Ames & Gough Survey: After second year of COVID-19, insurers concerned about pandemic’s negative impacts on design firms
WASHINGTON, DC – Even as the U.S. construction industry navigated a second year of the COVID-19 pandemic, most insurers providing architects and engineers (A/E) professional liability insurance remain concerned about their deteriorating claims experience and multiple issues related to the pandemic. These factors are leading many insurers to seek more extensive and sizable rate increases, according to a new survey by specialty insurance broker Ames & Gough.
As they look ahead in 2022, 81 percent of insurers in the Ames & Gough survey of 16 leading insurance companies (which, on a combined basis, represent a significant percentage of the overall marketplace providing professional liability insurance to architects and engineers in the U.S.) are planning to raise rates with the remaining insurers seeking to hold rates steady. This year, insurers planning to raise rates are closely divided between those seeking modest increases of up to 5 percent and those planning increases of 6 percent or more.
“Along with worsening claims experience, insurers have become increasingly concerned about the impacts of the pandemic both on their design firm clients and on the economy,” said Jared Maxwell, vice president and partner, Ames & Gough and co-author of the survey. “Besides worker shortages at A/E firms and supply chain disruptions affecting building materials, insurers are focused on how COVID-19 has elevated cyber risks and the potential for rising claim costs due to economic and social inflation, and prolonged litigation due to case backlogs in courts.”
Higher claims severity a concern. Among insurers surveyed, 63 percent saw an increase in claim severity in 2021 and 31 percent experienced greater claim frequency. The majority of insurers surveyed also reported paying multimillion dollar claims in 2021, with one in four paying a claim of $5 million or more, including 13 percent of the insurers surveyed paying claims between $10 million to $19.9 million.
Given the significant number of large losses, insurers surveyed shared lessons learned to help A/E firms avoid these outsized claims. Several pointed to the need for appropriate contractual scrutiny, including having a clearly defined scope of service, meaningful limits of liability protection, and a careful review of indemnification provisions.
“In the current economic environment, project owners and their legal counsel are inserting onerous contractual language to transfer as much risk as possible to design firms,” said Cady Sinks, assistant vice president, Ames & Gough, and co-author of the survey. “Besides carefully reviewing their potential contractual obligations before signing, A/E firms need to be thorough in their selection of projects, clients, and subconsultants. They also should stay focused on maintaining high standards for quality control and assurance.”
Among insurers surveyed, 63 percent expressed concern about the impact of “the great resignation” on design firms – in particular, the potential for worker shortages and increased claims. Specifically, insurers saw this trend exacerbating risks of design and technical errors, and project delays. They also pointed out the loss of institutional knowledge at A/E firms needed to keep projects on track and flag potential issues.
Insurers reveal plans for 2022 rate increases. With respect to their underwriting discipline and plans for rate increases, 77 percent of the insurers surveyed plan to target increases on what they consider higher risk projects, such as condominiums and schools; the same percentage will target higher risk disciplines, including structural engineering, architecture, and geotechnical engineering.
Meanwhile, 38 percent plan to apply increases to firms operating in states considered high-risk or with generally adverse loss experience, including California, Florida, New Jersey, and Texas. Furthermore, 69 percent of the insurers surveyed are planning increases across their entire book of business.
Heightened M&A risks. With design firms involved in more than 400 mergers and acquisitions in 2021, insurers cautioned those making acquisitions to practice careful due diligence, particularly in assessing the target firm’s legacy exposures. They also noted the need to focus on addressing employee concerns and conducting a thorough insurance program review.
To obtain a complimentary copy of the Ames & Gough Survey, PLI Market 2022: A/E Firms Face Headwinds Due to Adverse Economic Factors, email info@amesgough.