In the face of modest economic expansion in the US construction sector, a study from Ames & Gough reveals that a majority of insurers specializing in professional liability coverage for architects and engineers (A/E) are concerned over both economic and social inflation on claim costs.
These concerns are further compounded by increased risks linked to certain project types, disciplines within professional design, and new methods of project delivery. The survey, conducted by the specialty brokerage, revealed that in response, a significant number of these insurers are preparing to hike their rates for the third year in a row.
Entering 2024, 94% of the insurers surveyed from a group of 17 leading insurance providers intend to raise their premiums, with only a single firm opting to maintain current rate levels. Within this majority, three-quarters foresee modest rate increases of up to 5%, whereas the remaining 25% anticipate hikes of 6% or more.
The survey highlighted inflation as a key driver for escalating claim expenses, with only 6% of participants noting a decline in claim severity in 2023, and 18% reporting a deterioration in their claim experience from the previous year.
More than four in five (81%) insurers pointed to inflation as the primary cause for premium increases, emphasizing that construction-related inflation is outpacing general inflation, leading to elevated costs for materials, supplies, and labor. Furthermore, social inflation is aggravating the situation by empowering plaintiff attorneys to demand higher settlements, complicating mediation efforts, and inflating legal defense expenses.
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A notable finding from the survey was that a significant portion of insurers reported settling multimillion-dollar claims in 2023, with 23% handling claims exceeding $5 million, including 12% dealing with claims over $10 million.
High-risk projects and disciplines often lie at the heart of these large claims. When ranking the top three disciplines by claim severity, structural engineering was cited by 82% of respondents, followed by civil engineering (59%) and architecture (47%).
The survey also revealed a decrease in the availability of high-limit professional liability insurance, with only 40% of insurers capable of offering limits beyond $5 million — a sharp decline from the previous year. This trend suggests a tightening in the market, despite overall stable capacity, with some insurers choosing to reduce limits for individual accounts.
The survey further details insurers’ strategies for 2024, with 75% targeting rate increases for accounts with negative loss histories; 56% focusing on firms engaged in perceived higher risk projects, including residential buildings and infrastructure; and a portion planning broad rate adjustments to address concerns about rate adequacy and the potential for larger claims as business activities recover.
Jared Maxwell, vice president and partner at Ames & Gough and co-author of the survey, commented on the challenges A/E firms face in securing higher limits of liability
“In their quest to obtain higher professional insurance limits of liability, many A/E firms now find themselves between a rock and a hard place. They need to meet higher limit requirements of project owners but face greater underwriting scrutiny to obtain them,” he said.
Maxwell recommends that firms negotiate with project owners to verify the necessity of increased limits and consider alternative solutions like specific additional limits endorsements or structuring layered insurance programs with multiple insurers.
Cady Sinks, assistant vice president and partner at Ames & Gough and another co-author of the survey, advised design firms to rigorously manage their risk exposure.
“Even as insurers providing professional liability coverage continue competing for A/E business, many are focusing on the most desirable risk segments while being relentless in applying sound underwriting discipline across their entire portfolio,” Sinks said.
Sinks also highlighted the importance of comprehensive risk management practices, including careful client and project selection, managing subcontractors effectively, maintaining quality control, thorough contract reviews, appropriate risk allocation in contracts, and diligent documentation of communications with project stakeholders.
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