Insurance Market Source regularly taps into its network of experts for insight into key trends across the insurance landscape. Nicole Greene, Director of Brokerage, Professional and Executive Liability Center of Excellence, Burns & Wilcox, shares her insight on Architects and Engineers Errors & Omissions (E&O) insurance.
Q: Define Architects and Engineers E&O and the key factors brokers should consider when recommending these policies.
Nicole Greene (NG): An Architects and Engineers (A&E) professional liability policy provides financial protection for licensed design professionals and non-licensed trades such as contractors and construction managers. This coverage protects them against errors and professional negligence that may occur while providing services that either result in a design error or negligence in managerial oversight. When writing these policies, some of the most critical questions brokers should ask are regarding exactly what type of service the client is offering and what is the client’s specific area of discipline, such as geotechnical engineer, architect, or general contractor. This spells out what stage or portion of the project a client is responsible for. From there, it is imperative to be clear on what projects the client is taking on. Different projects carry varying exposures and risks, which will help determine rates. Brokers should also be aware of who is hiring the client. Understanding this helps brokers better understand the contractual obligations to which their clients are being held.
Q: What are the major trends in Architects and Engineers E&O insurance?
(NG): Design companies making annual billings of $250,000 to $1 million in revenue typically have a higher frequency, rather than severity, of claims. Many of these firms are relatively small with a rapidly growing client-base, and the principal is not as involved in every project as they once were. While the company may be growing, they are generally not at the stage where a formal quality control and quality assurance program is in place to verify the accuracy of work. These circumstances often lead to missed opportunities for documentation in change order requests because the firms may run into instances where they need to make design changes quickly. Change orders keep all necessary personnel in the know, and when changes are made without consulting everyone necessary, design errors can occur more often. These trends average in losses of approximately $300,000 per claim, and they are often experienced in five major disciplines, including prime architects, civil engineers, structural engineers, mechanical engineers, and geotechnical engineers.
Q: What carrier exclusions should brokers be aware of in Architects and Engineers E&O?
(NG): We are seeing trends relating to exclusions carriers are using. Ways to identify these are to study top losses by project type. One major exclusion that brokers and agents need to be aware of is in regard to condominium projects. Condos are currently a loss leader, topping the charts as the number one loss by project type with an occurrence of more than 40 percent in frequency. As a direct result, many standard market carriers are currently choosing to exclude clients who work on condos in any capacity. There are a few carriers who do a limited percentage of condo or track home services, but it is few and far between. If a client does work with condos in some capacity, brokers need to get a firm idea of what percentage of the overall business is dedicated to condos so they can negotiate with the carrier if possible. The good news is some carriers have a small tolerance allowing up to 30% of their projects to be condo or residential. There are even a few carriers that will agreeably insure design firms who work solely on condo/residential projects. The number of carriers willing to do this however is very limited. Brokers and agents should be familiar with the appetite of the carrier they are working with. That carrier may provide coverage for these project types or they could be specifically excluded within the policy.
Q: How does pollution fit into Architects and Engineers E&O coverage?
(NG): Contingent Pollution coverage is useful to add to an Architects and Engineers E&O policy, as it is typically prevalent in cases where design errors lead to pollution. Consider, for example, an entity that is adding a suite to an existing building. A heating, ventilation and air conditioning (HVAC) engineer is hired to connect the suite to the current system. If the slope of the ductwork is designed incorrectly and causes condensation pooling, mold spores will result creating a pollution condition. If Contingent Pollution coverage is added to an Architects and Engineers E&O policy, this type of exposure would be properly covered for legal fees, bodily injury from any illnesses that result, and changes in the design and function of the system. This is merely one example of an exposure that this type of coverage could address, and many architects and engineers are not aware of their potential for pollution.
Q: Are there any other tips for brokers and agents in regards to Architects and Engineers E&O?
(NG): Document everything. Without proper documentation, the design/engineering firm may extend their liability to items they did not intend to provide. It is important that a design firm has consistent documentation practices in place on all projects to limit their Design Professional liability. Most lawsuits for design professionals are a result of failure to meet expectations rather than actual design errors. Because of this it is vital that clients spell out what services they are being hired to perform and for whom. The design firm’s entire staff should be trained and familiar with the documentation protocols of the firm including how to properly record notes taken in the field and set up contracts with their clients. Brokers and agents should urge their design clients to use a written contract on every job. They should also request a copy of the standard contract to review what their client is agreeing to contractually, with regards to their services. Often times some contracts assume the managerial oversight of the construction staff. A typical design policy will need the addition of a few special endorsements to extend coverage to the managerial oversight. If this fact is overlooked at the time of quoting coverage it could mean the difference as to whether a policy will respond when a claim is filed or not.
Another hidden exposure could be the assumed responsibility for job site safety. If a client is assuming managerial oversight, contractually they may also be assuming job site safety. This may be an item they negotiate to have removed from their contract or they will need to negotiate with their insurance carrier to extend coverage for this responsibility. The copy of the contract they are using should include a detailed job scope. Brokers should also request a copy of the job scope when collecting the contract and application, this way they can prevent gaps in coverage at the onset of the relationship. Costly disputes and claims can often be avoided when design firms have sound documentation procedures in place.