A Behind the Scenes Look

Placing Professional Liability Insurance for Architects, Engineers and Environmental Consultants is our sole focus. As insurance brokers, we know that getting the best terms for our clients requires that we negotiate with underwriters the premium for each client. To do this effectively it is critical to understand how insurance underwriters view risk and the factors they use in setting premiums. The article below was written by Lee Genecki, one of our senior brokers. Lee was formerly the lead underwriter for the Travelers A/E professional liability insurance program. As the lead underwriter it was Lee’s responsibility to set rates and establish the risk assessment criteria for quoting premiums. This article describes risk factors underwriters assess and provides insight to design firms on how to complete an insurance application to present a firm in its best light. It also describes the role we play as a broker to negotiate competitive terms.
Michael Hall, President Hall & Company

A Behind the Scenes Look
How Your Professional Liability Premium is Determined
To those outside of the insurance industry it may appear that professional liability premiums are determined somewhat randomly by people with limited knowledge of the design profession. As a former underwriter turned broker, I am here to tell you that this misconception couldn’t be further from the truth. Your professional liability premiums are established through a process involving the assessment of several factors over which you have some power to influence.
Looking through the eyes of an underwriter, design professionals can gain an edge in obtaining the best possible insurance premiums with the use of a thoughtful application submission. The article below describes the factors underwriters use in developing quotes for professional liability insurance.
What your application tells underwriters
When an underwriter receives your application their immediate task is to evaluate your firm’s potential loss exposure. The two basic types of loss exposure are frequency and severity. Underwriters use the information on your application to calculate the probability of your firm experiencing claims over the life of the policy and furthermore, if you have a claim, how much it will potentially cost.
However, before even considering the merits of an individual firm, insurance carriers already have defined what type of firm is a “good risk” for their company based on previous experience. They try to attract as many such firms as they can with various coverage differences and program enhancements but the primary lure is price. Their objective is to set a price that attracts good risks but still allows for an underwriting profit. This is complicated by the catastrophic nature of professional liability claims in the A/E industry. Losses tend to be quite large with a recent statistic stating that the average indemnity payment for a paid loss is upwards of $350,000. As a result, the many end up paying for the few.
Design firms need to make their business look attractive to the insurance company in order to obtain the best possible terms. The first step in this strategy is to identify the different risk factors and then present your firm in the most positive way. While numerous factors determine the risk that your firm poses to an insurance company, for the purpose of this discussion we will focus on the most critical areas.
Area of Practice
There is not much that you can do to influence an underwriter in this category. You are what you are. But it may be helpful to understand how the insurance company evaluates each discipline when it comes to their exposure to risk. The most common discipline in most insurance companies’ books of business is Architects. As a result, insurance carriers tend to use their rates for architects as base from which to determine rates for other types of firms.
There are two disciplines that tend to pay a higher rate for their insurance than Architects: Structural Engineers and Geotechnical Engineers. Keeping in mind that underwriters are always thinking about exposure to loss, the question they asks themselves is “ what happens if there is an error in a structural calculation or a geotechnical report?” In many cases the project is stopped or even scrapped with a worst case scenario being a collapse. Because of this, Geotechnical Engineers take the unenviable position of paying the highest average rate in the industry with some carriers charging as much as two times what Architects will pay. Structural Engineers pay a much higher rate as well but they tend to be roughly 1.5 times more than Architects.
The professional discipline seen as having the lowest exposure to loss and thus paying the lowest rate is Electrical Engineers. Going back to the basic underwriting question, if an Electrical Engineer makes an error, the damage and corresponding fix is usually far less than a foundation issue or an insufficient support beam. There are always exceptions but the claims statistics strongly support this evaluation. Positioned somewhere between Electrical Engineers and Architects sits Mechanical Engineers, Surveyors, and Civil Engineers with Civil Engineers having a rate that most closely resembles that of Architects.
Location of Projects
The location of your practice or more specifically, the location of your projects, does have bearing on the rate that is determined for your firm. Claims statistics show that the probability of a loss on a building in Miami, Florida is much different than a building in Flagstaff, Arizona. There are many theories as to why this is the case, but the statistics clearly show that a higher rate is needed in most major metropolitan areas as opposed to most rural areas. Again, there are exceptions to every rule, but the statistics on this topic are definitive.
