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Importance of Quality Selection When Purchasing A/E Insurance
Introduction
Architect and engineering (A/E) firms have had a challenging few years. The economic slow down has cost thousands of jobs with the unemployment rate doubling in the last year to 7.3 percent according to the U.S. Bureau of Labor Statistics. Market conditions have reduced the overall number of A/E firms along with diminishing annual revenues. At the same time A/E firms are reducing, the number of professional liability (PL) insurance providers has increased, with four to five in the last year alone. There are wide variations in PL insurance providers, all competing for premium dollars. Certain newer providers have offered significant premium reductions in the effort to gain market share. Running parallel with reduced premiums, claims and litigation are on the rise in both frequency and severity.
How does this affect A/E firms; numerous insurance options, however, at what risk and cost? Conditions with fewer/smaller firms, increased number of carriers, combined with lower premiums with increased claims creates a financial imbalance and trouble ahead. These conditions cannot be sustained producing a “house of cards”. Firms should evaluate the quality aspects of PL providers before purchasing insurance. If not, firms may find themselves without the coverage or services needed when it is needed the most.
Cost of Insurance
The cost of Professional Liability (PL) insurance can be a big-ticket item for firms. For that reason alone, firms should be very selective when making this decision. Premium depends on many factors including; firm’s size, discipline, experience, services, location, claim activity, etc. On average, premiums range from .50% to 3.25% of gross annual revenues. Based on economic challenges, and the cost of insurance, many firms are obtaining insurance quotes from several carriers, some with significant savings. Based on a survey of A/E firms, on average approximately 19% of firms changed their PL carrier. The number one reason; premium. However, there other very important factors firms should considered when making this important insurance purchasing decision before premium cost.
Insurance Providers Competing for Premium Dollars
Based on the results of an annual survey of A/E Professional Liability insurance providers conducted by the American Council of Engineering Companies (ACEC), American Institute of Architects (AIA) and the National Society of Professional Engineers (NSPE), there are more providers than ever before in this specialized segment. Responses varied indicating between 30 to 40. This creates an enormous amount of insurance capacity (amount of available insurance) and selection options for A/E firms, all competing for your premium dollars. On the down side, selecting a carrier has become more difficult with wide variations. Driven by financial challenges, low cost providers can look very attractive for cash strapped firms. However, firms are cautioned not be "short-sighted" when making this important business decision. Firms should look well beyond premium costs and evaluate vital characteristics of providers. In this specialized insurance market, there are significant differences between experience, expertise, policy features and services. As a specialized sector, there is a limited talent pool of experienced staff including underwriters, claim managers, knowledge of effective coverage features and risk management programs. Having a strong financial rating is also important along with demonstrating methods used for managing risk. You want to select a carrier that exhibits a long-term strategy, not a short-term approach and chasing premium dollars.
What Should I Look for When Selecting a PL Provider?
When selecting a Professional Liability insurance provider, an excellent approach firms should apply is the same “quality selection process” they ask of clients when selecting consultants and contractors. You want clients selecting project team members based on capability and “quality” not a “low-bid” process. With increasing claims and litigation, in both frequency and severity, using a quality selection process is vital for supporting the financial viability of your firm.
Key "Quality Selection" Categories
1. Carriers’ financial stability: A important factor in today’s economic environment is confirming financial strength and stability. What impact has, or is the financial crisis having on the insurance carrier? Is it affecting their debt and financial strength as assessed by A.M. Best Company, Standard & Poor’s, Fitch Ratings, and Moody’s Investors Services? Is the carrier rating under watch or do they have a positive outlook or negative implications? Have the carriers’ surpluses been strained by investment losses, both realized and unrealized as well as declining net investment income due to losses?
2. Experienced A/E underwriting staff: While the number of carriers has increased, there continues to be a limited pool of experienced, knowledgeable underwriters. Knowledge of A/E firms and professional liability (PL) insurance is critical. Look for an average of 10 years experience specialized in the A/E PL segment.
