Professional Liability Insurance Carrier Annual Interviews 2014

Professional Liability Insurance Carrier Annual Interviews 2014 Each year, the American Institute of Architects (AIA), the AIA Trust, the American Council of Engineering Companies (ACEC), and the National Society of Professional Engineers (NSPE) conduct a survey of insurance carriers to gather general information regarding the professional liability insurance (PLI) policies and related services available to design professionals. The purpose of this activity is to understand how carriers try to meet the PLI and risk management needs of design professionals, and provide a tool by which design professionals can compare the various PLI carriers. A compilation of the participating carriers survey responses is available on the AIA website at http://www.aia.org/members/memberresources/aiab101873 and the AIA Trust website at http://www.theaiatrust.com/member-resources/risk-management-tools/. Of the responding carriers, a number are also invited to participate in face-to-face interviews to expand on their survey responses with representatives from AIA, AIA Trust, ACEC, and NSPE. Interviewees are asked to provide written responses to questions aimed at eliciting additional information regarding industry trends and risks to design professionals and to identify insurance products available to address them. During the interviews, interviewees are asked to expand on their written answers, and respond to questions from AIA, AIA Trust, ACEC and NSPE representatives. The following is a summary of the face-to-face interview discussions. 1 The summary begins with a discussion on general industry trends including the frequency and severity of claims, followed by a review of developing areas of potential risk affecting the design professionals and how the insurance carriers are responding to such emerging risks. Finally, the summary will review other major policy highlights discussed during the interviews, as well as the carriers loss prevention programs. I. Industry Trends There was considerable discussion around overall challenges facing the PLI industry, as well as the expected changes in the coming years. Generally speaking, the carriers noted that the high number of PLI carriers has created a very soft market. This substantial capacity in the PLI market has continued to suppress rates and most carriers do not expect significant growth in the number of insureds. Many carriers indicated that the amount of competition in the PLI market is, and will continue to be, the biggest challenge facing PLI carriers. 1 The information presented in this paper is not intended to provide legal or insurance coverage advice. While the information may be helpful in evaluating risks related to professional practices, and in making professional liability insurance procurement decisions, it is not a substitute for consultation with qualified legal counsel and insurance advisors. Page 1

A number of carriers noted that they had not changed their insurance policies in a number of years and that revisions could be expected soon. Some carriers are developing policies in modules so portions of the policy can be updated without changing the whole policy. Modules will also allow carriers to better tailor the policy to meet the professional s needs. Policies will only include needed modules so insureds only pay for what they need. A few carriers commented on the continued trend of owners requesting higher limits for insurance coverage. These requests for higher limits are not necessarily tied to the value of the project or increased risk exposure from the design professional, but rather are an attempt to increase the overall insurance proceeds available to the owner to respond to claims. As a result, carriers are seeing an increased use of project specific policies to respond to these requests. Underwriting has been stable and has not changed recently for most carriers. Claims have reduced in number but are larger in claim cost amount. Because claims can extend 3 to 5 years or more after construction is complete, many carriers have not yet been able to adjust underwriting to address those claims. One carrier reported efforts by owners during contract negotiation to impose wording that assigns risk to design professionals for product liability. Because design professionals typically provide only services and not products, liability for product quality and performance does not inure to the architect or engineer unless stated otherwise in the services contract. The carriers advised design professionals to be watchful for this when reviewing proposed contracts. II. Claims Frequency and Severity Overall claims frequency is the number of claims measured against the number of policies in effect. Claims frequency by project type is the number of claims for a specific project type measured against total claims of all types. Claims involving multifamily residential, condominiums, and schools/universities were reported to be high, or around 25% of total claims, while claims involving health care projects were reported to be more at a mid-level of 15% of total claims. Claims involving other project types, such as transportation, master planning, and surveys/studies, were reported to be low, at around 5% of total claims. Carriers reported that claims frequency has remained stable, just as they indicated in 2013; however, several carriers reported increased claims related to structural engineering. The general expectation is that claims frequency will increase somewhat over the next year. This is predicted because claims frequency increases with work activity, and the carriers think it is now an ascending market. Claims severity is a comparison of a project type s market percentage to the total claim dollars paid out. For example, if a project type occupies a small percentage of the market yet Page 2

