Rising Claims Severity in the Architects and Engineers Market: A Focus on Risk Management
The architects and engineers (A/E) market is experiencing growth due to an influx of new construction projects. While this presents opportunities for design firms, insurers providing A/E professional liability coverage are becoming more selective in underwriting due to the increasing severity of claims. This article explores the reasons behind the rise in claims severity and emphasizes the importance of sound risk management practices in the A/E industry.
A Healthy Industry, but Rising Claims Severity
Jared Maxwell, Vice President Partner at specialty broker Ames & Gough, acknowledges the overall health of the A/E community, with rising revenue leading to an upward trajectory in premiums. Construction remained relatively steady during the COVID-19 pandemic, but supply chain issues and worker shortages continue to impact the industry. As firms face the challenge of doing more with less, there is an increased risk of service delivery issues and missed details, resulting in claims.
Factors Contributing to Claims Severity
An Ames & Gough survey revealed that incidents involving bodily injury, environmental impacts, significant structural issues, and errors and omissions have led to more multi-million-dollar claims. Insurers attribute the heightened claim costs to factors such as backlog of claims litigation, worker shortages, supply chain disruptions, and the effects of economic and social inflation. As a response, insurers are taking early action on claims, including mediation and litigation analysis, to resolve them before they escalate.
The Impact of Higher Limits
A/E professional liability limits have remained consistent, but firms are seeking greater capacity to meet project owners’ demands. Renewing clients are opting for higher limits, leading brokers to be creative in supplying them. However, carriers may decline coverage or offer it at higher prices and with more underwriting review for limits above $5 million. The trend of higher limits stems from project owners’ requests following the 2007-2008 financial collapse, and it has consistently grown since then.
The Importance of Sound Risk Management
In the face of social and economic inflation, A/E firms are under pressure to implement sound risk management practices. Ames & Gough recommends leveraging new technology solutions for better tracking and quality control, establishing rigorous documentation procedures, and reporting incidents and claims promptly. Prudent risk management practices, including regular employee training, companywide meetings, seminars, and contract reviews, can lead to reduced claim activity within organizations.
Mitigating Liability Risks
Misinterpretation of contracts can expose architects and engineers to higher levels of liability if issues arise on construction sites. Claims often occur when contractors argue that the design documents were unclear or inconsistent, leading to delays and increased costs. To mitigate these risks, firms should prioritize clear and consistent communication in design documents and contracts, ensuring that all parties have a shared understanding of project requirements and timelines.
As the A/E market experiences growth, insurers are becoming more selective in underwriting due to the rising severity of claims. To navigate this landscape, A/E firms must prioritize sound risk management practices, leverage technology solutions, and establish clear communication in design documents and contracts. By doing so, they can mitigate liability risks, reduce claim activity, and maintain a healthy and sustainable business in the evolving construction industry.
