Update on professional liability insurance

Ten takeaways from the Ames & Gough survey of 15 leading insurance companies providing AEC professional liability insurance in the U.S.

There’s no question the coronavirus pandemic is having a widespread impact on the U.S. economy, including the construction industry. To this end, any impact on AEC professional liability insurance with respect to insurers’ overall plans to pricing, capacity, or coverage remains to be seen. In the meantime, however, it may be instructive to look back and review their perspectives at the start of the year, prior to the outbreak of COVID-19 in the U.S.

Here are 10 takeaways from the Ames & Gough survey of 15 leading insurance companies providing AEC professional liability insurance in the U.S.:

1. Insurers had significant premium growth last year. With the U.S. construction industry generally healthy, billings for AEC firms were up, which contributed to premium growth. Other key factors driving higher premiums included design firms taking on greater risk, having poor loss experience and purchasing higher limits as required by their clients. Today, even though the coronavirus pandemic has stalled construction for the time being, demand for building is likely to remain when the crisis ends. Furthermore, added pressure on the federal government to pass major infrastructure spending may pave the way for a substantial recovery.
2. Claim frequency and severity rose. Among insurers surveyed, 40 percent reported a worsening of their claims experience last year with most seeing losses increase as much as 10 percent. Many saw more claims related to certain project types, such as residential and infrastructure. Among disciplines, structural engineering was cited for having both high claim frequency and severity; architecture, mechanical engineering, and civil engineering also had higher severity. These outcomes were in contrast to past years, where generally favorable claims experience contributed to insurers’ profitability and rate stabilization.
3. Insurers planned targeted rate increases. Driven by concerns about deteriorating loss experience insurers were planning modest, albeit targeted, rate increases in 2020. Most planned to target higher risk disciplines, projects, and even geographic regions for rate adjustments.
4. Concerns grow over higher risk disciplines. In terms of their underwriting assessments, nearly all insurers surveyed cited structural engineering as the top discipline in terms of risk; many insurers also pointed to mechanical engineering, geotechnical engineering and architecture as having significant risk. Even when the crisis ends and the U.S. economy begins to recover, insurers likely will continue to be especially careful in underwriting design firms with these disciplines. Good recent and historical loss experience, as well as sound and effective risk management practices, will be key differentiators in obtaining more favorable coverage terms, pricing, and conditions.
5. Insurers watching construction complexity and costs. Insurers surveyed expressed growing concern about these issues, along with design resiliency as it relates to climate change and state laws adversely impacting design firms. Insurers have begun factoring some of these areas into their underwriting decisions; notably, project mix has been under increasing scrutiny as insurers have assessed the risk profiles of individual design firms. AEC firms should keep in mind that changes in their project mix may affect their professional liability insurance pricing, terms, and conditions.
6. Insurers wary of social trends. Some insurers surveyed are watching how “social inflation” and “litigation funding” are affecting claim severity. This is an industry-wide phenomena not limited to professional liability insurance and may ultimately factor into insurance pricing and coverage decisions across all lines.
7. Mounting questions over rate sustainability. Insurers are aware of a correlation between the increases in claims and the supply of the AEC workforce as compared to the demand in the construction industry. Although the continued competition in the professional liability insurance marketplace for AEC firms has kept rate increases to a minimum, many insurers are beginning to feel those conditions may be unsustainable if heightened claims activity continues.
8. Don’t overlook opportunities for premium credits. When asked what information supplied on the professional liability application might result in premium credits, 100 percent use of written contracts was noted by all insurers; most also identified fees attributable to feasibility studies, insured subconsultants and abandoned projects as areas where credits can be applied. Also, longevity with the same insurer was cited by some as an area that might qualify for credit. In addition, most insurers indicated that direct reimbursables are fully excluded for rating purposes.
9. Insurers’ insights on impacts of technology. When asked to consider technology’s impact on the AEC industry over the past decade and in the next 10 years, insurers pointed to the the compression of project timelines as well as the role of automation and technology in the insurance sector, facilitating a greater focus on data/analytics. They also cited potential opportunities for the future application of artificial intelligence and robotics.
10. For AEC firms, sound risk management remains key. Adopting and adhering to sound internal risk management protocols are essential, including due diligence when contemplating a merger and acquisition, which would include analysis of the firm’s practice areas, project mix, and loss history. Lastly, be aware that high-risk services have a propensity for claims, which could result in substantial future premium increases.

As design professionals work through the various challenges posed by the coronavirus pandemic, they should recognize that practicing sound risk management will continue to be an important element of their ongoing success.

To obtain a complimentary copy of the Ames & Gough Survey, PLI Market 2020: As Claim Costs Grow, Insurers Eye Targeted Rate Increases, email info@amesgough.com.

Joan DeLorey is senior vice president and partner at Ames & Gough. Jared Maxwell is vice president and partner at Ames & Gough. Joan DeLorey can be reached at jdelorey@amesgough.com. Jared Maxwell can be reached at jmaxwell@amesgough.com.