Consider these insurance trends when working with design firms
by Jeffery M. Slivka
November 9, 2015

The American Institute of Architects' (AIA) semi-annual Consensus Construction Forecast recently projected that spending will increase by nearly 9 percent this year, with another 8 percent gain in 2016.

Size is also an issue. In fact, findings by the United States Energy Information Administration found that there were 5.6 million commercial buildings in the U.S. in 2012, totaling 87 billion square feet of floor space.

Newer buildings are continually trying to outdo older ones in numerous ways, including design, size and efficiency. But at the heart of even the most robust efforts is the simple truth that most construction projects still consist of a complex combination of building codes, standards, aesthetics and owner demands performed in fast-paced environments. This is especially true today, given that architects, engineers and builders are increasingly being placed on the spot to achieve various eco-friendly thresholds, such as Leadership in Energy and Environmental Design (LEED) certification. Another problem is that some design firms are continuing to chase down jobs that do not match their expertise or exist beyond their normal jurisdiction. This continues to be a residual condition associated with the downturn of the construction industry from 2009 to 2011.

Today, nearly half of the 175,000 different entities listed under the Standard Industrial Classification (SIC) codes attributable to architectural, engineering and surveying companies operating in the U.S. purchase professional liability coverage. An increased dependence on technology and sustainability and a higher demand on the standard of care by owners have not only heightened the value of architects and engineers professional liability (A&E PL) insurance, but also produced a record number of carriers who are currently offering this policy form.

Architects and Engineers Professional Liability Trends

Architects and engineers professional liability insures design professionals against errors and omissions committed while rendering professional services for claims for damages like economic damages caused by delays in project completion. It is also ideal for covering industry segments against design liability exposures. Often, owners also require firms to secure project-specific professional liability coverage for larger projects.

Other leading drivers for this coverage include the use of tools like building information modeling (BIM). Unfortunately, the dependence on such delivery and technology methods has also lessened the A&E's management of the project in many cases. Furthermore, the company distributing the software may have limitation of liability clauses in its contract with the purchasing party. As a result, these gaps should be addressed by the A&E's professional liability program to avoid costly outcomes.

In addition, LEED philosophies are increasingly utilizing approaches that raise the standard of care and establish implied warranties and guarantees. Consequently, the issues occurring on such projects may be subject to coverage gaps since professional liability insurance policies are often limited to the ordinary standard of care (negligence) and not contractual, assumed obligations like guarantees and warranties. To avoid coverage issues, A&Es should push for limitation of liability clauses in their contracts, where liability is capped off at the maximum of the designer's fees for certain design approaches.

Carriers are now endorsing their A&E PL policies to include both pollution and limited technology/cyber errors and omissions coverage forms, since contracts are increasingly requiring such coverage types. Further, pollution coverage built into forms are expanding to include a shred of transportation pollution coverage, non-owned disposal site coverage and limited site pollution coverage for sudden and accidental pollution conditions at the insured's owned or leased locations. Others are expanding their appetite to allow for first-party protective coverage for design/build professionally led A&E firms.

A Look Ahead

For the short term, it appears the A&E professional liability market will continue to expand. Simply put, this means expanding coverages and competitive rates for the typical buyers. But that may only apply to the engineering disciplines most carriers are comfortable writing.

Firms engaging in delivery methods should be placed with carriers with the ability to handle complex claims situations arising out of such projects. A&E PL continues to provide owners with an added resource for financially overcoming partner errors, while supplying design professionals with another level of risk management.