Most of us have read the newspaper articles about the toll medical malpractice claims and rising insurance costs are taking on the medical profession, and the strident attempts at tort reform being made by legislatures at the national and state levels to counteract the problem.
While architects and building contractors may not be packing up their offices and abandoning states or entire regions yet, the crisis in professional liability insurance in the building trades is reaching serious proportions according to some. That crisis may be leading some in the industry to reconsider their way of doing business.
While many firms have realigned their risk management practices since the hard market of the '80s, certain lines of business have always been more problematic for architects, engineers and general building contractors to get into. The problem is those projects, especially notoriously litigious condominium developments, are always the ones that seem to pick up as the economy heats up, and the hard market starts to turn.
At the same time, many of the insurers still in the industry have stopped offering some of the more advantageous products, such as project policies and wrap-up insurance, which sometimes made larger projects such as public works more enticing.
TEA PARTY IN BOSTON HARBOR
While lots of architectural projects are always ongoing at any one time across the country, a large one in Boston may have appeared on insurers' radar screens in recent times.
"The 'Big Dig' is one of the largest civil projects in the country, historically. No one's ever come close to it," says Michael Hicks, a principal with Domenech Hicks Krockmalnic in Boston. "Back in the 1950s, they built an elevated highway in Boston. Now they've demolished the elevated roadway and built a very expensive tunnel system instead, cutting across the harbor to connect the turnpike and the airport."
The Big Dig is functioning and 95 percent complete, explains Hicks, whose firm worked on one of tunnels running under Boston Harbor. "We installed all the road services, lighting and signage. Our piece was finished relatively cleanly several years ago," he says.
Other contractors weren't so lucky, however, Hicks says. "One of the southbound tunnel sections is still not complete. Everybody would accept that such a project at the water's edge is bound to uncover a lot of unanticipated conditions, but because it's a public client, the Big Dig is so big it gets front page coverage in the largest periodical for the industry, the Engineering News Record, which comes out weekly. They hired a retired judge to oversee a cost-recovery project looking to recover over $200 million. There have already been some multimillion-dollar settlements reached with one of the parties," he says.
Although Domenech Hicks was lucky to get out of the project unscathed, that didn't stop the firm, with billings of $4 million or $5 million per year, from seeing their premiums double in February 2004.
Mike Herlihy, a risk manager with consultant firm Ames and Gough, agreed that rates have been increasing between 20 percent and 30 percent a year for two or three years, but says that the Big Dig is not the only reason. In fact, a global policy taken out on the Big Dig in 1993 may have mitigated its effects somewhat. But the policy would not affect claims made today, he says.
MUST I GO BARE?
Eric Singer, a litigation attorney with Wildman Harrold Allen & Dixon LLP, in Chicago, says that the hard market is certainly taking a toll on many firms. "Insurance rates have gone up very dramatically, by as much as 40 percent a year," he says. "And you used to be able to get full retroactive coverage, but you can't do that anymore."
Singer says the unavailability of project policies was proving to be a real hardship for some. "Some insurers got into project policies early on, but the only ones I see now are school projects, where the owners are willing to foot the bill. They're more expensive, and the experience in some markets was that they became a piggy-bank for the owner," he says.
Project policies were useful because contractors could band together on projects where the risk was out of proportion to the fee.
Wrap-up policies, which are similar, include other coverage such as workers' comp, difference in site conditions, and architect and engineer professional liability policies. "Zurich wrap-up policies even include a product called Sub-guard, which covers mechanics' liens and works like a surety bond," Singer says.
Hence, the hard market has driven some firms to handle more residential developments. "There are firms that have become pariahs to underwriters. If a one- or two-person firm has paid out a lot, and insurance is 50 percent of your income for a year, some smaller firms close their doors and go to work for other people. One of the most common questions I answer is, 'How do I protect my assets if I'm going to go bare?' That's intensely crazy if it means you can't sleep at night. Yet there are people who do it."
Other firms find setting up multiple corporations provides a creative solution to the problem.
"Some are setting up separate firms, one to do one kind of work, one for another. You don't really want the risk of one company to affect your entire line of business," Singer says.
THE WHIRLPOOL SUBSIDES
Provided that many smaller firms in the building trades may have to find other solutions such as offshore captives, however, the changes may not be as drastic as those experienced within the insurance industry itself. Some insurers, like Royal & Sun Alliance, decided to get out of the North American market completely and divested more than just their professional liability lines. Design Professionals Insurance Co., another longstanding insurer, was bought by XL. And Reliance went bankrupt.
"A couple of significant carriers have failed in recent years, but Reliance and Legion are the most recent. Legion carried architects, engineers, landscape architects, and they left a number of professionals uninsured, who [then] had to look to the state recovery funds," says Singer, who advised firms to watch insurers' ratings closely. "The difference between a B+++ and a A- is very significant, because many have contracts that require them to maintain an A rating, especially on public projects jobs."
The result is that many firms are finding it more difficult to find products which used to make life a lot easier for them, at least for the time being. "There were multiyear policies, where every year we had the option of renewing for another three years or staying with that policy," says Jim Atkins, a principal with HKS Architects in Dallas, who added that CNA was recently offering two-year policies to smaller firms on a limited basis. "Back during the sweet days, some insurers offered aggregate deductibles; when you'd have two or three claims reach a certain level, then you don't have to pay anymore. But those disappeared, and they were not available when we talked."
And of course, the offerings of project policies are not what they once were. "In the late '90s though 2000, they were writing a lot of them," Atkins says. "We've seen that market recede quite a bit, but our present insurer, Lexington, writes more project policies than anybody, including some for us," he says. "I believe in insurance, whether it's a project or practice policies; as long as you're covered, that's the main thing."
JOHN OTROMPKE is a Chicago-based freelance writer.
April 15, 2005
Copyright 2005© LRP Publications