results in a high percentage of total claim dollars paid out, the severity for that project type is high. Claims severity was reported by insurers to be stable overall, as it was in 2013, with increases in claims severity reported in specific areas such as structural engineering, personal injury and bridges/tunnels. III. Emerging Risks Associated with Recent Industry Developments a. Alternative Project Delivery Methods: IPD, DB, and Public Private Partnerships The insurance industry has been following the increased use of alternate project delivery methods including Integrated Project Delivery ( IPD ), Design-Build ( DB ), and Public Private Partnerships ( P3 ). Although carriers are closely watching claim statistics for these project delivery systems, most have not identified any trend indicating significantly different loss patterns from the more traditional delivery methods. i. Integrated Project Delivery IPD Carriers consistently indicate the two greatest causes of claims are poor communication and technical errors. Use of IPD tools and building information modeling (BIM) is seen as a way to increase communication and coordination and reduce technical errors, which leads to a reduction in requests for information, change orders, and claims. Many carriers expressed optimism that truly collaborative delivery models like IPD could reduce the number of claims on a project, but they do not have the data to support or deny this supposition. 2 Carriers have not seen many IPD projects and most carriers have not written policies specifically for IPD projects. One carrier noted that while the delivery model may help reduce claims, it is also possible that increased use of IPD will eventually give rise to an increase of unanticipated claims unique to IPD. True IPD is not being used as often as may have been anticipated by many IPD advocates. The more popular trend, according to the carriers, is to adopt certain IPD elements and collaboration tools and apply them to delivery methods such as Construction Management at Risk or Design-Build. These tools include the use of BIM for communication, co-location (big rooms), and lean construction practices. This is consistent with the use of the AIA documents transitional form of IPD (AIA Contract Document A295-2008 and its related documents), which uses construction manager at risk as the base and evolves it into an IPD process. ii. Design-Build According to the carriers estimates, Design-Bid-Build remains the most frequently used delivery method; however, the use of Design-Build continues to grow. Most carriers indicated 2 Key issues for a positive outcome include: clear end goals; well-articulated expectations; high-level communication; strict project management; and consistent use of compatible and well integrated technology. Page 3

that the nature of claims against design professionals on Design-Build projects remained the same as in Design-Bid-Build. Many carriers noted that while claims frequency is reduced in Design-Build, claims severity appears to be higher. Some suggested that this is the result of the more collaborative nature of Design-Build, which allows for constructive claim resolution. Smaller issues are often resolved in the field while the larger issues more often grow into formal claims. Carriers did note, however, that if the underlying project driver is a guaranteed maximum price, absent any other avenue for financial recovery, design-builders are very motivated and able claimants against design professionals. iii. Public Private Partnership P3 Although there is significant industry discussion devoted to the P3 delivery method, most carriers have not seen claims from these projects. The carriers all agreed that P3 projects are rare in the current industry. The few carriers that have encountered P3 projects reported that the claims tend to be larger, but less frequent, than on a typical project. Again, the collaborative nature of the delivery model suggests that smaller disputes are resolved without a claim. Given the scarcity of P3 projects and related claims, however, the carriers were largely forced to speculate as to the risks associated with P3 projects. One specific P3 issue that a carrier raised related to the running of the applicable statute of limitations. Many P3 projects are structured so that the project participants remain on the project in an operator role following project completion. The question was raised as to what impact this continued project involvement would have on triggering the applicable statute of limitations. Another risk that was discussed had to do with the presence of another party on the project as a potential source of claims; namely the concessionaire. Similar to design-builders, concessionaries could prove to be very motivated and able claimants against designers. Lastly, it was noted that P3 projects are often performance driven (e.g. toll roads). Accordingly, if the project is not profitable or does not perform up to expectations, the partnership may look to the design professionals for its contribution to the lack of profitability or performance. b. Technology Related Issues i. Building Information Modeling BIM None of the interviewed carriers identified an increase in claims against design professionals related to the use of BIM and many noted that the use of BIM (and its collaborative capabilities) could lead to fewer claims on projects in general. A few carriers noted, however, that the increased use of BIM will inevitably result in greater technology risk and associated claims, and the proliferation of BIM could eventually change the applicable standard of care. The extent of these risks, however, cannot be determined and carriers will continue to the monitor the market as the use of BIM evolves. Page 4