Type of Projects
Rate factors in the area of project types, more so than any other, presents the greatest amount of differentiation amongst the various insurance carriers based on their individual statistics and beliefs. Understanding the “sweet spots” of the different carriers and matching your firm’s characteristics with the best markets is the job of your insurance advisor, your broker. As a design professional, you cannot possibly know all of the different markets and specifically which markets best suit your firm.
In general, project types that are seen as the least “risky” in the eyes of the insurance company are those which tend to have less individuality in the design and have less emotional attachment than other project types. This includes projects such as office buildings, banks, retail, and most commercial projects.
Project types that tend to be more of a challenge from a risk perspective are those which are more unique to their individual locations and have a much greater bodily injury exposure than the others. They can also run quite large in scale which increases the physical damage exposure exponentially. These include schools, jails, industrial plants, bridges, parking garages, and stadiums.
Finally, the projects that are considered to be high risk are residential projects, swimming pools, harbors and docks, mines, and amusement parks and zoos. The project type with the highest perceived risk is condominiums. The industry has determined that for every premium dollar received by the carrier for a condominium project, 3.5 dollars goes out. All of these projects either carry a high emotional factor from the end user or have a high inherent catastrophic loss exposure such as a mine or amusement park. It is not the intent of this article to discourage any design firm from performing services on high risk projects but it is prudent to understand the exposures and manage the risk as well as possible.
Internal Risk Management
Your firm’s internal risk management practices provide the best opportunity for you to differentiate your firm and illustrate to the underwriter why you are worthy of their absolute best rate, the rate that is given to the “best in class” type firm. Throughout the application are questions that on the surface seem benign and unimportant but they are there to paint a picture of the firm for the underwriter that goes beyond the discipline and project types.
These questions include, but are not limited to, use of written contracts, limitation of liability provisions, insured sub consultants, types of contracts, in-house education programs, attendance at risk management seminars, and professional society memberships. Individually and collectively these categories allow for the underwriter to apply debits and/or credits based on the responses given. In some cases the difference can be as much as 25%.
The unfortunate reality is that far too few firms are properly advised by their insurance representative as to the effect of these questions and thus do not enjoy the premium reductions associated with them. Again, it pays to be with an expert that knows your business and the ever changing marketplace.
Loss History
The area of risk that is perhaps most quantifiable is loss history. As was mentioned earlier, when a design firm does have a legitimate claim, they tend to be quite expensive. There also is a belief in the underwriting world that past claims are a pretty fair indicator of potential future claims activity. As a result, a firm with claims in their past generally pays a much higher rate than a similar firm with no claims. The industry standard is to look five years into a firm’s past for claims activity but it is not uncommon for a carrier to look ten years back when evaluating a larger firm.
The key for any design firm with a claim is to take the time to effectively articulate the circumstances regarding the claim and the lessons learned. In some cases, given the right approach and documentation, a firm along with its broker, can convince the carrier that it is an even better risk than a firm with no claims because of the experience and knowledge gained from the unfortunate situation.
Setting the price
Underwriters’ thorough review of these and other factors gives them a profile from which to develop a specific rate for your insurance. The rate is applied against your professional fees and a premium is determined. The premium is increased as the limits of liability desired increases. Conversely, the premium is decreased as the deductible that is carried increases.
Summary
Looking through the eyes of an underwriter, design professionals can gain an edge in obtaining the best possible insurance premiums with the use of a thoughtful application submission. However, an application does not speak for itself. As your professional liability insurance broker, we work with you to understand your practice and gather mitigating information on the areas that underwriters perceive as risky. Then, we negotiate with underwriters to favorably characterize your firm and prove the mitigating information to encourage the most competitive premium quotes. Integral to this task is our specialized knowledgeable and complete focus on the A/E industry.
We hope this information has been helpful for you to better understand the process for quoting professional liability insurance for design firms. Our staff is available to consult with you about your firm’s specific insurance needs at 1-800-597-2612. Visit our website at www.hallandcompany.com for more resources and information about our capabilities.

