Personal lines have faced the threat of direct writers and online insurance solutions for years. But recently, the trend has started creeping into commercial lines, too—and no market is immune, no matter how specialized.
Nicole Greene, director of brokerage, Professional and Executive Liability Center of Excellence, Burns & Wilcox, says more architects & engineers are starting to use online platforms that allow them to specify their professional class and project type, then receive a near-instant insurance quote.
“A lot of that is just a straight automation,” Greene says. “And that’s fine, but the problem with those platforms is they aren’t customizing them back to the specific exposure if the client is doing something a little outside the box of the normal scope of work”—and in a market that’s currently experiencing unprecedented capacity, Greene is noticing many clients getting nonrenewed for exactly that reason.
Sure, some A&E risks are pretty straightforward. But how confident are you that all your A&E clients are properly covered? Here are five common causes of coverage gaps to make sure you discuss at your next meeting:
1) Overseas projects. According to Kevin Collins, senior vice president, professional liability at Victor O. Schinnerer & Company, most A&E firms now pursue projects around the world—and that presents two key issues from an insurance coverage standpoint.
The first is legal definition of liability. “Every country’s different. In the U.S. you have what’s called standard of care, which says that in order for the A&E to be sued and found guilty, the injured party must prove negligence in the performance of these services,” Collins explains. “That means they did something another A&E in a similar situation would have done differently—very simplistically, for example, an architect designs a house and forgets to include a door.”
Many countries, however, do not use negligence or common law as the basis for defining liability. Instead, “it may be contractual in nature, which means whatever you agree to in the contract becomes the liability that you’ll be judged through in that country,” explains Collins.
While many U.S. A&E policies provide “worldwide coverage,” Collins says, it’s often only under the U.S. definition of liability—and may even include exclusions for contractual liability. Look for a carrier like Schinnerer, which provides coverage for contractual liability in the event that a country’s laws do not follow the same guidelines as the U.S.
The second issue is whether the coverage for work overseas is “pay on behalf of” or “indemnify,” says Jim Schwartz, U.S. A&E focus group leader and underwriter at Beazley. If it’s the former, it’s the same as the U.S.—the carrier steps in and pays claims expenses on behalf of the insured, “as opposed to the insured having to go out of pocket to cover that, and the insurance company indemnifying the insured after the fact,” Schwartz explains.
While Beazley’s policy includes “pay on behalf of” language, Schwartz points out that some A&E forms only provide indemnity cover for work overseas. “That’s a material difference for a lot of firms, depending on their size,” he explains, so read the policy language carefully.
2) Blended design and manufacturing. Previously, most A&E firms were responsible for providing a design draft to a client, who then took it offsite to do the manufacturing “because offsite manufacturing was so cheap,” Greene explains. “But now, with the lack of quality control offsite, people are realizing, ‘It might have been cheap, but I get what I paid for.’”
In response, many A&E firms are beginning to offer blended design and in-house manufacturing services—a practice which significantly changes their exposure. Beware placing these clients on the wrong form.
“Because of their lack of experience with manufacturing and design being blended together, some agents are trying to take their GL knowledge base and apply that to this, and it’s a misconception because these policy forms require more special attention,” Greene explains. “It might be that they need to remove some verbiage from a common base policy form to incorporate the additional level of services the client is now offering, or it might be that they need to add an endorsement.”
Greene recalls an instance in which an agent neglected to ask a client whether manufacturing took place onsite. Upon further investigation, Burns & Wilcox later discovered that the client did perform in-house manufacturing, but “the previous policy form contained exclusionary wording regarding the manufacturing piece,” she says. “The insured had no coverage for almost two years. ”
Upon receipt of a broker of record request, “Burns & Wilcox was able to negotiate with the incumbent carrier to have the policy amended to remove those exclusions, in order to provide adequate coverage,” Greene says.
Solutions are out there—some insurance providers are already beginning to change coverage “to pick up the design liability, engineering with managerial oversights and financial loss, along with the contingent bodily injury and property damage that might occur as a result of that design error, then extending it through the manufacturing process,” Greene says.
Just make sure you ask your A&E clients for a copy of their contract, and use an application that is “specifically tailored to the design or engineering involvement in the manufacturing of a product or process,” Greene says. “There are additional lines of questions that need to be answered to figure out what the client is contractually being hired to do as a design company for third-party client.”
3) Contractual liability. Securing a copy of the contract will also ensure you understand what your A&E client has agreed to in terms of contractual liability. “Are they providing design only, or do they have both a design responsibility and a construction responsibility to bring that proof of concept up to a standing building? Or, are they only being contractually hired to provide a drafting plan?” Greene says. “Without knowing which one it is, you might unknowingly restrict coverage.”
If a contract requires an A&E firm to take responsibility for the hiring and firing of subcontractors or assume construction oversight responsibilities, for example, the firm could be held liable if something goes wrong during the construction process.
“Coverage would need to be tailored to address that additional exposure to pick up not only the design liability, but also the legal liability the design firm assumed for the subcontractors they were responsible for hiring,” Greene explains. “If you aren’t securing those contracts to tailor coverage, it’s going to be pretty clear pretty quickly when the claim comes in and it’s excluded.”
4) Custom technology solutions. In the electrical engineering space especially, Greene is also seeing more A&E firms tackle projects that involve infusion of custom technology.
“Let’s say they want to make the assembly line work more efficiently at GM or at Ford, so the engineer suggests using three component parts inside these vehicles to streamline the process,” Greene says. “Maybe there’s a language barrier in the coding, and one of the parts doesn’t communicate with the others, causing the custom-designed process to fail to perform as intended.”
That error will cause financial loss for the firm’s client—and “the A&E design policy can be ambiguous when it comes to technology-related claims, unless it is specifically endorsed to have technology services and technology products included,” Greene says. The result is often claim denials: “Those policy forms need to be adjusted to include technology coverage extensions and alleviate any potential gaps of coverage.”
5) Cyber. “You see a lot of high-profile breaches—cyber has just become a business risk for any sized company,” says Schwartz, who notes that first-party cyber coverage is written directly into Beazley’s A&E policy. “It could be a small company, it could be a large company. They’re all targets of bad actors, and not necessarily because they do A&E—it’s just that because they’re small businesses, they will be targets.”
“At A&E firms, we’re seeing this grow exponentially because the people who are stealing the data are becoming more sophisticated,” Collins agrees. “They’re targeting businesses that don’t update their systems enough or periodically, and we find that often, A&Es don’t see themselves as a target because they’re not connecting with legal information or banks.”
Whether it’s built in to the A&E policy or available via endorsement, failing to offer cyber coverage to an A&E client could become “a real fountain for E&O action” for your agency, Collins says.
“If you were talking to me last year, I would have said I can see these hacks happening across industries, but I would have been hard-pressed to think of an A&E firm that actually had that experience,” Collins says. “In the last six to nine months, I’ve talked to 15 just in my own travels that have. From an agent standpoint, technology is the No. 1 issue to watch out for.”
Jacquelyn Connelly is IA senior editor.