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Professional Liability Insurance Carrier Annual Interviews – 2013

Each year, the AIA and the AIA Trust meet with leading professional liability insurance (PLI) carriers to learn about trends the carriers are seeing, and learn how A/E firms can best position themselves to reduce risk. This meeting is sponsored jointly with the American Counsel of Engineering Companies (ACEC) and National Society of Professional Engineers (NSPE). Invitations are sent to a large number of PLI carriers, asking them to participate in an extensive written survey and an in-person interview. A compilation of the PLI written survey responses is available on the AIA website.

During the in-person interviews, carriers are asked to expand on their written answers, and respond to questions from AIA, AIA Trust, ACEC and NSPE executives. The in-person interview responses obtained in 2013 are summarized below. This information is not intended to provide legal or insurance coverage advice but rather should be helpful in evaluating risks related to professional practices and professional liability insurance procurement decisions.

Industry Trends

During the interviews, nearly all professional liability carriers expressed a concern over the current excess capacity, meaning a larger than normal number of PLI carriers is offering coverage in the insurance marketplace. In recent years, the number of carriers in the A/E professional liability insurance market has grown to over 60 carriers. This large number of carriers in the marketplace is causing a great deal of competition in setting rates - which is good for A/E firms but challenging for the carriers. Most carriers projected that rates for the coming year will be flat, or at most rise only modestly (0 to 5%). This excess capacity combined with low rates and resultant low return on investment (although most carriers remain profitable – even if razor thin) will cause some carriers to exit the marketplace, as Zurich did recently. Yet, one carrier mentioned that at least three new carriers are anticipated to enter the marketplace in the upcoming year.

Many carriers mentioned an increased use of analytics to provide the means for them to more carefully select who they insure, with expectations that these decisions will lead to improved profits for the carriers.

In general, carriers reported that claims frequency seems to be trending down and the severity of claims is trending up. A small minority of carriers stated that technical errors were seen as the predominate cause for claims. Most stated that inadequate communication, missed expectations and a poor relationship between key members of the project team were the most important factors contributing to claims. Some noted that use of technology on projects enables technical errors to be temporarily hidden. At the same time project team members are being encouraged to rely on information provided by others, thereby exacerbating mistakes and resulting problems.

Some carriers have been expecting an increase in claims following the 2008 recession due to the termination of experienced staff, pressure to do “more with less”, less experienced staff being promoted too quickly, staff being dependent on software programs without a basic understanding of construction, firms pursuing work that is not in their “sweet spot”, lack of qualified new hires as firms became busier, and a break down in the quality assurance/quality control (QA/QC) processes where seasoned professionals are not in place. Carriers noted that problems associated with these less-than-ideal firm changes can take up to 5 years to mature, and before claims begin to surface.

More recently with work increasing, firms are opting for increased premiums in favor of a lower deductible. Meanwhile, owners are demanding higher coverage limits. The normal claim limit coverage has traditionally been $1 million but now more and more clients are looking for $5-10 million limits. Most carriers offer options to increase coverage on a project-specific basis, thus avoiding the expense of a blanket policy limits increase. Carriers believe that owner-driven requests for these higher limits can be out of balance with the risk undertaken and the reward received by A/E firms. Clients that request the higher limits often find other means to mitigate their risk if faced with paying for this additional coverage as a separate and additional cost to the A/E contract.

Projects using Public-Private-Partnerships (PPPs) contracting agreements are experiencing increased claims, and it is anticipated that this trend will continue. States (or other jurisdictions) and the concessionaires are often protected by sovereign immunity and are often leaving the A/E firm as the sole target for claim relief. There continues to be pressure to include assurances of fitness of purpose, warranties, and similar clauses in PPP contracts. These terms could potentially flow down to the A/E firm, may not be insurable, and may not be subject to the statute of limitations or the statute of repose.

Many more projects are using Design-Build as a procurement delivery method. Most carriers noted that the owners, architects and contractors’ knowledge of this delivery method is maturing and the amount of claims remains steady.

