Value Beats First Cost When Buying Professional Liability Insurance
By Roger L. Ball, PE, FACEC, and Cara Shimkus Hall, FAIA
Every architecture or engineering firm faces the same question annually: in today’s professional liability (PL) insurance marketplace, how do you determine which program is right for your firm? How do you bring a high level of consistency and quality to a decision that impacts your business year after year? Who will be the right partner for your firm?
As the CEOs of multi-disciplined firms tasked with purchasing our PL coverage, we’ve learned to place value first, followed by coverage options, insurer experience and capabilities and, finally, cost. We believe this approach has largely insulated us from the uncertainty and volatility in the insurance marketplace. In talking to our colleagues, we realize that many find the PL market increasingly challenging to navigate, so we thought it might be worthwhile to share our thoughts on the subject.
We’ve watched as dozens of new insurance companies entered (and exited) the PL marketplace over the last 25 years, all vying for our business. Some of these new carriers offered bargain-basement prices – at least for the first year. But when we looked closely, many carriers lacked the support, infrastructure and experience that would help us navigate disputes specific to the design industry, educate our staff, and remind us where the real risk lies in our business. In fact, over time, many have demonstrated a lack of commitment to keep the design profession as a line of business, entering and leaving the market when it was prudent for them to do so, and leaving the insured without their support.
Predictably, when the claims caught up with their pricing, these carriers often raised their rates without a corresponding increase in service or support. Some got out of the PL business entirely. During our tenure in the business, over 50 insurance companies have left the A/E market. And a lot of our design professional colleagues who chose their insurance based mainly on price ended up paying more down the road. We’ve seen friends in the situation of having their insurer exit the market, and scramble to find a new carrier while in the midst of a claim.
What does this mean for A/E firms that are buying professional liability coverage today? As we mentioned, we’ve learned to make the decision based on value. To us, this means we consider the benefits we derive now as well as those we’ll see in the long run – even if we don’t file a claim. Instead of thinking of PL insurance as an expense, like utility bills, we consider it an investment. We learned a long time ago that there’s a difference between the cost of insurance and the cost of risk. While we have relatively little control over the cost of insurance, we can influence our cost of risk. So, we look for a carrier that helps us manage that risk and support our company’s risk management goals.
We liken our decision-making model to qualifications-based selection (QBS). Our clients select us based (we hope) on our experience, skill, knowledge, and stability; we use the same criteria for our professional liability insurer, and believe those criteria apply, regardless of the size of the design firm or insurance carrier.
So, what do we look for? Of course, the insurer must be a financially stable, well-capitalized entity with consistently high credit agency ratings. That’s a given. But it’s also critical that the insurer maintains the desire and ability to manage insurance cycles, and will offer us predictable coverage terms and ongoing support regardless of our claims experience. We want an insurer that is willing to work with us to provide coverage broad enough and flexible enough to meet our needs, one that offers the limits, deductibles and coverage options my firm requires. It’s crucial to us that our professional liability insurer specializes in serving our profession with a legacy in the A/E market.
But these days, you have to know where to look to find these insurers, and your agent or broker owes it to you to help. Many good A/E insurers have been acquired by new parent financial companies. These programs have been around for years and they’re run by specialists in A/E risk. Still, if an insurance company has been recently acquired through a merger or acquisition, you’ll want to know if the new parent company is committed to their A/E program, if they’re investing in it, and if they’re keeping key personnel and programs.
It Only Takes One Claim
To us, great claims handling is a deal-maker. You only need to be involved in a single claim to understand how critical this is. We want to work with claims people who understand our business and who specialize in our type of disputes. We don’t want to have to explain what we do in our profession to someone who also works on life insurance claims. And we want to know how experienced their claims staff is, whether they are licensed attorneys, and if they specialize in A/E defense or are simply general adjusters.
We look for a claims department that will help us resolve problems before they become full-blown claims, that will step forward if the claim is justified but that will not roll over and pay unnecessarily just to settle a case. We look for an insurer that will try to find ways to cover claims, rather than run away from them. And we want claims people who help control legal expenses appropriately, who provide personal service and who communicate with us promptly and frequently.
A Partner in Risk Management
We’ve found that professional liability insurance carriers with value offer first-rate training and risk management education programs, and our firm relies on and benefits from these programs. And we expect our professional liability insurance company to provide a high level of service and advice to help us with our professional services agreements.
It’s also important to us that our carrier is actively involved in the professional associations (especially with the AIA, ACEC, and the Engineers Joint Contract Documents Committee, a joint venture of the ACEC, NSPE, and ASCE), that it helps our local, state and national professional associations, and participates in legislative efforts on behalf of our professions.
A Word About Insurance Brokers
A properly-selected insurance broker will never let us down. The broker that you select for your professional liability insurance should be an expert in the field, not just the same person that sells car insurance to you. We expect them to recommend a professional liability insurance program rather than a price. In other words, our broker will run through a qualitative vetting process and will show us how a carrier will support our risk management efforts, educate our staff, and treat our time and deductible as if it was their own. As design professionals, we have to stand by the recommendations we make to our clients; as licensed professionals we do not shy away from this responsibility. We expect the same from our broker.
Value vs. Cost
The thing is, someone will always offer you a policy for less. But as we are constantly explaining to our own clients, the first cost is not always the lowest cost or the best value. In the end, we want an insurance company that will be there for the long term, one that works hard to preserve our capital, reduce our losses, and that is willing to go to bat for my profession and my business. In other words, the one that offers the best value.
Roger L. Ball, PE, FACEC, is President and CEO of Rick Engineering, headquartered in San Diego, CA.
Cara Shimkus Hall, FAIA, is Principal and CBO of GH2 Architects, based in Tulsa, OK.