AEC firms are navigating more complex risks and an evolving market for professional liability insurance.
While many AEC firms throughout the U.S. are capitalizing on opportunities to expand or maintain their business, they face the challenge of navigating more complex risks and an evolving market for professional liability insurance.
The Ames & Gough 2023 survey of 16 top insurers finds all but one plan to raise rates this year, in some cases by double-digits. Notably, the insurers generally remain concerned about deteriorating claims experience, a backlog of claims litigation stemming from the COVID-19 pandemic, worker shortages, supply disruptions, and the effects of economic and social inflation on claim costs. Here are 10 key takeaways from the survey:
- Social inflation continues driving up claim costs. Among insurers surveyed, 75 percent saw an increase in claim severity in 2022 and 38 percent indicated their overall claim experience in 2022 was worse than the prior year. The overwhelming majority (88 percent) cited social inflation as driving up costs, with one noting claim settlements have risen 50 percent in the past decade.
- Insurers still seeing large claim payouts. As in past years, most insurers surveyed reported paying multimillion dollar claims in 2022; many of the largest claims involved high-risk projects or disciplines, bodily injury, environmental impacts, significant structural issues or other errors and omissions that led to serious project delays and substantial cost overruns.
- Insurers target rate hikes on adverse loss experience, high-risk projects, disciplines. With respect to their underwriting discipline and plans for rate increases, 73 percent of the insurers surveyed plan to target increases on accounts with adverse loss experience and 60 percent plan to target high-risk projects, such as schools and condominiums, and disciplines, including structural engineering, geotechnical engineering, and civil engineering.
- Labor shortages having multiple impacts. With labor shortages expected to continue throughout 2023 and beyond, insurers are concerned their impact on design firms may contribute to overworked employees, diminished staff morale and well-being, reduced productivity and project delays, widespread skills gaps, and project quality concerns. AEC firms might consider implementing new technology to facilitate better tracking and quality control, more robust communication, more rigorous documentation procedures, and strengthening working relationships.
- Despite stable capacity, obtaining higher limits may require creativity. Even though nearly two-thirds of the insurers surveyed can offer limits of $5 million and above, obtaining higher limits is subject to greater underwriting scrutiny. As a result, AEC firms may need to work with their insurance brokers on strategies to meet increased limit requirements, such as building a “tower” with multiple participating carriers.
- Insurers gear up for continued industry consolidation. As robust M&A activity among AEC firms continued in 2022, many insurers are applying more rigorous underwriting to firms involved in combinations. That includes assessing the acquired firm’s staff, experience, loss history, and culture. In terms of AEC firms managing their potential M&A risks, insurers cited the need for acquiring firms to focus on top-down risk management, quality control, and to consider purchasing extended reporting period cover to address liabilities of the target firm.
- Insurers concerned about impacts of health and safety risks and climate change. Insurers expressed concerns about how the exposures related to infectious disease such as COVID-19 and climate change might change how firms provide their design services. For example, to address exposures related to a pandemic, mechanical design work may need to consider air flow and potential air-borne disease. Meanwhile, climate change may trigger changes in building codes which will make it necessary for designers to address increasing severe weather and other climate-related risks.
- Insurers offer “mixed bag” of coverage for alternative project delivery. Many insurers consider design-build and designer-led projects to be higher risk with some citing higher claims frequency and severity. While nearly all the insurers surveyed don’t have specific exclusions for design-build or designer-led projects, some simply don’t provide any coverage for them. Among those providing coverage, some charge higher rates while others limit coverage with specific exclusions for faulty workmanship, construction activity, means, methods, and site safety.
- Some insurers plan enhancements to their AEC professional liability policies. Among insurers surveyed, 44 percent are making some modifications to their policies, including one planning to add rectification coverage and another introducing new coverages for property managers, real estate developers and project managers. One insurer plans to write more large AEC firm business while another plans to enhance its risk management and educational programs for design firms.
- Design firms need to maintain focus on sound risk management. Practice appropriate contract scrutiny, including having a clearly defined scope of service, meaningful limits of liability protection, and carefully reviewing indemnification provisions. In addition, be more thorough in your selection of projects, clients, and subconsultants; improve documentation procedures, especially with respect to any changes discussed with owners; and review your quality assurance and quality control measures. Finally, provide brokers and carriers with timely notice of any claims or incidents.
Jared Maxwell is vice president and partner at Ames & Gough. Cady Sinks is assistant vice president and partner at Ames & Gough. Jared Maxwell can be reached at jmaxwell@amesgough.com; Cady Sinks can be reached at csinks@amesgough.com.