Claims Type/Frequency

Carriers reported no significant increase in Building Information Modeling (BIM), Integrated Project Delivery (IPD) or technology related claims. Carriers also reported that restarting suspended or abandoned projects following the 2008 recession has not resulted in increased claims as long as the original project team remained involved in the re-start. Some claims for sustainably-designed projects have been experienced, but sustainability is not considered a risk driver.

The areas that are experiencing the highest frequency of claim activity are:

    • Geotechnical Engineering

    • Structural Engineering

    • Schools – especially publicly funded

    • Hospitals

    • Residential – especially condominiums, although fewer have been built in the last 5 years

Specifically for multi-family residential, carriers are seeing an increase in interest in coverage for these projects but they are frequently including a clause in the policy that excludes coverage should the apartment building be later converted to condominiums.

Claims Severity

Severity is often measured by comparing the project type’s market fee percentage to the project type’s market percentage of total claim dollars paid. For example, if hospital fees make up 13 percent of the market, but account for only 3 percent of total claim dollars paid, hospital claims are considered less severe than condominium claims which make up only 2 percent of the market, but account for approximately 10 percent of all claim dollars paid. Carriers noted that the severity of claims is trending up in general and that the root cause for claims is becoming more obvious.

Claims severity by project type, listed most to least severe, are:

    • Residential – especially condominiums

    • Educational

    • Commercial/industrial

    • Healthcare

    • Retail

Some carriers reported an increase in both frequency and severity for structural engineering and geotechnical based claims.

Building Information Modeling

When BIM first started being used in the early 2000’s, many carriers were concerned that there would be an increase in the number of claims arising from the use of BIM. However, those concerns have not borne out and the carriers have not seen many, if any claims arising specifically from the use of BIM. On the contrary, some carriers believe that the collaborative use of BIM identifies errors earlier, reducing change orders while providing assistance with long lead items and material substitutions. BIM has moved from a tool viewed cautiously to a tool for risk management. These conditions are believed to lead to fewer claims with some carriers now offering a premium credit to firms using BIM on their projects.

However, several carriers believe that while the risk of technical errors may be reduced, data security issues, system integration, data integrity and software bugs/viruses may create a different exposure that is better protected through technology insurance coverage. This coverage may be included within the typical professional liability insurance policy or may be covered in a separate policy. A/E firms should verify, based on their procedures for use, ownership and transfer of electronic documents, that their technology insurance coverage is adequate.

Integrated Practice Delivery

Professional liability insurance carriers are seeing very few true IPD projects, and when they do, the IPD entity typically has a project policy that is written around the specific project team and project structure. These IPD projects typically include a waiver for liability for joint decisions as well as contingencies for design, construction, and owner changes. However, more projects are using variants of IPD considered “IPD light” which integrate the use of collaborative techniques such as integrated BIM and team co-location. Carriers also believe that IPD claims are low because owners tend to select the design-construction team based on qualifications rather than price. However, some concern was expressed regarding inter-firm BIM system integration, software bugs, and the high learning curve required.

Key issues for a positive outcome when using IPD include:

    • Clear goals

    • Well-articulated expectations

    • Extensive communication and strict project management

    • Consistent use of compatible and well-integrated technology

Overall the carriers believed the appropriate use of IPD will reduce claims; however it is difficult for carriers to assume that the lack of claims or anecdotal responses related to the use of BIM or IPD is a result of these practices. Some carriers indicated they are in the process of mining data from projects and comparing the use of BIM and IPD to other project delivery methods to statistically determine if there is a measurable reduction in exposure to liability.

Technology issues

While carriers did not identify any specific emerging claims issues for technology, they generally offer coverage for network security and data privacy issues through their professional liability insurance policies. Most consider these risks related to the use of technology in the A/E profession, to arise out of or to be a part of the professional services that are covered.

As many, if not most, A/E firms move to digital record keeping and communication they should regularly assess whether they are expecting an increased risk due to technology and determine how best to address that risk - whether through insurance, contract language, avoidance, or other risk mitigation approaches.

Firms primarily involved in data management, records retention services, hosting collaborative design communications, storing sensitive financial data, or providing technology solutions, are candidates to consider stand-alone cyber risk policies. These stand-alone policies for network security and privacy liability are available through some but not all carriers. They are often coupled with first party coverage for business interruption and crisis management.

