Which came first; the economy's improvement or the construction industry's improvement? This quandary is similar to the chicken and the egg debate. The good news is that both are improving and moving forward.
Architects and engineers are in demand for new construction as well as for retrofitting and rehabilitating buildings. The construction industry needs are changing because of technological demands and increased interest in sustainability. A number of insurance companies are entering the architect and engineer's professional marketplace to meet these and other coverage demands. However, insurance agents should be cautious because coverage forms are not identical and the long-tail nature of this coverage requires companies that are financially stable and that have a solid history in the construction industry.
Pent-up demand for apartments is driving the construction industry forward. This demand provides strong growth for many contractors and encourages workers to return. It is also encouraging more insurance carriers to enter the marketplace. However, insurance agents must be very careful if they compare premiums without examining the various exclusions that can result in serious gaps in coverage.
SPECIALIZATION, UNDERSTANDING DRIVE A&E INSURANCE SUCCESS
Agents need to be prepared with risk management advice
By Dave Willis
The architects and engineers business may not be where it was a decade ago, but it's seen a marked improvement over where it's been over the past few years. And that spells opportunity for insurance agents and brokers who understand and want to serve the business.
"The overall state of the economy and a slight uptick in construction activity points to business growing for architects and engineers," says Scott Barry, president of Intercorp, Inc. "It may not be rapid growth, but at least things are headed in the right direction."
Katherine Dimit, vice president, architects & engineers at The Hanover Insurance Group, concurs. "Architects and engineers are generally enjoying increased revenues from the slight economic upswing and construction growth," she explains. "Continued pressure for sustainable design and technology will be among the main challenges for these professionals, now and in the future."
Dan Buelow, managing director of Willis A&E, notes that many firms have yet to fully recover from the economic downturn. "They're not back from what was an average decline of nearly 50% in both revenue and staffing," he explains. "As they come back, firms continue to grapple with the challenges they've always faced in the areas of managing client expectations."
In addition, they're dealing with changes in the design industry. "Some of the more recent changes are in the area of project delivery," he explains. "More firms are involved in or asked to consider design-build, integrated project delivery and now P3s-Public-Private Partnerships." Design-build involves projects where design and construction services are contracted by a single entity. Integrated project delivery is similar to that but features greater collaboration with the project owner.
"In addition," Buelow says, "the standard of care continues to evolve and be challenged as more firms gain proficiency in what's known as building information modeling and as demand for sustainable and innovative projects increases." The National Building Information Model Standard Project Committee defines building information modeling as "a digital representation of physical and functional characteristics of a facility" and "a shared knowledge resource for information about a facility, forming a reliable basis for decisions during its life-cycle."
Assessing the insurance market
As architects and engineers regain their financial footing, insurers are eager to write the business. "The insurance marketplace for architects and engineers continues to be highly competitive," explains Mitch Sellett, CEO at AEIC. "There is an ample supply of both established carriers and new capacity."
Barry agrees that the market is competitive noting that there are "a number of carriers supporting this class of business and several new entrants have entered the marketplace in the past year."
According to Buelow, "The marketplace for architects and engineers professional liability, which covers the design firm's greatest exposure, continues to be one of the softest of all professional liability markets. While dozens of carriers have recently entered the niche, due to the perceived attractiveness of long-tail business, many are unproven and simply cannot offer the level of stability and program quality as the handful of markets that have been committed to the design community for many years."
The result, he says, has been "disparity in both coverage terms and claims handling among A&E carriers. In addition, while markets continue to enter into the marketplace, it is our belief that pricing levels are at or below levels that can be sustained without further erosion of the quality and support most A&E firms value from their insurance carrier."
Barry points out that, while some carriers are expanding their A&E classes, a few hard-to-place areas exist within the A&E segment. "Most notable among these are firms doing more than a small percentage of geo-tech work," he explains. The firm also had recent difficulty finding a market for a consulting engineer supervising a proposed project to install power lines under a body of water between the U.S. and Canada. "Other than that, competition remains strong for A&E firms of all sizes," he says.
He says several carriers are adding cyber liability or other technology-related endorsements to their policies. "This is important as the business of designing and engineering continually becomes more and more digital," he adds.