3. Insurance coverage features: Insurance policy and coverage features vary. Certain carriers specify coverage features while others indicate more coverage is provided with less defined. Do not just read marketing material and brochures. It is important to have a professional evaluate coverage language and specifically exclusionary features. Marketing material and policies may identify "highlights" in one section then removed or limit coverage in another.
4. Claims management expertise: Experience in the A/E PL market is critical for claims managers along with the selection of panel counsel. Look for an average of 10 plus years of experience. It is vital to inquire into a carriers claim management experience and practices. Inquire if the carrier allows you to selection counsel or is selection limited?
5. Pre-claims assistance: A critical service at anytime, however more important when litigation is on the rise. This service assists firms when things “may” be going wrong or when assistance/guidance is needed when no formal claim has been made. An important service option that should be offered at “no cost” to insured’s. Quality and capability of service is based on claims management experience and practices which can vary widely by carrier.
6. Risk management program: Claims and litigation are costly and time consuming. Before having to use an attorney, it is important to be knowledgeable and incorporate strategies mitigating risk and liability exposures. Such programs indicate a provider’s commitment, knowledge, and interest in managing risk. Programs vary widely with certain carriers offering extensive programs with others offering limited or no services; which should be at significant premium savings.
7. Industry and insureds’ feedback: Inquire and obtain feedback from other A/E firms and industry professionals: Does the carrier have a positive reputation for services and claims handling? What is their renewal rate when firms have had a claim? Does the carrier have an excellent reputation for claims handling? One resource is ACEC’s Annual Professional Liability Survey of insured’s. The survey includes firms’ satisfaction with carriers’ risk management programs, pre-claims, and claims-handling processes.
8. Length of time in the industry: Important indicating a successful strategy, however the landscape is changing with newer entrants into the A/E PL market hiring experienced personnel from long-term providers. It is always a good practice to request information about underwriters and claims managers; experience, abilities, commitment and practices as indicated above.
Specialized A/E Insurance Providers
The following statements and/or descriptions are from certain specialized A/E professional liability (PL) providers in alphabetical order. For additional information, seventeen (17) A/E PL providers were interviewed by SmartRisk identifying industry trends and insights. The complete survey can be found at; www.smartrisk.biz/products
Arrowhead Design Insurance (ADI)
"Why consider coverage from the Arrowhead Design Insurance (ADI)" asks Jack Doran, ADI Co-President. "Our staff has more than 150 years of combined experience serving architects, engineers and environmental consultants. We know the business and can provide high-quality, affordable insurance and risk management programs. Our program is backed by the financial strength of Hudson Insurance Company, an A.M. Best Company “A” (XV) rated insurance company". Loss prevention and risk management educational resources are the cornerstone of ADI providing high-quality loss prevention and risk management services to all client’s insureds. " Programs have been certified to earn continuing education credits as well as qualify for up to a 10% credit on their renewal premium" Jack says. www.arrowheadgrp.com
Beazley Insurance Company
James Schwartz, Esq, Beazley Specialty Lines states “Beazley has been writing A&E professional liability for almost 25 years, insuring more than 7,000 A/E risks, from small to 30 of the Top 50 firms on the ENR.” Beazley’s A&E team is comprised of highly experienced professionals. Underwriters average more than 10 years of experience and the claims team is made up of attorneys with 10 to 25 years in practice focused on defending A/E firms. “This depth of experience is important for providing long-term value while maintaining the profitability and sustainability in the A&E market” explains Schwartz. Risk management is a fundamental part of Beazley’s program. “We provide insured’s quarterly risk management webinars stressing good practices which in the long run lead to better results” www.beazley.com
Catlin Design Professional
“At Catlin Design Professional, we’ve focused on hiring the best underwriting talent, creating the best and broadest policy form and having a first class claim organization to assist our insureds” says Thomas Bongi, Esq, President of the group. Bongi goes on to say, “we hired underwriters who have spent their entire careers working with architectural and engineering (A/E) firms. We have created a design professional liability (PL) policy that covers technology exposures and rewards firms that have sound risk management practices. From a claims management point of view, when faced with a potential claim, our insured can pick up the phone and speak to our claims attorney to obtain advice and assistance. Often, we will even retain a local attorney to assist with potential claim situations". www.catlinus.com
Liberty International Underwriters (LIU)
Liberty International Underwriters (LIU) is the global specialty lines division of Liberty Mutual Group providing professional liability (PL) insurance to Architects, Engineers, and Environmental Consultants since 1995.
