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The market for architects and engineers professional liability coverage has remained largely stable in recent years as other lines have seen price hikes and capacity constraints, but some projects and structures can still be challenging to insure.
Major construction projects and condominiums can present particularly thorny challenges, experts say. The longevity of large projects deters many insurers, and the ownership structure, population densities and nonprofessional management boards of condos raise concerns.
This is reflected in lawsuits filed concerning issues at certain high-profile projects and events connected to design or engineering failures. Demands for actions such as inspections and enhanced oversight have also increased (see related story below).
For most architects and engineers, capacity is available, and pricing of errors and omissions coverage is seeing only minor fluctuations.
“Firms are having their needs met, owners are having their needs met from an insurance standpoint,” said Doug Strong, Exton, Pennsylvania-based chief underwriting officer, design professional, for Axa XL, a unit of Axa SA.
Jeffrey Coe, Atlanta-based U.S. architect, engineer, contractor professional liability leader for Marsh, said there are about 60 insurers providing coverage for architects and engineers. “That’s great from a capacity standpoint,” he said, adding that renewals have largely ranged from flat to single-digit increases on loss-free accounts.
Typically, architectural and engineering firms buy a practice policy that covers all projects they work on over a year, he said.
For larger jobs, though, such as multiyear infrastructure projects, design firms are often required to buy a project policy with dedicated limits specific to the project. This sector of the market is “very, very challenged,” Mr. Coe said.
“You’re basically asking an insurance company to put a number on a project that would run sometimes as long as 10, 15, even 20 years,” he said.
“Only limited markets are capable of deploying project-specific excess limits over their own primary coverage,” said Ros Bayley, Addison, Texas-based technical underwriting leader for architects and engineers at Hiscox USA.
E&O coverage for condo projects also poses its own challenges, sources said.
While a commercial structure, such as a warehouse, is likely to have a single owner, a condominium may have tens or hundreds of individual owners.
In addition, while commercial structures are more likely to have a professional manager or management company, condos are often run by member-staffed boards, which may not be as qualified as a professional manager to address engineering and other issues.
Mr. Strong of Axa XL noted that condominiums have a “high density of individual living units within a structure, so any type of litigation can involve multiple plaintiffs and multiple claims,” which can increase the frequency and severity of losses.
“You have a huge amount of tenants in the building,” said Joey Franiak, San Diego-based broker, professional liability for Burns & Wilcox Ltd. This can lead to “class action suits from the tenants coming against the architectural firm, the engineering firm, things of that nature.”
Condo maintenance also can be different than that of other commercial properties.
“Developers or commercial landlords typically have an asset manager or somebody who’s in charge of developing a maintenance budget paying attention to these things,” said Caley Larue, Chicago-based co-national director, real estate and hospitality practice, at Arthur J. Gallagher & Co. “Sometimes a condominium association is made up of the owners,” potentially leading to a situation in which needed repairs are not made.
E&O-related lawsuits may also be driven by owners’ attachment to their homes, he said.
“That emotional aspect can really drive litigation. ... People don’t get as upset when something goes wrong in a warehouse as they do when it’s their home.”
Owners of high-end condos can have different assumptions about their properties.
“In addition to technical design difficulties, many of the new supertalls are high-end residential facilities whose owners have an expectation of perfection and convenience,” said Rob Cunningham, New York-based head of U.S. professional liability for Aspen Insurance Holdings Ltd.
“The residents have the means and wherewithal to initiate claims against those involved with the construction of the building, including architects and engineers.”
New York City’s 432 Park Avenue, part of the city’s growing “Billionaire’s Row,” has been plagued by myriad suits resulting from water damage, structural issues and alleged design flaws.
When lawsuits do arise, sources said “social inflation,” or rising court awards and settlements, is changing the environment.
“Social inflation and the proliferation of nuclear verdicts are certainly among the two most concerning factors,” Mr. Cunningham said. “One trend with nuclear verdicts is the increase in bodily injury claims and payouts, many of which are primarily concentrated in a select number of states like California, Florida, Illinois, New York and Pennsylvania.”
“The market has seen an increase in frequency as well as the value of claim demands, as claimants strive to capture as much available limit as possible,” Ms. Bayley said.
Mr. Franiak said cases are also taking longer to close due to backlogs in the courts, driving higher defense costs and raising overall settlements and awards.
“Everything related to the resolution process is more expensive,” including defense, expert witnesses and travel, Mr. Strong said.
Major construction losses, such as the June 2021 collapse of Champlain Towers South, a 12-story beachfront condominium in Surfside, Florida, have led to changes in practices such as inspections and oversight.
“Following the Surfside condo collapse, some governmental and ownership entities required forensic evaluations of existing structures ... so we’ve seen an increase in requests to engage in forensic evaluations of existing structures,” said Doug Strong, Exton, Pennsylvania-based chief underwriting officer, design professional, for Axa XL, a unit of Axa SA.
The deadly collapse was the catalyst for the Florida legislature’s passing a law mandating statewide structural inspections for aging condominiums and cooperatives.
“The purpose of this legislation is to enforce building owners and homeowners associations to protect the structural integrity of buildings through proper maintenance and monitoring, to ensure the safety of the public,” said Rob Cunningham, New York-based head of U.S. professional liability for Aspen Insurance Holdings Ltd.
Caley Larue, Chicago-based co-national director, real estate and hospitality practice, at Arthur J. Gallagher & Co., said the Surfside incident likely had an effect in Florida coastal communities from a risk management perspective.
“Are we inspecting our buildings and paying attention to the things that could have made the situation a bit less likely? Are they being looked at closer? Yes,” he said.