According to Dimit, the market continues to provide what she calls, "many good options for informed buyers. These buyers understand the importance of selecting the right carrier and agent partners. And they consider breadth of coverage, expert claims handling, payment terms and free value-added services, such as continuing education offerings, webinars/seminars, and contract review services, in addition to the premium."
Understanding loss drivers
A number of factors lead to losses in the architects and engineers sector. Buelow says most A&E professional liability claim dollars are spent on claims due to economic loss. "However, some A&E disciplines and some project types have a heightened exposure to BI or PD claims," he explains.
"It's also important to note that most claims against design firms are due to unmet expectations," he adds. "In fact, the vast majority of claims aren't due to technical error but rather are rooted in four 'non-technical' areas: contract negotiation; client selection; project team capabilities; and communication/documentation."
Dimit sees similar claim drivers. She says, "These include poor communication and not setting client expectations; accepting projects for which the firm has no experience or expertise; poor bidding and contracting processes in place; hiring uninsured sub-consultants, thereby assuming their vicarious liability; and accepting client-offered professional services contracts that may be inappropriate and uninsurable."
"Setting aside a hyperactive plaintiff's bar, most claims originate in the bidding process," explains Sellett. "Owners engage the lowest-bid contractor, who then, through change orders and cost overruns, implicates the designers' work product as a means to bridge the gap between a properly bid project and the bid required to get the work."
Sellett adds, "The best protection is for the designer to be actively engaged with the owner during the bid process, in an attempt to engage contractors with a track record of delivering similar projects on time and within budget."
Covering defense costs also is an issue clients need to consider. "While the primary cause of a loss or claim may be an alleged design flaw or omission of a critical element, the cost of defense often makes up the biggest element of a claim's cost," says Barry. "One of the major A&E carriers indicates that more than half of an A&E claim's total cost is generally attributed to defense."
He says this reinforces the need for appropriate coverage. "That's especially important for smaller firms that do not have the resources available to mount an expensive defense absent a good insurance policy," he notes.
According to Dimit, "Insureds often are very busy and don't have a great deal of time to respond to claim-related issues. An independent agent can truly provide value by alerting them to and reducing the risk of common claim drivers." Buelow adds, "Agents can help their A&E clients by being proactive and providing on-going education and risk management support to address each of the potential problem areas."
Agents and brokers also need to help clients avoid mistakes when it comes to adequate insurance protection. "Market conditions tempt designers-often encouraged by their agents or brokers-to view price as the driving consideration when purchasing coverage," explains Sellett. "This has the effect of perpetuating an overly competitive market that is writing coverage at unsustainable prices." He warns that firms that engage in this type of insurance buying strategy will be hardest hit when the market returns to equilibrium.
"One mistake some of the smaller firms make is to go bare, because they think they don't need it or can't afford it," says Barry. "In addition, failing to thoroughly read and understand proposed contracts is another area of concern. Some insureds simply hand the contract to their insurance agent and ask them to make sure they are covered for whatever the client is asking for, when the requests might be unreasonable and sometimes even unavailable."
According to Sellett, "Brokers need to be willing to educate their clients on characteristics of carriers other than price, including loss preventions services and claims management expertise. This will help to de-commoditize the product, increasing the length of the designer/carrier relationship." A benefit to brokers willing to resist the temptation of selling only on price is a more stable book of business, he adds.
"Even though professional liability insurance is generally an architect and engineer firm's largest expense, too often management is unengaged in the process," explains Dimit. "They leave detail gathering and decisions to lower level personnel.
"Architect and engineering firms may end up ineligible for preferred carrier programs because they cannot produce their own valid claims history or are unwilling to complete a long-form application required for top flight policies," she adds. "The best architects and engineers work with an experienced independent agent or broker to select a specialist carrier and take the time to provide underwriting information required to achieve the best results."
Buelow says, "Because of the complexities and nuances of A&E PL claims made coverage and due to the different levels of exposures, design firms can face which can vary by project type, client type, discipline, project delivery, and other factors. The importance of working with a broker that specializes in this niche cannot be overstated."
Adds Dimit, "Specialist independent agents and carriers offer a variety of value-added services intended to guide and educate architects and engineers through the project and contract process. In addition, the best carriers offer expert claims handling. Take advantage of free risk management offerings and contract review services to mitigate or avoid claims."
