for pizza and a risk management presentation.”
“A specialized architect and engineer-focused broker provides a much greater benefit than a generalist broker.”
NICK MALETTACLIENT EXECUTIVE AND SHAREHOLDERHOLMES MURPHYPRESIDENT, PLAN
Broker recommendation comes into play as well. “A specialized architect- and engineer-focused broker provides a much greater benefit than a generalist broker,” Maletta says.
Member firms rely on brokers for PLI guidance. “We really appreciate that our brokers review our contracts before we sign them—not necessarily for the exact terms of a contract, which often come down to a business decision, but for the insurability of the agreements in case there are disputes,” Moore says.
A firm should fully assess and understand the coverages the policy provides and the services the insurer offers, and whether those are adequate for the risks the firm faces, says Michaela Kendall, manager of strategic partnerships at insurer AXA XL. “It’s important that a firm feels like it has a risk management partner in its professional liability insurer.”
Roger Guilian, senior vice president at insurance broker Greyling and co-program manager of the ACEC Business Insurance Trust, concludes: “Engineering firms of all sizes and service offerings deserve a broker who not only excels at the blocking and tackling of insurance placement and policy management, but who can provide innovative solutions and has the depth of authentic industry experience to be a strategic business partner.”
Bob Violino is a business and technology writer based in Massapequa Park, New York.