Since 1912, Liberty has had a reputation for doing what is right for its policyholders. This mantra is in our culture and the A&E group has always been focused on consistency, fairness, and longevity.
Liberty’s A&E program success is attributed to its unique “team” approach. 1) Highly experienced and solution oriented underwriting team; 2) Dedicated, service oriented, and experienced claims team; 3) Strong relationships with leading specialized defense counsel; 4) Risk Management Services with information and educational material specifically designed to minimize loss and prevent claims; and 5) Working with specialized brokers who are committed to AE professional liability.
Visit our risk management web site at www.ae-libertyiu.com for additional information. Tour of our online educational program at www.LIU-AEwebdemo.com.
Terra Insurance Company (A Risk Retention Group)
“Terra is entering its 42 years of operation writing Professional Liability (PL) insurance coverage for geotechnical, civil and environmental engineers” says Dave Coduto, President and CEO. To understand Terra’s culture, it is important to look at their history. Up to the Orion acquisition of DPIC in 1984, Terra owned over 40% of DPIC stock, which it helped to capitalize and form DPIC in the early 1970's, an A/E PL market leader for many years. “Terra strength lies in its underwriting expertise and knowledge of a specialized market segment. We are one of the most reliable and highest rated insurers in the marketplace today” says Dave. He also goes on to say, “in the past 5 years, Terra has devoted between 13% to 20% of its operating costs reimbursing insured’s for peer review and the costs of their professional education pursuits. Our claim statistics indicate that by helping firms fund those pursuits today, saves on claim payments tomorrow”. www.terrarrg.com
Victor O. Schinnerer & Company, Inc.
Victor O. Schinnerer & Company, Inc. is one of the largest and most experienced underwriting managers of architects and engineers professional liability insurance in the world and has been doing so since 1957. Schinnerer now serves more than 20,000 design professional policyholders through independent agents and brokers.
This longevity is a testament to our experience, and commitment to the design industry. We have architects and engineers on staff as risk managers, program managers and senior underwriters. We work closely with many associations and are commended by both the American Institute of Architects (AIA) and The National Society of Professional Engineers (NSPE).
Because Design Professionals may offer an array of services, we provide a form that is one of the broadest in the industry, with a wide range of limits and deductibles. We provide a wealth of risk management resources for our insureds to help them avoid claims and manage their business. Go to www.PlanetRiskManagement.com
Assistance Selecting a PL Provider
A good resource in helping A/E’s firms making decisions on PL insurance is a specialized A/E insurance agent. Internet links to A/E agent networks can be found at www.smartrisk.biz/links. These professionals are knowledgeable regarding insurance and carrier options.
Conclusion
This is a very challenging period for A/E firms trying to survive and reducing operating costs where possible. Adding to the challenge, litigation and claims are on the rise driven by slow economic conditions. This a critical time for firms and are advised to make risk management a priority. If firms take a holistic approach for mitigating risk, the natural fallout is improved performance, profitability and your bottom line. To be effective, risk management, including PL insurance should be an integral part of the firms business operations, not viewed as a line-item business expense. Professional liability insurance is a vital part of any firms operations. When selecting a PL provider, using a quality selection process is just as important as when selecting any other business partner.
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