Happy Holidays

CHRISTMAS CARD 2009

Yes, it’s that time of year again! Hall & Company has created another fun and festive card to celebrate the holiday season. We had a lot of fun thinking of a creative way to include all thirty-two of us! (Plus a dog!) You can view the current card and the ones we have done in the past at http://www.hallandcompany.com/xmas2009.php

Managing Professional Fees

There are two things certain in life, death and taxes. However, for the design
professional, there is an additional certainty: If the firm files a lawsuit for fees,
it can often anticipate receiving a countersuit for professional malpractice.
Approximately 40 percent of all claims - two out of every five claims or circumstances
reported - originate from fee disputes. If the client doesn’t pay the fee
for design services, there is most likely a cause for it and the grounds behind it
may vary. A client may be dissatisfied with the service received, or a project’s
price tag may be higher than the client had expected. Maybe there are more
change orders on a project than the client is prepared to pay for, or the client
merely may have run out of funds and is looking to the design professional to
recover some of the expense.
When a client fails or refuses to make a payment, there are several options
design professionals can exercise to obtain payment. A statement of caution,
though: How a design professional responds can set the manner for how the
client responds.
Cease Work Option
A number of professionals make threats to abandon the project if they don’t
collect their fees. If you select this course of action, look ahead to the client to
appoint a replacement designer to complete the project. In all probability, the
design professional can also look forward to being served with a lawsuit or
claim asserting professional negligence. The client may well seek reimbursement
for the replacement design firm’s fees, as well as expenses related to delays,
change orders and other related damages. Issues and claims might also develop
from the use of the original design professional’s plans.
File a Lien or Lawsuit Option
Several design professionals elect to file a lawsuit or place a lien on the client’s property to recover fees. Design
professionals who opt for this course of action can expect the client to file a lawsuit or claim for professional misconduct,
alleging numerous errors or omissions on the project and seeking compensation that often surpass the fees that are due.
Allow the Client to Remedy the Alleged Breach of Contract Option
When design professionals have written contracts with their clients, they may contact the clients, make them aware
that they are in breach of contract and request the clients to work with them to resolve the situation. In these
instances, practical design professionals should discuss with their clients that they are dedicated to the project and
will work with them to work out the options for fee payment, perhaps a payment plan. Pursuing this line of action
will reveal that the design professional is willing to work with the client to put an end to the issue, which could give
way to a better outcome and keep the problem out of court.
What to do Before You Sue
In advance of suing for fees, design professionals must consider the hidden costs in pursuing a fee claim, including
litigation expenses and the time and energy it would take to defend a suit. And given the fact that a design
professional’s fee suit will generally result in a counterclaim for professional negligence, other expenditures may
be involved.
If a professional negligence claim is alleged, it is essential that the design professional alert their professional liability
carrier and place them on notice to defend the claim. The design professional will need to pay any deductible applicable
to the policy to defend or settle the claim, and spend time and legal expenses to defend the claim. This in the future
could affect insurance premiums, as well as take necessary and important time away from business, an indirect cost
that only the design professional themselves can determine.
We hope this information has been helpful for you in understanding a little bit more about professional liability insurance. Feel free to consult our website at www.hallandcompany.com for more resources and information about our capabilities. As brokers specializing in serving A/E firms we are readily available to help you further. We can be reached at 1-800-597-2612.

Hall & Company provides Professional Liability Insurance

Hall & Company provides Professional Liability Insurance to Architects, Engineers and Environmental Consultants. We specialize in the placement of Errors and Omissions Insurance (E&O Insurance) and serve as insurance brokers to several thousand design firms nationwide. In addition to Professional Liability Insurance, we also provide all of the Property Casualty Insurance coverages that Architects and Engineers need.
Our customers are design professionals of all types and sizes; including Land Surveyors, Construction Managers and Design/Build Firms. We insure firms that range in size from one person to firms listed in the ENR 500. We work with a wide variety of insurance companies but also offer a number of professional liability insurance programs that are exclusive to Hall & Company and are not available though any other broker.
Our approach is to meet the insurance needs of design professionals by offering experienced and knowledgeable staff, high-quality and competitively-priced products, and thoughtful, attentive service.

Feel free to consult our website at www.hallandcompany.com for more resources and information about our capabilities. As brokers specializing in serving A/E firms we are readily available to help you further. We can be reached at 1-800-597-2612.
19660 10th Avenue NE
Poulsbo, WA 98370
[P] 360.598.3700 [F] 360.598.3703
www.hallandcompany.com
HALL & COMPANY