Are Your A&E Clients Cutting Coverage Corners?

In one of the most competitive environments the architects & engineers insurance market has ever seen, your A&E clients have plenty of options to choose from for their insurance solutions.

But not all options are created equal—and as an independent agent, it’s your job to make sure your clients cover all their coverage bases.

“Even the smallest of A&E firms—which often are buying insurance because they’re contractually obligated to, not because they perceive any real exposure—can be in the wrong place at the wrong time,” says Barbara Sable, assistant vice president – RLI Design Professionals Program.

For example, a small A&E firm may be responsible for the maintenance of traffic on roadways or bridges. In the event of an accident, “they may be one of the deepest pockets available associated with that crash,” Sable explains.

In such scenarios, proper insurance coverage is crucial. Here are three coverage developments currently affecting architects & engineers—and what you can do to make sure you protect your clients.

1) Cyber. While most A&E firms have a rulebook about quality control issues—how to work with a client, how to deliver effective services, how to respond to contractor requests—“firms are losing sight of the need to have good risk management practices around their general business, especially in the technology space,” says Kevin Collins, senior vice president at Victor O. Schinnerer & Co., Inc., who works with the professional lines division and specifically the A&E program.

In cyber liability, Schinnerer has observed owners increasing the technology requirements and protocol A&E firms must have in place to engage them. “Owners are also becoming more involved in asking for an insurance policy to deal with those exposures,” Collins says—and that applies to partners and vendors the firm uses, as well.

Partnerships “have totally changed the entire risk landscape for firms, no matter what industry you’re in,” says Jill Tellez, senior vice president at Victor O. Schinnerer & Co., Inc., who manages all professional liability programs including A&E and has a background in cyber liability risks. “Think about the Target hack—they actually entered the system through the HVAC contractor. When you think about that in the A&E world, no one is excluded from that risk profile.”

From low-tech theft of a laptop, mobile device or USB drive to highly sophisticated hacking strategies like using bots to create malware in the computers of unsuspecting users, “that becomes very serious if you have information about a confidential project or payment information,” Sable points out.

“Hackers don’t care if you’re a hospital or a bank or an engineer or an architect—they’re coming after you, too,” Collins cautions. “But what we’re finding is that the design community really doesn’t recognize the overall business risk they have. They’re so concentrated on what they do well, which is the design piece. Firms need to redefine risk management to recognize they need to have a pulse on their overall business risks, not just on their practice risks.”

2) Design-build contracts. Collins says more and more A&E firms are getting involved with design-build contracts, in which an owner wants one entity to drive delivery of both design and construction for a particular project. “That one entity could be the design professional, that one entity could be the contractor, it could be a joint venture of two firms—it could come in a lot of different ways, but the owner’s basically looking to one entity to deliver the entire project,” Collins explains.

Consider the following claim scenario: During an A&E firm’s design phase, the contractor begins excavation of the site, calculates the pilings and discovers that if they proceed according to plan, the building will fall down because the structural pilings holding the building up are not strong enough to support it—all unbeknownst to the owner.

“The underwriter would like to have a building that stands up, and I’d prefer not to build it and have somebody make a claim,” Collins says, noting that Schinnerer has developed “rectification coverage” that pays the additional cost of redesigning the foundation in a scenario like this.

For architects & engineers who take on the greater risk involved with design-build contracts, Collins says the question is “how do they define themselves, and how do they want to participate in that process as owners look to get delivery of their projects more and more from that type of contract?”

3) Stricter insurance requirements. Blame the 2008 recession: “A lot of the development that fell flat in the financial crisis led to more of a risk management view at the owner level, where a lot of standard agreements had been changed over the last five years,” Collins explains. “That creates more problematic contract clauses or more detail of requirements to the individual architect & engineer.”

With more sophisticated owners negotiating more difficult contracts, Schinnerer has noticed insurance requirements tightening. “When a lot of owners engage with design professionals, they will have an insurance requirement that says there’s a minimum level, type and amount of coverage you need to have in place for your business in order to work on my projects,” Collins explains. “That’s not new.”

What is new, however, is expansion of what’s required. “In our program, we’re seeing a continuous rise in the average limit of liability purchased by firms in our program,” Collins says. “Clients tend to drive to the limit of liability they need to effectively practice, and the owners are driving that.”

In the past, $1 million of coverage for professional liability was usually the most frequent ask. Now, $5 million is “a very normal request,” Collins says, “or at least $2-3 million. Being able to negotiate effectively with the owner and having a program that can meet their financial needs from a limit standpoint is going to be very important.”

Jacquelyn Connelly is IA senior editor.