Engineering Inc. - Winter 2020 - 32

STEADY FOR NOW

A buyer's market continues for A/E firms, according to John
Farrar, vice president at Clark Dietz, Inc., and a member of the
ACEC Risk Management Committee. All PLI carriers surveyed
indicate the market is still saturated with capital, and more capital is entering the market every day.
A small number of newer insurers-those considered less than
seven years old-continue to drive down premiums in the pursuit of market share, keeping rates artificially low and, many say,
unsustainable when considering the growing severity of claims.
Some markets are already feeling the effects.
"Within the last 12 months we have seen some Lloyd's [of London] syndicates pull out or pull back in professional liability as a
result of inadequate rates, claims activity, and underwriting experience. It is unprofitable, so they are walking away," says Timothy
Corbett, founder and president of SmartRisk and an ACEC Risk
Management Committee member. "In my opinion within the
next 12 to 36 months, we will see additional shakeout in the
insurance marketplace."
As another indicator, the Professional Underwriters Agency
(PUA) reports that commercial and automobile rates are increasing, and that PLI typically follows approximately 2.5 years behind.
Still, more than half of the carriers plan to continue to offer
the relatively flat rates they have for the past few years. As evidence, just six carriers surveyed expect to increase rates in 2020,
according to the survey results.
While rates stay the same or increase slightly, the actual PLI
premium is often going up because of increased volume of work
over the last few years. One carrier indicated that A/E industry
design fees have been growing by five to six percent over the last
several years.
FREQUENCY OF CLAIMS STEADY, SEVERITY RISES

The frequency of claims has been relatively stable over the last
several years. At Victor US, formerly Victor O. Schinnerer &
Co., which rebranded in November 2019, on average one out of
every five firms in the program sees a claim each year.
"That number has varied slightly, but when you look at it over
the long-term-it shows a rather stable consistency of claims,"
says Kevin Collins, senior vice president at Victor US. However,
when Collins looks at the severity of those claims, he sees a bit
of an increase.
Over the last 18 months, severity has significantly increased
for services and claims in the 2015 and 2016 policy periods for
some carriers, meaning those payouts may be coming soon.
"We are seeing large claims on large infrastructure projects,"

says James Schwartz, U.S. A/E focus group leader and underwriter at Beazley. "The most severe claims are rooted in technical
areas, but there are also claims involving general project management of these very large infrastructure projects."
Claims severity is also inflating because the cost to defend is
increasing, according to Schwartz. The influence of social inflation, or how society views politics, plaintiffs, and insurance companies, often magnified through marketing, also affects claims.
"We are seeing larger jury awards because of some of those
factors," Schwartz says.
Design-build and public-private partnership (P3) projects also
play a role in claims severity, according to Daniel Cecchi, president of Collins Engineers, Inc., and an ACEC Risk Committee
member.
"Part of it is everything just costs more these days. Just the size
of construction projects, even large developments are increasing," Cecchi says. "Then if you throw in the design-build and
P3s, you get a lot of the design-build contractors looking to
recover their losses from their designers."
COMMON CLAIMS

In the broader market, the most common claims continue to be
from condominiums and residential properties and projects, particularly in Arizona, California, Florida, New Jersey, New York,
Pennsylvania, Texas, and Washington.
Victor US reported condo claims running about $3 for every
$1 of design exposure. Numerous other carriers had an even
worse loss ratio on condos, some up to $10 to $1. Almost all PLI
carriers mentioned that residential homes were the worst risk in
frequency, and condos in severity. However, a few reported higher
severities from structural claims.
The most problematic design disciplines for higher-thanaverage claims involved architects as well as geotechnical, structural, and civil engineering firms. Specifically, structural engineers
continue to be a problem with both frequency and severity. One
PLI carrier reports these claims averaged $750,000 for a firm.
As for geotechnical or structural engineering, claims have
become more severe due to the higher cost of fixing a structure
and recouping lost profitability when a foundation design or
ground analysis is proven to be flawed, according to Collins.
Several carriers are looking more closely at the rate for traffic
engineers, pointing to increases in large highway claims. More
highway accidents are evolving into lawsuits against all those
involved with the design and construction of the road. Plaintiffs
take a shotgun approach to suing every entity that might be
involved. A large portion of the bodily injury claims are settled

"We are seeing large claims on large infrastructure projects."
JAMES SCHWARTZ
U.S. A/E FOCUS GROUP LEADER AND UNDERWRITER
BEAZLEY

ENGINEERING INC.

WINTER 2020

Engineering Inc. - Winter 2020

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