Building a book
"To effectively compete in this space, you must be a specialist," says Buelow. "You will need to be able to assess a given design firm's exposures, tailor the appropriate coverage and place it with the best carrier. In addition, you will need to provide on-going risk management support and advice, including contract review and education on how they can mitigate and reduce their exposure to claims. Lastly, you will want to be able to provide your A&E clients with claims support and to advocate on their behalf."
Dimit encourages agents and brokers to seek out experts in the class. "Team up with a specialized carrier that offers great products and value-added services, such as a focus on risk management, continuing education and contract review services," she explains.
"We see the best agents getting involved in the industry by becoming a member of the American Institute of Architects, the National Society of Professional Engineers, or another national or local professional trade association, to stay on top of industry trends," she adds, noting that agents also can further their education and consider obtaining an RPLU (Registered Professional Liability Underwriter) professional designation.
Barry offers a handful of tips for agents and brokers looking to grow and keep a solid book of A&E business: "Understand your client's business. Provide complete submissions. And allow adequate time for an underwriter to do a thorough job of preparing a good proposal."
He adds, "Know and understand policy forms and terms, and be able to point out differences and options to your clients. Also, provide coverage comparisons where needed, so your insured can make an informed decision.
"That is the value a good agent or broker brings to the table," Barry concludes.
Stronger economy drives contractor insurance opportunities
By Dave Willis
In general, construction activity is up from its lows of several years ago. According to Tom Murphy, RPLU, ASLI, vice president at Quaker Special Risk, "The environment for most contractors is much more robust now than it has been in several years. More than 65% of the major metropolitan areas of the United States have seen construction employment rise considerably." But growth is not necessarily broad-based. And not every market is the same.
According to Casey Evans, CIC, area vice president/casualty broker at Risk Placement Services, "Following the recession of 2008, it appears the multi-family housing market is trying to play catch-up, perhaps responding to a pent-up demand from renters that need a place to live."
He says apartment project work is strong in the Southeast, Texas, Colorado and the West Coast, as are condos in California-especially in the more dense urban areas like San Francisco, and, also most recently, in Florida, which has seen substantial foreign investment.
Scope has changed, though. "Before the recession, most multi-family projects we saw were 40-plus-story buildings," Evans says. "Now, most top out at seven or eight stories. Projects are smaller but more plentiful."
Pre-recession projects typically were flat concrete slabs with vertical stick construction all the way up, he says. "Now, we consistently see concrete podium floors for the first couple of levels, which are typically parking garages/amenities/shopping, and then four or five levels of stick framing above," Evans adds.
"Single-family new home starts and remodeling projects are not up by as much as multi-family," says Murphy. "Severe winter weather may have had an effect on those numbers. With warmer temperatures, better consumer confidence, increasing equity and more lenient credit, we see home improvement projects starting to take off for many paper general contractors."
Colleen Parmelee, CIC, CRM, commercial lines territory manager at Harleysville Insurance, says that the bulk of larger construction contracts go to the very large contractors-those with more than $100 million of annual volume. "Bonding has become more difficult to secure, and more stringent insurance requirements set forth by property owners and general contractors only create more difficulty for today's contractors," she explains.
"Many larger projects are bringing on construction managers to help manage projects from pre-construction planning through completion," says Murphy. "These individuals are brought in on projects ranging from power-and energy-related to large apartment projects to retail and office buildings. Work backlogs are no longer uncommon."
According to Maureen Caviston, president of Partners Specialty Group, infrastructure contractors are doing well. "Depending on where you are, there's a lot of work out there with power lines and other energy projects, water and sewer systems, bridges, and streets and roads," she says.
Even with increased work, the construction business is quite competitive. "We're still seeing more bidders on jobs than there used to be," explains Parmelee. 'This affects the bottom line of the contractors being awarded the jobs." This has led some contractors to branch out to new geographic areas or take on work in which they may not have expertise, she adds. "When this happens, sometimes they act as general contractors, subbing out the work."
Robert Ivey, vice president, construction, for McKee Risk Management, has seen similar growth in the use of subcontractors. "Overall, we have seen an increase in business for our insureds," he explains. "As a result, finances are improving. Following the recession, contractors reduced payrolls significantly and sold equipment. Now, contractors are increasing the amount of work being subcontracted out rather than increasing payrolls."