ii. Non-BIM Related Technology Risks Project use and reliance on technology continues to grow and construction industry participants are becoming increasingly susceptible to various technology-related risks. As the use of project networks and associated network breaches continues to grow, these technologyrelated risks (e.g. privacy/confidential data or inadvertent disclosure of information subject to non-disclosure agreements) will become an increasing reality for design professionals. In response, carriers are developing insurance products to respond to the anticipated need. Some carriers have begun to include coverage for network security and various other technologyrelated services in their standard PLI policies. Others are addressing such coverage through separate endorsements. It should also be noted that some carriers include coverage in their standard policies for technology-related risks that are incidental to the practice of architecture/engineering. As such, they differentiate between practice-related technology use and more administrative uses of technology. One technology-related risk that caused substantial discussion involved the collection of personal information and related privacy concerns. It is becoming increasingly common for firms to collect and store personal information (e.g. social security number; medical service or healthcare data; driver s license or state identification number; bank account; and credit card or debit card numbers) on the firm s computer network. Networks, however, are susceptible to breach, resulting in the disclosure of personal/confidential information. The carriers have not seen many claims related to the failure to maintain the privacy of such information, but those claims they have seen tend to be large. Further, carriers view this as a growing area of concern for design professionals and are developing insurance products to respond to the anticipated need. That being said, some carriers indicated that while they are preparing responsive products, they do not view this as a large risk exposure for design professionals under normal circumstances. c. Apartment to Condominium Conversions There has been an increased incidence of conversions of rental apartment units to condominium ownership. This has been caused in part by the glut of construction prior to the economic collapse and the ensuing difficulty in maintaining profitable rentals in a down economy. Add to that the scope and quality variations caused by contractor and owner value engineering substitutions, and the fact that the ultimate third-party condo owners are not always happy with the finished product. The result has been increased claims by the condominium owners against developers, contractors and design professionals. Many carriers noted concern over a recent case in California that found that the design professionals owed a duty of care to the eventual property purchasers (condominium owners) who did not hire the professionals, and with whom the design professionals did not have a contract. While there are many cases in Page 5

different jurisdictions that have reached the opposite result and found that the complainant must have a contractual relationship with the design professional, the carriers identified the California case as troublesome precedent and evidence of the increased risk associated with condominium projects. Several insurers interviewed indicated that they take a more detailed look at firms that provide condominium design when they quote policy rates. Over 40% of the insurers interviewed reported that they have policy restrictions on condominium work, and almost 60% interviewed stated that condominiums may lead to higher rate increases in the coming years. That said, apartments and condominiums will no doubt remain a viable business model in the industry. d. Duty to Defend Historically, professional liability coverage has been viewed as negligence based. That is to say that in order for professional liability coverage to indemnify for a claim, the claim had to be based on the breach of the applicable professional standard of care or other legally imposed duty. Claims based purely on contractually assumed liability, such as warranties or contractual indemnity, might not be covered. This has resulted in coverage concerns when Owners insert a contractual obligation to defend the Owner, which according to some carriers has been an increasing trend in the industry. Some carriers take the position that the duty to defend (provide or pay for legal counsel for a third party in defense of a claim) does not fall under professional liability coverage. This means that while the design professional may ultimately be successful in defending a claim brought by a third party against the Owner and design professional, the design professional will be required to pay the full cost of the Owner s defense. That cost would not be recoverable under the policy and the design professional would be required to pay for the costs out of its own pocket. At least one carrier has developed a partial work-around for this issue. However, for the work-around to be effective, the underlying contract for professional services must be written to provide that (1) only if the design professional is found to be liable for some or all of the claims against which the owner is forced to defend, then (2) the design professional is obligated to pay the proportionate share of the attorney s fees incurred by the owner in defending those claims. In those circumstances, the carrier will pay the value of the proportionate attorney s fee as part of the owner s claim, within the policy limits. IV. Program/Policy Highlights and Loss Prevention Tools It is in the best interest of design professionals to take full advantage of the plethora of services and tools the professional liability insurance carriers make available to help manage risk; which benefits both the insured and the insurer. For this reason, all of the carriers interviewed offer risk management and loss prevention tools in various forms. Page 6

