Architects, engineers face insurance capacity crunch
Professional lines are feeling the impact of social inflation, making it an increasingly difficult segment for insurers.
As first described by Warren Buffett in the 1970s, social inflation is “a broadening definition by society and juries of what is covered by insurance policies.” Noneconomic factors — such as how society perceives big business — are leading to larger jury awards, higher claim settlements and greater litigation expenses.
Social inflation first impacted insurers offering certain standard commercial lines. For example, claims against trucking companies resulted in nuclear verdicts affecting commercial auto insurers as early as 2011. By 2019, many insurance providers began recognizing social inflation’s impact on general liability and professional lines.
Changing sentiment regarding who should pay when someone is injured is giving rise to reduced capacity in the architects and engineers (A&E) insurance market segment. Unfortunately, the A&E line is falling victim to some plaintiffs’ counsel unspoken rule of following the money, leading them to name all parties doing business on a particular project as defendants in lawsuits.
When an incident leads to a claim of professional negligence, the standard of care is reviewed to determine fault. That standard of care was an accepted understanding of what a professional architect or engineer was expected to do, the level of service they were expected to provide, as well as the accuracy with which they were expected to perform. The determining question was, “Would a reasonable architect or engineer in that position have completed it the same way?” If answered in the affirmative, the architect or engineer would not be found liable.
The standard of care appears to have lost some weight in legal matters, and parts of society expect reparation regardless of who is found liable for an accident or injury. Viewed by society as having deep pockets, insurance providers end up being responsible for these costs. When claim costs spiral out of control, insurers must tighten their appetite for risk, leading to limited capacity for new risks or renewals.
In the A&E segment, insurers are seeing an increasing number of bodily injury claims on highways and in construction zones, even in situations where there is no fault on the part of the engineer. Sometimes architects or engineers are neither at the scene nor in control when an incident happens, but they will be deemed at fault solely because they were part of a project. Plaintiffs’ attorneys will allege that the architect or engineer should have foreseen and prevented the incident and, therefore, was negligent. These types of scenarios are difficult to underwrite, making it an increasingly challenging segment for insurance providers.
In response, insurers are taking steps to manage their exposures, including lowering limits and adding sublimits on bodily injury coverage to reduce the risk that an insured could become a target. These steps also include robust risk management tools to assist firms in reducing their professional exposure.
Insurance providers can further guide firms by alerting them to the types of projects that tend to get targeted most often in these types of lawsuits. These can range from single-fatality accidents in highway construction zones to high-profile incidents that impact many lives, such as the collapse of high-rise residential complexes.
The goal is to help firms mitigate their risk before they are involved in a lawsuit.
Agents can do their part to assist clients by explaining the cost drivers behind premium increases: As claims departments have continued to see a rise in lawsuits targeting A&E firms, insurance providers have needed to raise rates to remain viable to protect their insureds in the long run. Agents can also help clients determine steps to take to keep their costs down, including increased deductibles or self-insured retention options.
In the long term, the industry may need to start advocating for tort reform on behalf of their A&E clients, highlighting the need to return the focus to the legal standard of care to determine fault.
Jackie Neal is executive vice president at Berkley Design Professional, a division of Berkley Alliance Managers, a Berkley Company. Previously, she spent 10 years as the chief actuary and chief enterprise risk management officer of Berkley Alliance Managers. She can be reached at jneal@berkleydp.com.
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