According to Tim Cappellett, vice president of sales and marketing at Oryx Insurance Brokerage, "Business conditions remain competitive, with consistent regulatory and legal environment challenges. An agent told me that having a good reputation for performance and payment history doesn't carry the same leverage it did years ago. Now you need to be able to meet minority sub requirements and, at times, be able to meet onerous labor agreements."
Rick Keegan, president of Travelers Construction, points to a continuous evolution within the industry. "New and innovative building technologies, a changing workforce and legislation governing contractual risk transfer issues are just a few examples of changes contractors face," he explains.
"With all the change, and in turn challenges, we hear loud and clear from our contractors that their biggest concern right now is finding skilled labor," Keegan adds. "Many craftsmen have retired or left the industry, so as volume picks up there is a huge need to replace those workers."
Murphy sees this as a significant challenge, too. "A decrease in funding for technical education programs and more baby boomers retiring from the construction industry are squeezing the supply of qualified employees and subcontractors," he explains. "Many of the long-absent experienced construction laborers were hired back and they are now being re-trained."
Adds Keegan, "Our customers are more frequently asking us to help them improve or refresh their hiring and training programs with pre-hiring, safety orientation, equipment operation, defensive driving, mentoring programs and more."
In general, the insurance marketplace for construction firms is stable and competitive. "The casualty insurance marketplace for construction firms has been relatively stable from a rate perspective over the past 12 months," says Evans.
"Quite a lot of capacity exists," adds Murphy. "Regional and national carriers alike remain committed to the construction industry." Ivey sees competition increasing. "New carriers are entering the market, specifically targeting contractors," he explains. He says workers comp for contractors is an exception and is generally less competitive.
Type of work performed affects market dynamics. "For specialized trade contractors like plumbers, HVAC contractors and electricians, the market has softened some over the past year, with more markets competitively pricing their insurance programs," explains Parmelee. "Contractors in more hazardous trades, like steel erectors or roofers, still are experiencing a very hard market, with limited direct markets and firm pricing."
Geography affects the market, too. Murphy says, "Some states pose problems for carriers, as the legal environment may be very difficult." According to Caviston, "With the exception of residential construction in some of the tougher states, standard markets are, by and large, writing the primary coverage for many contractors, with wholesalers operating more in the excess arena."
California is one of those tougher residential construction states. "There still is concern about construction defects, so those are generally placed on a wrap-up basis," Caviston says. "An artisan contractor that does roofing and those working on areas where there could be water intrusion, such as grading and excavation, are more challenging to write. And builders risk for wood frame construction is tough in California because of wildfires."
In New York City, Caviston says, markets are available for many risks. "Most difficult to place these days are exterior masonry and scaffolding classes, because they are working from heights and the claims driver is falls from heights," she says. "Concrete contractors pouring foundations for structures over four stories high also are challenging there, as are start-up contractors, because they may lack a solid track record. Agents need a good submission to demonstrate the past experience of the individual or individuals leading the firm."
On a national level, she notes, infrastructure contractors require some significant limits. "Depending on the number of vehicles they have and the number of heavy vehicles, placing umbrellas can be more challenging for them," Caviston explains.
Apartment construction defect losses have emerged as an issue in some states. "A developer can come back after the contractors for a construction defect group claim," she says. "In the past, that was generally isolated to condo owners going after the contractors for faulty construction."
Cappellett says, "Many insurance companies we work with have taken predictive modeling to the next level, incorporating class-and/or region-specific analysis into their underwriting. That's something that we, as an MGA, have done since day one."
One of the more significant issues affecting loss costs is the impact of escalating medical expenses. "These are driven by many factors, including changing population demographics, rising cost of prescription drugs, and higher utilization of expensive medical procedures," explains Keegan. The recently released Travelers Business Risk Index shows that medical cost inflation was the second biggest concern among more than 100 construction industry decision-makers surveyed.
Keegan says carriers and agents that can help customers prevent claims in the first place and mitigate the impact of those that do occur should be able to offer the most cost-effective programs, as these issues continue to impact the industry.
Evans is seeing signs of carriers pushing for higher rates. "This is especially true on the higher hazard trade contractors," he explains. "The casualty market for new residential contracting has been dominated by the use of general liability-only wrap-ups. This means a subcontractor typically need not worry about paying extra premium to get new residential coverage on their policies, since they'll likely only bid new residential jobs when a wrap-up is being used."