Each insurance carrier thinks that their program and/or policy is unique in one or more ways. Sometimes they offer something that is offered by few, or none, of the other carriers. Sometimes they feel they provide a higher level of service or coverage when compared to the other carriers with a similar program or policy element. Certainly, it would seem that one insurance program or policy may not meet the needs of all design firms. Accordingly, when selecting an insurer, the design professional should consider whether one insurance program better meets some of the unique needs of their practice, and whether certain policy provisions or options are necessary to satisfy their particular needs. The following are some program and policy elements (including loss prevention tools): Education: Many carriers pride themselves on providing robust educational materials and opportunities for their insureds, including books and guides; newsletters; seminars; or webinars. Carriers offer different options for education, at different levels of detail, utilizing different information delivery formats, and covering a wide array of topics. Several carriers host live seminars, typically cast in larger cities, and a few schedule in-house seminars for their large clients. Generally speaking, the larger and more established PLI carriers have the largest cache of educational tools, but even those relatively new to the PLI market are actively building their library. Contract review: Some carriers offer contract review services for their insureds. These services vary from carrier to carrier. Reviews are performed by in-house counsel or out-sourced to specialty attorneys, and reviewers may address a variety of topics such as insurability of the scope of services, standard of care, indemnification and defense, third party exposure, and limitation of liability. Specialized knowledge or experience of agents, underwriters, claim specialists, or panel attorneys: Many carriers like to highlight the fact that their agents, underwriters, claims specialists, or panel attorneys have specialized knowledge of the insurance policies and programs and/or knowledge and experience specific to design professional claims. For example, some carriers note that their agents only sell for them, or only sell PLI insurance. Other carriers note that their underwriters have significant experience specific to design professional claims. Many carriers note that their internal claims specialists are often design professionals, individuals with legal degrees, or both; and that they engage defense counsel with significant construction litigation experience. By implication, this specialized knowledge, experience and training, works to the benefit of the insured when selecting coverage options, establishing premiums, and throughout the pre-claim and claims resolution processes. Page 7

Mediation and practice-related credits: Several carriers offer deductible credits or other incentives if a claim is resolved in mediation. At least one carrier offers an additional credit if a claim is resolved before mediation, arbitration, or trial. Early claims resolution often allows the carrier and insured to avoid significant arbitration/trial related expenses. Some carriers also offer credits or premium discounts if the insured implements certain risk management practices. At least one carrier offers a credit for firms doing LEED certified projects. Claims management: The carriers also noted the importance of claims management and early notification of claims to the insurer. Carriers offer and encourage, although do not mandate, that design professionals provide early notice of a potential claim, allowing the insurer to assist in the pending process to reduce exposure or loss to the insured. Typically, an experienced claims manager or defense attorney is assigned to investigate the potential claim to determine its validity. This may lead to a step-bystep strategy for dealing with the issue before it becomes a claim, or for risk mitigation if it actually does. Several carriers offer credits toward deductibles, pay initial attorney fees, or offer other forms of incentive for pre-claim notification. Some carriers believe that the content or format of the insurance policy itself sets them apart from other carriers. Some carriers believe they have a broad definition for Professional Services covered; the inference being that the broad definition results in more coverage for their insureds. At least one firm expressly includes the use of BIM and LEED design as part of the definition of professional services. Other carriers like to draw attention to coverage extending to foreign countries, or to their capabilities for procuring coverage acceptable in foreign countries. Some carriers like to point out that they offer, or continue to offer, project specific policies. Other carriers like to point out that they can offer a full array of coverages to meet several of the insured s overall business needs such as general liability coverage, auto coverage, worker compensation coverage, etc., or to respond to unique business risks. Some carriers offer coverage for certain aspects of firm management liability (e.g. director and officer, fiduciary, employment practices liability), or for significant and detrimental firm events ( crisis management ). Some offer predecessor firm coverage. In addition to coverage for the design professional s breach of the standard of care, many carriers are offering additional coverage as part of the professional liability policy to meet specific and unique risks such as pollution coverage and cyber or internal network risks. At least Page 8

one firm offers supplemental coverage for disciplinary proceedings, and coverage for OSHA, ADA, FFHA regulatory proceedings. Another carrier offers coverage for punitive damages, when such coverage is allowed by applicable law. V. Conclusion Assessing professional liability insurance needs and selecting the carrier/insurance policy that best fits those needs is an important business decision facing design professionals. An insurance policy ill-suited to the unique aspects of a particular practice can leave a firm unnecessarily exposed to significant uninsured risk. As such, great care should be taken to compare the various insurance offerings available in the industry and the ability of those offerings to protect your practice. In addition to this white paper and the associated insurance carriers survey results, the AIA and the AIA Trust have developed a number of other useful tips for buying insurance and managing risk. For more information about the AIA Trust Professional Liability Insurance Database, go to http://www.theaiatrust.com/pli-database/ and be sure to check out the section on Tips for Buying Insurance for helpful overviews and in-depth guides on this complex subject. For more information from the AIA regarding Risk Management, go to http://www.aia.org/practicing/aias078707. The Authors: Jim Atkins, FAIA, FKIA AIA Trustee Jamie Aycock, AIA AIA Trustee Michael Bomba, Esq. Director and Counsel, AIA Contract Documents and Risk Management Kenneth Cobleigh, Esq. Managing Director and Counsel, AIA Contract Documents and Risk Management Henry Reder, AIA, Esq. John Rogers, FAIA, FACHA AIA Trustee Page 9