Liability insurance insights

AEC firms see growth opportunities amid gradual U.S. economic rebound clouded by insurer concerns over inflation, claim costs, higher risks.

Even as AEC firms throughout the U.S. continue to benefit from growth opportunities brought about by the U.S. economy’s gradual recovery, their professional liability insurers have concerns about the effects of economic and social inflation on claim expenses, as well as heightened risks associated with specific project types, professional design disciplines, and evolving project delivery methods.

As a result, nearly all insurers participating in the Ames & Gough 2024 survey of 17 leading insurance companies providing professional liability insurance to architects and engineers in the U.S. are planning to raise rates with only one insurer seeking to keep rates flat. Specifically, among the insurers raising rates, 75 percent are planning modest increases (up to 5 percent) while 25 percent plan rate increases of 6 percent or more.

Here are a dozen key findings and insights from the survey that shed light on insurers’ concerns that may be helpful to AEC firms as they develop or refine their business strategies going forward:

1. Construction inflation ratchets up claim expenses. Of the insurers surveyed, only 6 percent saw claim severity decrease in 2023 compared to 18 percent whose claim experience worsened in 2023 on a year-over-year basis. Four in five pointed to inflation for driving up costs, emphasizing that construction inflation exceeds headline inflation with higher costs for materials, supplies, and labor.
2. Social inflation remains unchecked. The insurers surveyed continued to cite social inflation for wreaking havoc on claim severity, emboldening plaintiffs’ attorneys to seek higher settlements, complicating mediation, and driving up legal defense costs.
3. Most insurers report paying multimillion-dollar claims. Of the insurers surveyed, nearly one in four paid a claim of $5 million or more in 2023, including 12 percent paying claims of $10 million or more. The largest claims often involved what insurers consider high-risk projects or disciplines, particularly structural engineering, civil engineering and architecture.
4. Insurers wary of states with elevated risks. Some insurers surveyed identified Florida and Texas as states with concentrations of higher risk projects, such as schools, condominiums, and multifamily construction; meanwhile, New Jersey and New York raised concerns over legal environments that may lead to larger awards, higher defense costs and greater claim severity.
5. Availability of larger professional liability limits declines. Most insurers surveyed reported consistent availability of professional liability insurance limits. However, only 40 percent indicated they can provide limits exceeding $5 million, a huge drop from two-thirds of insurers willing to offer this capacity level in the 2023 survey.
6. AEC firms with higher limit requirements need a plan. When faced with owner requirements for higher professional insurance limits of liability, AEC firms might try negotiating with owners to check if higher limits are warranted. If so, they might explore alternative structures, such as specific additional limits endorsements/project excess or review their program structure and build layers with multiple participating insurers.
7. Most insurers target rate increases on accounts with poor loss experience. This year, 75 percent of the insurers surveyed plan to target rate increases on accounts with adverse loss experience; 56 percent will target firms with what they consider higher risk projects, such as condominiums and other residential construction, street/road, highway, and infrastructure. The same percentage plan to target higher risk disciplines, including structural engineering, mechanical engineering, civil engineering, and architecture. And 25 percent plan increases for their entire book of business.
8. Insurers foresee rebound in AEC firm M&A. Although M&A activity among AEC firms slowed in 2023, insurers surveyed believe a resurgence of transactions is likely should interest rates begin to stabilize. Meanwhile, they continue to apply careful underwriting to firms involved in combinations with some adding questions about such growth plans to their new policy and renewal applications.
9. New concerns over AEC firms’ ability to address climate change. This year, insurers raised a new wrinkle on climate change with some uncertainty over whether AEC firms can adapt to designing to address more extreme and complex weather conditions not yet contemplated by existing construction codes.
10. Watch looming risks of AI. As AEC firms begin to embrace AI opportunities, they need to navigate potential regulatory and legal compliance issues given the largely unregulated nature of AI in the workplace. Those adopting AI should reevaluate existing policies to accommodate AI deployment in the context of varied federal and state laws. They also need to address employee concerns about job security as they adopt AI.
11. Insurers continue to balance competition with sound underwriting. Even as insurers providing professional liability coverage compete for AEC business, many are focusing on the most desirable risk segments while being relentless in applying sound underwriting discipline across their entire portfolio.
12. AEC firms must remain diligent about risk management. In this environment, design firms need to approach their risk management with heightened diligence that encompasses all aspects of their business – from client and project selection to choosing and managing subconsultants, maintaining effective quality control, performing thorough contract reviews, ensuring proper contractual risk allocation, and providing timely documentation of communication with owners and project participants.

Contact info@amesgough.com to obtain a complimentary copy of the Ames & Gough survey, PLI Market 2024: A/E Firms See Steady Growth, Evolving Risks, and Inflation-Driven Costs. 

Jared Maxwell is vice president and partner at Ames & Gough, and Cady Sinks it 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.