While many carriers continue to monitor potential liability issues associated with cyber risks, no significant trends have been identified to date. Therefore, changes in pricing parameters driven by technology issues or availability of coverage are not anticipated. Some carriers found that the improvement in, and increased use of, technology, in many cases, helps to reduce overall claims on projects. However, since technology is ever-evolving, firms should regularly reevaluate their exposure to the ever-evolving risks.

Sustainability

Sustainability has been noted as the most significant global issue of recent times. It is not surprising then that as recently as 2008 many carriers were seeing sustainability services as a risk for their clients as well as themselves. However, these risks have not materialized and in fact through increased education, widespread media exposure, improved material evaluation and project certification, the notion of sustainability is becoming widely accepted. Most carriers noted the growth of sustainably designed projects within their clients’ services.

Some carriers are offering a small discount to their insured for sustainable projects. These discounts are not being offered because of a perceived lessening of risk but rather as a means to reward the use of sustainable practices, as carriers endeavor to participate in what they believe is the “right thing to do”.

While sustainability practices were not identified as a high-risk factor on projects, professionals need to be careful about statements (or guarantees) about attaining certain levels of certification referenced in contracts. A second source of concern was the use of building materials that may not have significant track records for performance and/or resiliency which owners are likely to expect.

Many of the carriers indicated that the sustainability services of their clients are covered in their base policies, but it is always prudent to verify that specific policies cover those services.

Reducing Risk (and Maybe Premiums) Through Education

Most carriers look at educational offerings as their opportunity to reduce claims. The carriers’ analytics are showing that firms following risk mitigation practices have a lower risk profile than those who do not. It is in the best interests of both the carriers and the firms to understand and follow best practices for risk mitigation. As a result some carriers have very robust risk management programs for their clients’ use including regularly offered webinars, videos, interactive sessions, risk management tools, contract review services, white papers, project evaluator tools, and project management newsletters. Some firms support local and national associations with webinar presentations for their members. Larger firms may qualify for individual seminars hosted in their offices. Most carriers offer a premium discount for completion of the carrier’s risk management program.

Carrier-provided risk management programs can cover a broad range of market-driven topics including hiring, mentoring, improving contract terms, uninsurable contract language, contract negotiation, selling services, trends in claims, and ethics. Webinars are often pre-approved for AIA Continuing Education Unit (CEU) credit.

With a goal to have carrier involvement early on, carriers highly encourage their insureds to take advantage of pre-claims services. Waiting and then reacting to formal claims can be a disadvantage for A/E firms. Carriers can provide recommendations to engage legal services during various stages of the pre-claims process and other strategies to best position the firm for diffusion of the situation or its possible defense.

Carriers expressed the desire to hear from their clients even when things go wrong. Their long term view and tools to mitigate risk make them an important partner in the risk management strategy firms’ employ for mitigating risk. Some carriers have an identified risk manager to work with clients to conduct a project post mortem, so mistakes are not repeated.

Typical Contracting Errors

The first recommendation from carriers for any Owner-Architect relationship is to have a written contract. Even the smallest projects can benefit from the use of standard, such as the following AIA Contract Documents:

    • A105™–2007, Owner/Contractor Agreement - Residential or Small Commercial Project

    • B105™–2007, Owner/Architect Agreement - Residential or Small Commercial Project

    • A107™–2007, Abbreviated Owner/Contractor Agreement - Project Limited Scope

    • B104™–2007, Owner/Architect Agreement - Project Limited Scope

    • B107™–2010, Developer-Builder/Architect Agreement for Prototype(s) for Single Family Residential Projects

As compared to AIA Contract Documents, client-prepared documents or architect-prepared letter agreements may not adequately deal with the project’s inherent risks, or be coordinated across all agreements that an Owner has in effect for the project. However, regardless of form, all owner/architect/specialty consultant contracts should include appropriate language for the following:

    • A well-defined scope of services inclusive of architectural, interiors, engineering and specialty disciplines as needed.

    • Project parameters (size, program and location), fees and reimbursable expenses, and overall project schedule.