Even in a competitive marketplace, construction clients sometimes end up with coverage gaps-for any of a number of reasons. "As carriers attempt to limit their exposure through various exclusions and limitations, coverage gaps can occur," explains Murphy. "Agents that can navigate through the coverage forms and options and explain them clearly to contractors have the most success retaining a book and attracting referrals."
Some contractors' focus on cost is leading them to forgo certain coverages. "In New York, for example, a number of the smaller trades still purchase based on price, not necessarily on coverage," explains Caviston. "That's definitely a challenge, because some carriers there attach a height limitation, which could restrict the contractor from bidding jobs."
She says some of these under-protected contractors still bid for jobs. "They take a chance," she adds. "Retail agents and brokers also take a chance if they go along with that. But it's happening."
Evans has seen owners and general contractors fail to purchase adequate limits under a wrap-up policy. "I have had a number of requests lately for excess wrap coverage in the name of the general contractor or the subcontractors, only to give those general contractors and subs what they view as the proper amount of excess coverage on a job," he explains.
According to Ivey, "The differing applications of Kvaerner, as well as the availability of primary and non-contributory coverage on the general liability and umbrella, can present coverage issues for contractors." Kvaerner refers to a Pennsylvania Supreme Court decision that said faulty workmanship could never qualify as an 'occurrence,' as required under a commercial general liability policy.
He says these coverages are becoming common requirements when bidding for jobs. "In addition," Ivey notes, "many Department of Transportation contracts are requiring higher primary and excess limits on general liability policies."
Contractors also are neglecting other exposures. "A few recent high-profile hacking cases have raised awareness of the potential need for cyber liability insurance," says Keegan. At the same time, other construction firms are filling some gaps. "There seem to be more requests for professional liability and pollution liability policies from contractors," he notes. "Many of our customers are seeking to increase their umbrella limits, too."
Building a solid business
Agents and brokers looking to grow their contractor business have several options. "Smaller trade contractors obviously are easier clients to take on, as they will have less certificate activity and the agent or broker will have far more market choices," says Parmelee. "Contractors working in more rural areas or those working directly for homeowners will have less need for coverages and endorsements outside the standard policy, thus making them easier to service."
On the other hand, she says, "Agents and brokers who are larger and have in-house loss control or claims departments, and who have dedicated staff to handle certificates, obviously are better equipped to handle larger contractors. They probably possess the expertise needed to handle the more complex coverage needs and the time required to deal with these issues."
"Street and road contractors and infrastructure contractors are ideal prospects," says Ivey, "as there are minimal height exposures and they receive governmental funding for their jobs. Aging bridges in the Northeast-especially Pennsylvania, where more than 63,000 bridges are slated for rehabilitation-contribute to the significant amount of work available to these types of construction firms."
Cappellett suggests agents and brokers consider targeting contractors in the excavation, oil and gas installation, environmental and commercial trade arenas, as well as specialty contractors doing site work and street and road projects. "Most of these include well-funded public projects that require contractors with a consistent track record, credit mods and the ability to complete projects on-time," he explains.
Caviston encourages agents to explore opportunities in the energy sector and with environmental and remediation contractors. "There are fewer markets for contractors that do remediation in the environmental space, so we're seeing more opportunities there," she explains.
She also recommends targeting apartment and condo projects in New York City. "The economy is pretty strong and we're seeing a lot of projects for the high-end buyer, which present great opportunities for retailers," Caviston says. "They're buying coverage based on project policies that cover all of the contractors on a single policy for the length of the project."
"The biggest portion of my construction book is focused on wrap-up policies," Evans says. "So from a wholesale broker's perspective, if you want to be a big player in the construction marketplace and aren't doing wrap-ups right now, you are missing the boat."
Keegan offers some universal counsel: "Contractors who take an active approach to risk management and value construction expertise are attractive clients. A good strategy for agents and brokers is to establish a relationship with a carrier that has demonstrated a long-term commitment to the construction industry. Then, work closely with them for leads on the types of contractors with whom they've been successful."
He says this also is a great way to build knowledge about the industry for those producers who are new to the business.
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.