Survey: Claim Severity Driving Rate Increases for Architecture and Engineering Firms

Rising claim severity is leading to rate increases for professional liability insurance sold to architecture and engineering firms, according to a report released Tuesday by Ames & Gough.

The brokerage, headquartered in McLean, Va., said that 73% of professional liability carriers surveyed in 2020 reported they had increased rates up to 5%, while 20% had increased rates by 6% or more. Last year, 60% of the carriers surveyed had kept rates flat and the remainder increased rates no more than 5%.

“The upward pressure on rates appears to be gaining momentum this year based on indications provided by the survey participants,” the report says.

Ames and Gough surveyed executives from 20 major professional liability carriers.

About half of the survey respondents said that claim results worsened in 2020, while the other half said claim results were similar to last year. What’s more, 25% of the carriers that responded said they received more claims related to certain project types, such as residential and infrastructure, the report says.

When asked to identify areas with the greatest claim severity, insurance executives noted structural engineering, followed by architecture, civil, geotechnical and mechanical engineering. Insurers said the largest claims involved bodily injury, design defects, property damage and construction delays.

The report cites comments from Larry Moonan, chief operating officer for Berkley Design Professional and Georges Pigault, a national product head for Liberty Mutual.

“We have noted more breakdowns in (quality assurance/quality control) and true technical errors,” Moonan told Ames & Gough. “We think this is related to the challenge the industry has had in attracting and retaining qualified staff, and the advent of technology,” particularly “too much reliance on technology for QA/QC.”

On the other hand, Pigault said that architecture and engineering firms find it difficult to improve quality control on some projects because of lower fees, difficulty in hiring quality staff and reduced communication because of remote work environments, the report says.

Ames & Gough said the survey shows multi-million claim payouts were common: 45% of respondents reported paying a claim of $1 million to $5 million, 25% reported paying a claim of $5 million to $10 million and 10% reported a payout of $10 million to $20 million.

As a result, carriers interest in increasing coverage limits may be waning, the report says. While more than half of the carriers surveyed offer coverage limits $5 million and above, obtaining those higher limits requires greater underwriting review. “In other words, higher limits are available, but only after a firm and the project are thoroughly vetted,” the report says.

Carriers are eyeing even higher rates next year. The report says 57% of the carrier surveyed are seeking increases of up to 5% this year, 25% are seeking increases of 6% to 10% and 19% are seeking increases of more than 10%.

Insurers identified Florida, Texas and New Jersey as states where rate hikes may be implemented.