    • Clear understanding of the frequency of and review processes for invoicing and payment.

    • Specific process for additional services requests and client approval thereof.

    • Should the client insist upon ownership of the instruments of service, language making ownership of the documents contingent upon payment in full, as well as language indemnifying the project team for reuse by others.

The experiences of the insurance carriers suggest further contractual clauses or processes for an architect’s consideration:

    • A well-defined path for project communications of all forms and through all phases, particularly those that affect changes in scope, or where expectations will be altered.

    • Language that recognizes that compliance with sustainability goals and certifications, energy savings, and the like are not in the total control of the design professionals.

    • Clarity about the sharing of digital models and other electronic data with regard to version control, ability to rely on information provided by others, and ultimate design and construction responsibility.

    • Agreement over the schedule of construction administration, in particular the timeliness of the project team’s response to submittals and requests for information.

    • Affirmation that the contractor has sole responsibility for construction means and methods.

    • A carrier’s review or attorney’s review of indemnification clauses requested by the client.

    • Language that requires the Architect’s review and approval of any owner or contractor-initiated changes to the general conditions for construction.

AIA Contract Documents offer a comprehensive suite of over 160 contract documents meeting the needs of any design and construction project. These documents use time-tested language that is widely accepted and backed by over 100 years of case law. The AIA’s contract documents are well coordinated to cover most risks that are often overlooked in other contracts, providing a balanced approach for all participants. More information about AIA Contract Documents is available on the AIA.org website.

Other Tips from the Carriers

    • When choosing a carrier, start with the policy and consider everything else as value-added (i.e. broker assistance for project issues, risk management programs/tools, unique coverage, risk mitigation credit, claims credit for best practices)

    • Select a carrier best matched to the specific offerings of the firm

    • Complete a thorough due diligence process when changing professional liability insurance carriers - treat it like an acquisition.

    • Use the carrier’s online application that provides evaluative questions guiding A/E firms to determine what coverage is needed and whether an additional endorsement or policy is warranted. Alternately, a discussion with an insurance broker could yield the same determination.

    • Be proactive in providing details when asking for quotes and appreciate that there is a reason for each question asked on the application. Each year upon renewal A/E firms should ask for a 5 -10 year currently dated prior loss run report and keep it on hand. A/E Firms should also retain 5-10 years of prior policies, applications etc. on file.

    • Differentiate between fees for master planning services, studies and other low/no-risk services when reporting gross revenue to carriers.

    • Ask for premium discounts or credits for the use of BIM, certification for LEED or other sustainable project programs, completion of carrier provided educational programs, receipt of AIA project awards, regular use of AIA contracts, or implementing other best practices strategies such as performing constructability and QA/QC reviews, collecting insurance certificates from sub-contractors etc.

    • Investigate cyber policy coverage. The risk is real and the policies provide exceptional value.

    • Build institutional knowledge through creation of a list of issues from previous projects in a database. Use the information to guide future practice decisions.

    • If possible, renew policies at the end of the year.

Conclusion

The first step for any firm in assessing professional liability insurance needs is to consider the firm’s risk exposures. Underwriters will want to review basic information about your firm such as total billings, claims history, use of written agreements, other firm services, project and contract requirements, and more. Check out the useful tips for buying insurance on the AIA Trust website and related risk management topics including Controlling Exposure to Risk, How to Minimize Your Insurance Premiums and Reporting Claims and Potential Claims Under Professional Liability Insurance Policies on the AIA.org website as well as the characteristics of the insurers listed in the AIA Trust professional liability insurance database to evaluate options and compare coverage. For more information on procuring professional liability insurance, call the AIA Trust at 202-626-7376.

The Authors:

Jim Atkins, FAIA, FKIA – AIA Trustee

Ann Casso – AIA Trust Executive Director

Deborah DeBernard, AIA, AIBC-Architect – AIA Vice President and General Manager for Contract Documents

Ed Hord, FAIA – AIA Trustee

Michael Prifti, FAIA – AIA Trustee

Henry Reder, AIA, Esq. – AIA Risk Management Committee

John Rogers, FAIA, FACHA– AIA Risk Management Committee

 

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