With the market hardening for AEC professional liability insurance, an accurate and complete application may help keep your firm’s premium as low as possible.
As AEC firms face a tightening market for professional liability insurance, they need to explore every opportunity to establish themselves as favorable risks to underwriters. A detailed and carefully completed insurance application may help keep your firm’s premium as low as possible – even in the current rate environment.
The following areas in typical professional liability insurance applications relate to an AEC firm’s billings and may represent opportunities for premium discounts:
- Feasibility studies. Historically, most insurers discount billings for feasibility studies, master plans, reports, and opinions by as much as 60 percent to 75 percent. Even if the feasibility study ultimately becomes a full-blown project, you may still be able to list some billings in this category. For instance, if your study explores four alternatives and one is chosen, the cost of analyzing the other three options should be categorized as billings for feasibility studies.
- Abandoned projects. Most insurers either discount or exclude billings for projects abandoned prior to the construction-documents phase. These projects may be on hold, pending financing or other considerations, or truly abandoned. Consequently, there is nothing likely to give rise to a claim. This category is exceptionally relevant given the large number of projects dropped entirely or on indefinite “hold” due to the COVID-19 pandemic. Take time to review and identify these projects and related revenues.
- Project-specific policies. Many insurers significantly discount billings for a project covered by a project-specific professional liability insurance policy. Unfortunately, this category is diminishing as fewer projects are being insured under project-specific polices given a lack of underwriter interest in providing this coverage.
- Construction management. Discounts of 35 percent or more may apply to agency (not at-risk) construction and facilities management. However, consult your broker about the CM-related revenues before finalizing your application as some underwriters consider this higher-risk. What might help you with the majority of carriers could result in higher premiums or less competitive alternative quotes from others.
- Reimbursables. Directly reimbursable expenses, such as the cost of making copies of documents, traveling to a construction site, or other incidental costs, typically do not pose any professional liability claims exposure. If your billing system tracks these separately, then list them separately in the revenue-related section of your renewal application. If your billing practices are less detailed, you can still make a good faith estimate of these amounts; a typical range is 3 percent to 5 percent of gross revenue.
- Insured subconsultants. Some underwriters discount revenues passed through to insured subconsultants. If this information isn’t requested on your application, break these out and list them separately by attachment. Even if your incumbent carrier doesn’t discount these amounts, your broker can use them with other carriers; perhaps securing a lower alternative quote in the process.
Here are some additional considerations for AEC firms completing PLI applications:
- Licensed professionals. A key question on nearly all PLI applications is the number of licensed professionals your firm employs – architects, engineers, land surveyors, landscape architects, and all others. Typically, this must be broken down by number of principals, partners, officers, or directors and number of staff. Why is this important? A recurring source of claims is inadequate staff with project managers and other professionals spread too thin to keep pace or provide effective client communications and QA/QC efforts. Highlight your professional to revenue ratio to show you are managing risk by not over-working your professionals.
- Types of service. Most applications have several choices for areas of professional services and want them allocated categorically by percentage. Some higher-risk categories, such as structural or geotechnical engineering, generate higher premiums; others, such as interior design or landscape architecture generate lower premiums. The same pertains to types of projects. Ask your insurance advisor about your insurer’s views on what are considered low versus high risk services and project types. In addition, keep in mind that underwriters’ views on risk change with experiences – water/waste-water projects are now viewed more cautiously than in the past as are services performed in the power sector. Discuss your service and project types with your broker and be aware of how they are perceived by your current carrier. Most applications have categories that may overlap – civil engineering, transportation, highway/roadway – as examples. Avoid assigning percentages without understanding the potential impact on the renewal pricing. Lastly, there is typically a catch-all category of “Other.” If you choose it, provide as much detail as possible; anything listed here will likely be assumed as higher risk unless you explain why it shouldn’t be so perceived.
- Claims. Claim records are paramount for PLI renewals. Be sure you and your broker are proactive in understanding your claim history – especially the past five years and even 10-year history. If you have claims – even if they haven’t resulted in carrier paid losses – provide carriers competing for your business with an informative narrative of each matter and lessons learned, such as how your firm tightened its QA/QC practices or discontinued a service, client, or project segment. For example, one AEC firm that just settled a multi-million dollar claim obtained favorable renewal terms because they adopted and shared with the underwriter their newly implemented contract review process, a go/no-go Risk Management Committee (which under the firm’s new guidelines would have rejected the owner and project) and pulled back from the market segment where the large claim occurred.
- Risk and educational training. Many carriers offer a 5 percent to 10 percent discount if your firm participates in annual, qualified training sessions. Most are now offered online. Take the classes and be sure the proposed renewal terms reflect that you’ve earned the related discount.
By preparing an accurate and informed application, you’ll help gain the confidence of underwriters and might avoid overlooking potential discounts. PLI applications are fairly thorough. However, if any information not requested in the application may enhance an underwriter’s understanding of your firm, provide it in an addendum to the application.
Rob Hughes, senior vice president and partner, Ames & Gough. He can be reached at rhughes@amesgough.com.