Earlier this year, the AIA Risk Management Committee, the National Society of Professional Engineers/Professional Engineers in Private Practices Professional Liability Committee, and the American Council of Engineering Companies Risk Management Committee teamed up to send a comprehensive survey questionnaire to leading carriers of professional liability insurance for architects and engineers. They received responses from 14 carriers and, in a joint meeting in Chicago in September, interviewed representatives of:

• Ace Insurance
• Arrowhead—Liberty Mutual
• DPIC—Royal & Sun Alliance
• Lexington
• Lloyds of London Companies
• RA&MCO—Great American
• The St. Paul Fire & Marine (ex-Kemper)
• Victor O. Schinnerer & Co—CNA
• XL Insurance
• Zurich American

In addition, the following insurers responded to the survey but were not interviewed:

• Arch Insurance Group
• AVRECO
• Euclid Managers
• Prairie State Administrative Services, Inc.

All of those interviewed agreed that the insurance market has plenty of capacity to handle the professional liability needs of design professionals at this time. Most carriers also maintained, however, that their deteriorating investment income and recent claims losses are creating pressure on them to raise insurance rates and tighten their underwriting policies.

Overview of interview results
Your insurance premium is a direct function of your annual billings multiplied by the rate set by your insurance carrier. Thus, if your insurer charged you a rate of 1 percent for every $100,000 of your billings, and if you billed $1,000,000 per year, your annual insurance premium would be $10,000.

The rate is determined by a number of factors. To use a simple example, a carrier that suffers substantial claims losses in a given year may feel pressure to increase overall rates to the people and firms it insures. Similarly, if a carrier were to make good on a large claim by a specific firm, it might decide to increase that firm’s individual rate in the future. There are many other factors that can come into play in setting rates, and those factors may vary considerably from carrier to carrier.

Most companies responding to the AIA/NSPE/ACEC survey reported that the professional liability insurance rates for architects and engineers were likely to continue to increase through 2004. The level of increase varied broadly—from near zero for some carriers to a range of 15 to 35 percent by at least one carrier. These reflect average increases across each carrier’s full book of business. Some design firms may experience greater increases due to their individual risk factors.

The characteristics ranked “most important” in determining the premiums were:

• Annual billings—The basis for determining premiums after the rate is established.
• Type of practice—What disciplines make up your practice. Certain practice areas—for example, condominium design and construction—are likely to experience higher rates (and may not be insurable by some carriers at any rates).
• Claims history—If you have had frequent or costly claims in recent years, your rates are likely to go up. In most cases, this does not include your notifying your carrier of potential claims. Your broker can confirm this with a potential carrier.

Other major factors mentioned by survey respondents in setting rates for individual firms included:

• Firm experience—If your firm has been the subject of frequent or severe claims in recent years, don’t be surprised if your rates increase.
• Types and locations of projects—If you are doing high-risk projects, or work in states where juries are particularly sympathetic to plaintiffs, you may see higher rates.
• Contracting practices—If you use contracts that help to control your risks, this may in turn help to keep your insurance rates down.
• Loss prevention practices—You may be able to help control your rates by demonstrating loss prevention strategies endorsed by your insurer.

Other carrier strategies for controlling costs

• Higher deductibles—A number of insurers are encouraging their clients to agree to increase their deductibles in exchange for lower rates.
• Sub-limits—Some insurers are also attempting to impose limits for certain types of claims (for example, a cap on limits for mold coverage).
• High-risk projects—T ere is increasing reluctance to write insurance for condominium and other perceived high-risk project types.
• Low-risk clients—Insurers are also increasingly focusing on "better risk" firms (e.g, firms with a lengthy tenure, low-risk practice areas, careful client selection, etc.).
• Single-year policies—Except for some “small firms” (i.e., those with $500,000 or less in annual billings) covered by some insurers, multi-year insurance policies are now largely a thing of the past for design firms.
• No first-dollar defense—Insurers are also tending to offer lower rates to firms that are willing to pick up at least the initial legal costs involved in defending against claims.

Status of exclusions

• Mold continues to be a significant concern, with carriers largely adopting a wait-and-see stance. Some carriers have filed with state regulators to be allowed to exclude coverage for mold-related claims, but none of the carriers we interviewed indicated any intention of actually implementing such exclusions in the near future.
• Pollution and asbestos claims are not seen as significant issues at this time.
• Terrorism is a new issue that is being addressed in various ways. Some carriers have a surcharge built into rates, with a credit for excluding it from coverage.

Project policies
Few opportunities exist for project policies as we know them. Lexington and RA&MCO are among the few carriers willing to write project policies, but they are expensive. Some other insurers will provide project coverage to their current customers by quoting higher limits for specific projects in the customers’ existing liability policies. Victor O. Schinnerer indicated, for example, that CNA would offer project policies to CNA practice policy holders only and on a limited basis.

Claims activity
Most carriers indicated that frequency of claims has been fairly stable in recent years, but they have seen a slight increase in the average severity of individual claims over the last year.

Status of players in the market
At least two carriers have had significant changes over the past year.

• Kemper has sold its renewal rights to St. Paul Fire & Marine, which is continuing the professional liability business with many of the ex-Kemper staff.
• At the time of our interviews, DPIC’s parent, Royal & Sun Alliance, was in the process of divesting itself of its North American holdings. AM Best downgraded Royal & Sun Alliance’s rating to B+ from A- in September. DPIC's renewal rights have since been purchased by XL Insurance, whose rating is A+.

Also noted
There are some new players in the market as well as some old players with renewed interest in the market. Included is Arrowhead Design Insurance Division—Liberty International, which has been writing insurance for about two years and is headed by former DPIC staff.

It should be underscored that the best way to be sure you are doing the best you can when buying professional liability insurance is to work with a broker who is very knowledgeable about and has a special focus on professional liability insurance for design professionals. Their expertise will be invaluable as you work your way through very detailed applications.

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