Professional Liability Insurance—Options Like Never Before

by Frederick F. Butters, FAIA, Esq.

How do you . . . select an appropriate insurance carrier from the wide range currently available.

Summary: To assist AIA members in negotiating the complex and ever changing professional liability insurance market, the AIA Risk Management Committee—in collaboration with the American Council of Engineering Companies (ACEC), the National Society of Professional Engineers (NSPE), and the AIA Trust—conduct an annual survey of those companies providing liability insurance coverage for the practicing design professional. In addition to market conditions, this year’s report touches on the current risk implications of BIM, green design, the housing market, public work, and aging infrastructure.

Professional liability insurance is critical to the successful architecture firm, and today’s architect has more insurance options then ever before. Better still, those choices come at competitive prices. The 2007 Professional Liability Insurance Survey of Carriers process culminated with a joint meeting in Chicago in October of 2007, where representatives from each company were interviewed to determine the aspects of their particular coverages and identify emerging market trends. An overall summary of the survey results can be found on AIA.org.

The market in general
Market health. All of the carriers interviewed indicated that the overall market is generally healthy. The influx of capital seen in prior years has continued, which has engendered competition. Premiums are generally declining, and most carriers concentrate on retaining their current insureds. As most carriers also indicated a desire to expand their business, the general expectation is that overall premiums will continue to trend downward, although no substantial drop in rates is expected. Since the design professionals have many options today, carriers are placing more emphasis on the accuracy of their underwriting and reserves.

All of the carriers interviewed indicated that the overall market is generally healthy.

Claims trends. Most carriers reported that the incidence of claims continues to remain relatively flat. However, the severity of claims continues to rise, albeit at a relatively small rate. When the severity of claims is adjusted for inflation, the actual rise is likely very small. Some areas of the market (housing and public buildings in particular) have seen a rise in both the incidence and the severity of claims. Most carriers reported an increase in claims arising out of geo-technical issues.

Carrier health. AM Best financial ratings (a leading indicator of the financial health of an insurance carrier) held steady over the past year. Those carriers that shared information concerning their profit models generally adhered to the proposition that they must generate profit on their underwriting. In years past, some carriers had relied on investment income for profits while operating their underwriting at a loss. As certain types of risks derivative of specific types of work mature, some carriers are open about their intention to manage those risks by reducing the number of firms that perform that type of work in their book of business. Since overall market health depends on maintaining a number of healthy carriers, this business focus likely bodes well for the long term.

AM Best financial ratings (a leading indicator of the financial health of an insurance carrier) held steady over the past year.

Developing trends
Building information modeling (BIM). Although building information modeling is a concern, claims exclusively derivative of the project delivery system have not yet emerged. Most carriers admit that the insurance industry generally plans for the worst. In its infancy, CAD presented some of the same concerns inherent in BIM. Not only did the worst CAD fears never develop, CAD has actually made the industry much more efficient and better. The normal approach—stay at arm’s length and blame someone else—likely will not work with BIM, since the A/E involvement by definition must be much more immediate. Generally, most carriers believe that the traditional issues (standard of care, scope creep, contract language, etc.) will eventually present again as the technology develops, albeit from a BIM perspective. Most carriers are already addressing the easier questions (damage from viruses, hardware and software compatibility, electronic transfer of documents, etc.) in their current policies.

Sustainability/green design. As with BIM, claims that are exclusively derivative of sustainable design principles have not as yet materialized. However, with owners investing heavily in sustainable features on the strength of promises that the investments will pay dividends, carriers are concerned that the claims will eventually develop if performance projections do not materialize.

Housing. With the market squeeze on the housing sectors, most carriers report an up-tick in residential claims. Although the exact causes are unclear, the belief is that builders and owners are seeking to recoup losses they incur from the general tightening of the residential market. Residential issues have become the principal source of claims for some carriers. As the housing market difficulties continue, claims in this sector are expected to do likewise.

As the housing market difficulties continue, claims in this sector are expected to do likewise.

Cost reallocation. The drive to quantify the standard of care by contract is increasing. Public owners in particular are now insisting on contract clauses that allocate fault to the design professional where cost overruns exceed a specified level. Worse, the levels at which owners are seeking cost recovery has dropped to almost zero. For some carriers, the onset of this cost recovery mentality has elevated public work above condominiums (a traditional claim hotbed) as a claims generator.

Aging infrastructure. As the infrastructure ages and deteriorates, it commands an increasing level of attention. The need for inspection and evaluation of those aging buildings and systems has created a new market for some firms. However, conducting an inspection may carry with it liability for conditions that were the subject of the inspection but were not detected.

Next Steps
The purpose of the survey is to provide the reader with basic information necessary to make an informed choice from the myriad of carriers and insurance products available in today’s market. Some good questions to ask:

• Does your insurance broker have access to a range of carriers and products so that you can take best advantage of the choices the competitive market provides?
• Are you receiving competitive premium quotes that reflect the level of competition inherent in today’s market?
• Does your carrier have a loss prevention/risk management program and, if so, does it provide you with appropriate value in exchange for the investment?

The A/E liability insurance market is more varied and dynamic than ever before. Although that circumstance creates opportunity, it also demands careful attention to and evaluation of the numerous options available so that the opportunity is fully realized.