Market trends downward slightly; habitational still a challenge

After the recent hard markets, rates for professional liability insurance for architects and engineers are beginning to see some relief. Even so — despite 10 percent to 20 percent drops in professional liability insurance in some related fields — there has been only a slight downward trend for engineers and architects.

The overall market for engineers and architects today cannot be deemed as particularly hard or soft. If an insurance company has had good experience with a client, the carrier probably will do everything it can to maintain the account. This means that rates may be significantly better for firms that have had a good loss record for the past five to 10 years, practice disciplines not considered higher risk, and maintain strong risk management practices.

Looking forward
Project policies for the design professionals will continue to be difficult to find and very expensive (possibly 3 percent or higher of project value) with possibly six-figure deductibles. This depends, of course, on the complexity of the project. Industry-wide loss experience on professional project policies is extremely poor.

There tends to be more competition for the “easier” disciplines such as landscape architects, mechanical engineers, civil engineers and land surveyors, particularly those who have limited work involving condominiums and other habitational clients.

Habitational exposures, especially condominiums, are particularly challenging. Some geographic areas are especially difficult due to the legal climates and long statutes of repose relating to construction of property. Architects and engineers practicing in these areas may experience strict underwriting guidelines and the potential loss of market if the percentage of billings in an area exceeds what the companies deem acceptable.

One longtime provider of A&E estimates that habitational risk, which is (defined as single-family homes, hotels and multi-family occupancy, including apartments and condominiums) generates from a 1.7 to 4.2 ratio of claims to percentage of billing. More than one to one is considered high-risk. Claims arising from apartments and condominiums represent about 4.5 percent of total billings, but account for 18 percent of all claims.

In addition, the market is narrow. There are half a dozen major carriers that have long served engineers and architects, and seemingly few new carriers entering the market.

Potential pitfalls
In view of this, it’s important to avoid three pitfalls: cut-rate pricing, policy language and internal controls.

Cut-rate pricing. Beware of going with the carrier with the lowest cost. It’s strongly recommended that good clients stick with their carriers in all but the most exceptional situations. Too often, when the markets start to soften, newcomers enter the market and slash premiums on good accounts. But when the market becomes harder, they leave. Clients who have claims during this period will find it very difficult to find another carrier. It’s better to be with a carrier who has been through both hard and soft markets, and understands the risks.

Policy language. Check the policy language with an emphasis on definitions. For example what constitutes a wrongful act, professional service or claim? Make sure that full prior acts coverage is included and is not limited by either definition or retroactive dates. Some policies may be issued with a deductible and a “hammer clause” in contrast to a self-insured retention with consent to settle, which, in some situations may allow the insured to pick his fight. Nuances such as these could lead to the “too-good-to-be-believed pricing,” with potential coverage gaps.

Internal controls. Work with clients to be certain that they have the proper risk management controls in place, including proper client selection practices, contractual analysis and project, consultant and contractor assessments.

For example, ask these questions: Is the project a condominium or an office building and can the firm manage the design complexity? Is there a prior relationship with the client and does the client have the financial strength needed to achieve the objectives? Does the contract clearly define the scope of service and are there any provisions that create insurance coverage questions?

This is merely a sampling of the multitude of questions that need to be answered and analyzed by the design professional.

Risk management
As insurance companies become more sophisticated relative to risk management, they expect their clients to do the same. Contracts are skewed toward the owner and typically pass more of both the insurable and non-insurable risk to the professional.

In many situations contractors can no longer provide additional insured endorsements or policy coverage forms needed or contractually demanded by owners, leaving the architect or engineer as the deep and only pocket.

These are only a couple of the many problems plaguing architects and engineers, and those who adhere to proper risk management standards will reap the benefits of continued insurability at stable or moderately decreased rates.

Bruce Lockhart is chairman of the ad hoc subcommittee on professional liability insurance for the Construction Practice Group of RiskProNet International, a network of 29 leading independent brokers in the United States and Canada. He also a vice president and a member of the construction practice group at Dawson Companies in Cleveland, Ohio.

Topics Trends Carriers Risk Management Professional Liability