Liability Insurance Market Remains Healthy
Summary of the annual AIA Professional Liability Insurance Survey

by Nolanda H. Bearden, AIA
Managing Member, NHB Group, LLC

Summary: Professional liability insurance is the necessary evil that all successful design firms must consider to minimize risk exposure effectively. Each fall, the AIA Risk Management Committee, along with the American Council of Engineering Companies (ACEC), the National Society of Professional Engineers (NSPE), and the AIA Trust, conducts an annual survey followed by interviews of insurance carriers specializing in providing professional liability insurance coverage to design professionals. During the October 2008 interview session, the economy was, and continues to be, deeply troubled; markets around the world are in a state of unpredictable turmoil and our federal government’s economic intervention assistance to private industry is historically unprecedented. The information gathered during October’s interview reflects market trends between October 2007 and September 2008. This article does not address or predict how our current economic crisis will impact the market health and claim trends for professional liability insurance carriers serving design professionals. The summary below reports the general discussions during the interviews with carrier representatives along with risk management trends design professionals can anticipate in 2009.

Market overview
Market Health. All carriers interviewed consistently agreed that the overall insurance market serving design professionals is healthy. There continues to be competition among carriers, affording design professionals several options to consider when selecting professional liability insurance. Insurance premiums continue to trend downward although no drop in rates is expected. Every carrier interviewed was reluctant to predict how the current economic crisis will affect the health of the professional liability insurance market. In the absence of any historic comparison to the unprecedented economic times we are experiencing, carriers are taking a wait-and-see approach before predicting beyond 2009.

Carrier Health. Carriers responding to the survey maintained their A. M. Best ratings of A or A+. A Best rating is an independent third-party evaluation that subjects all carriers to the same rigorous criteria to provide a benchmark for comparing carriers worldwide. Insurance professionals, consumers, and investors depend on Best’s rating to determine the financial strength and operating performance of carriers. Each carrier also maintained its financial size category, with the exception of one carrier improving in this category. Carriers anticipate rates in 2009 to decrease or remain the same, very similar to rates during 2008. All carriers expressed an interest in gaining market share with only one carrier hoping simply to maintain its market share. Overall, carriers are financially sound and optimistic that our economic crisis will soon stabilize.

Carriers anticipate rates in 2009 to decrease or remain the same, very similar to rates during 2008

Claims Trends. For 2008, most carriers reported that both the number and the frequency of claims are consistent with 2007. However, the severity of claims experienced a moderate increase this year. Carriers anticipate the 2009 claim trends will be consistent with 2008’s trends. Carriers listed the following disciplines as having the highest percentage of claims: structural and civil engineers, architects, and land surveyors. Carriers listed the following project types leading the frequency and severity of claim category: condominium projects, commercial projects, educational/institutional projects, and single-family residential projects.

Does your current policy meet your practice needs?
The carrier survey benefits the reader by summarizing information to help identify carriers and the insurance products they offer in today’s market. Use the survey results to engage your insurance broker to confirm that your professional liability insurance program meets your practice needs. Consider the following questions:

• Is there communication and trust with your broker, your underwriter, and the people who handle the claims?
• Does your insurance broker have access to a range of carriers and products so that you can take advantage of the choices the competitive market provides?
• Are you receiving competitive premium quotes that reflect the level of competition in today’s insurance market?
• Does your broker or underwriter offer agreement reviews?
• Does your broker or underwriter provide timely review of your agreements?
• Does your carrier have a loss prevention/risk management program and, if so, does it provide value to you and your staff in exchange for your investment?

Use the survey results to engage your insurance broker to confirm that your professional liability insurance program meets your practice needs

Premium costs should not be the only factor considered when selecting or renewing your professional liability insurance.

Carriers identify new areas of risk and concern
Carriers were asked to share future concerns regarding claim issues that may impact the design industry in the future. The summary below outlines their responses.

Alternative delivery methods: Integrated Project Delivery (IPD)/Public Private Partnerships (PPP)/Single Purpose Entity (SPE)/Design-Build Hybrids (DBH). Fear of the unknown expresses the major concern articulated by all carriers regarding potential claims that could develop from very complex project team agreements. The traditional contractual relationship among the parties will change depending on the chosen alternative delivery method. To minimize risk, the project team (owner, contractor, design professional, and additional parties to the agreement) must consult with an attorney to facilitate drafting an agreement that will define project roles, responsibilities, and insurance requirements. During the entity formation period, before performance starts, the parties must also consult with an insurance provider regarding insurance requirements for the full term of the agreement. In addition to professional liability insurance, the parties must also consider general liability during construction and operational phases, builders risk, workers compensation, property insurance, and other project-specific insurance requirements.

Building Information Modeling (BIM). BIM provides the potential for the virtual building information model to be handed from the design team (architects, consulting engineers, and others) to the contractor (subcontractors, fabricators, and suppliers) and then to the owner (maintenance staff and post-occupant vendors). Each party is provided access to the model, adds its additional discipline-specific knowledge, and is then able to track modifications to the single model. An advantage to using BIM is the potential to decrease conflicts greatly during design. Although claims exclusively derived from BIM are not currently an issue, carriers continue to monitor closely the design professional’s potential risk exposure in the event something goes wrong in the chain of access. Generally, most carriers believe that the traditional claim issues (standard of care, scope creep, intellectual property, contract language, etc.) will develop as the technology develops and industry use of BIM increases. Most carriers are already addressing claims risk exposure from damage from viruses, hardware, and software compatibility and electronic transfer of documents in their current policies or policy riders. All carriers were concerned with undefined responsibilities among the architect, owner, and contractor using BIM. The carriers’ advice to design professionals was to be clear on the services being performed in the service agreements.

Although claims exclusively derived from BIM are not currently an issue, carriers continue to monitor closely the design professional’s potential risk exposure in the event something goes wrong in the chain of access

Sustainability design and certification. As with BIM, claims that are exclusively derived from sustainable design principles have not materialized. However, with owners investing heavily in sustainable building materials and systems because of long-term cost benefits promised by the design team, carriers are concerned that claims will eventually develop if owners fail to realize the building performance projections promised. Managing client expectations by providing clear concise written information will be helpful to the design professional in the event future claims occur.

Housing. Carriers reported that housing projects continue to lead the number of claims for design professionals, and the carriers expect these claims to continue to rise. Most underwriters are seeing their greatest risks in housing, especially, but not limited to, condominiums. As a result, the carriers are tending to charge a higher rate to firms that do a considerable amount of work in this sector. The residential market decline is also a factor for anticipated increase in claims. Carriers continue to underwrite design and engineering firms that exclusively serve the housing and condominium development market. Most underwriters evaluate the individual applicant considering the applicant firm’s longevity and expertise in the housing market, the applicant’s claim history and geographic location, along with the quality and size of housing projects designed by the applicant to determine a firm’s risk to the carrier.

Design professionals’ controllable risks
To implement policy and procedures to minimize risk, design firms must first know the risks they need to prevent. Each carrier was asked: “What is the Number One controllable risk facing design professionals?”

The following responses were provided:

• Avoid providing services without a contract
• Select a good contract that properly defines each party’s role and responsibilities
• Know, understand, and appreciate your experience/limitations; avoid accepting unfamiliar project types without teaming with consultants familiar with the project type
• Communicate and document communication with your clients to manage client expectations better
• Be selective in choosing clients.

To get the most out of this information, you should confer your their insurance advisor or legal counsel after reading this article

Final words
To get the most out of this information, you should confer with your insurance advisor or legal counsel after reading this article. Together, you can craft a good strategy to address these issues and work them into an effective insurance plan that best fits your needs as a practitioner.