Soft market conditions drive growth in product and service offerings
It’s a whole new era for professionals in accounting, architecture, engineering, law, medicine, and other specialized fields. Long gone are the days when professional credentials automatically conferred respect and inspired deference. Today professional status is more likely to draw a demanding level of scrutiny.
“The relationship dynamic between professional service providers and their clients has been shifting, and it seems to have accelerated recently,” says Matt Probolus, errors and omissions portfolio manager for Travelers. “In the past, it might have been professional but friendly. Now it’s more of an arm’s-length transaction, and you no longer have the same level of customer and client loyalties.
“My advice to agents and brokers is to work with an underwriter with a track record of delivering timely solutions. Evaluate your carriers based on their financial strength, their commitment to support your business, and the additional services they provide.”
Divisional Vice President, Professional Liability
Great American Insurance Group
“The standard of care for professionals is very high,” he continues. “There’s no room for error, there’s no such thing as an honest mistake anymore, and our professional clients can’t rely on a handshake or a 15- to 20-year relationship. A professional-client relationship is only as strong as your most recent interaction.”
For that reason, Probolus says, it is all the more important for professionals to rigorously review their contracts and engagement letters to ensure that the duties, deadlines, and expectations of all parties are clearly stated and understood.
The growing scrutiny of professional conduct extends beyond compensated work into personal exposure for volunteer activities.
“High-net-worth individuals are frequently asked to participate on nonprofit boards,” says Lisa Lindsay, executive director of the Private Risk Management Association (PRMA), an organization whose members specialize in risk management for affluent individuals. “Many do so without thinking twice and performing due diligence. However, service on nonprofit boards can pose great personal risk.”
For that reason, Lindsay urges agents and brokers to advise clients to exercise the same level of care in accepting a volunteer engagement as a compensated one. Among other things, PRMA recommends that prospective board members carefully review several factors:
- The organization’s mission
- Its governance structure at all levels
- The role and expectations of directors who are company officers
- The experience and qualifications of outside directors
- Its directors and officers liability indemnification and insurance policies
- Any claims made against the organization and/or its directors and/or officers
Traditional errors and omissions exposures for professionals are further complicated by the growth of new kinds of exposures, particularly in the area of cyber liability, where professionals face a rapidly growing risk of liability for breaches of their clients’ highly sensitive personal or proprietary information.
In a 2017 report on professional liability insurance, A.M. Best states that “the [errors and omissions] marketplace is still trying to get its arms around the impact of large data and privacy-related losses afflicting the retail and health sectors, along with other technology losses that have breached the six-figure threshold.”
Substantial exposure to cyber risk has led some professional liability insurers to steer clear of the retail, health, and financial institution sectors, the company adds.
Cyber-related risks loom large in Marsh’s 2017 report on the top 10 trends in financial and professional liability insurance. “[In] 2017, financial companies will increasingly see exposures that were historically the domain of the technology industry, [while] technology companies will continue to move into highly regulated areas that they may be unfamiliar with,” the report reads.
Business interruption caused by a cyber loss is a first-party exposure with potential liability implications. “Organizations are increasingly considering the threat of business interruption as a result of a security breach,” Marsh reports. “Risk professionals will need to address evolving cyber risks across multiple platforms, as the business interruption may be caused by both physical and nonphysical perils.”
In response, professionals are seeking more cyber coverage in their liability policies, and insurers are providing it.
Cyber threats were number one on a list of top trends in professional liability exposures for attorneys published in 2017 by the Argo Group, which has added third-party cyber liability coverage to its lawyers professional liability policy.
“As new risks emerge, such as ‘social engineering’ claims, firms are considering more insurance products to transfer these risks,” says David Blue, divisional vice president within Great American Insurance Group’s Professional Liability Division. “Social engineering” refers to sophisticated frauds wherein cyber-criminals impersonate the online identity of an individual to induce someone to voluntarily provide information.
In response, Blue says Great American’s Professional Liability Division has added supplemental coverages to its policy for design professionals, including insurance for extra expenses incurred in the wake of a security breach or public relations crisis, service as a director or officer of a nonprofit organization, and other exposures. “This competition and expansion of coverage ultimately benefit the insurance buyer, especially smaller firms that may not have contemplated these risks,” he says.
Sandip Chandarana, a specialist in insurance for architects and engineers, concurs with that observation, but with a different emphasis. “There is no doubt that new exposures are creating a need for new types of insurance,” particularly for cyber exposures and aerial drones, says Chandarana, who is director of the Professional Underwriters Agency of NSM Insurance Group.
“However, professional liability is still king when it comes to professionals,” he continues. “Not only is it the most expensive insurance in a professional’s portfolio, it also provides them with protection for their largest source of liability. Most professionals would not be able to get work without it.” Apparently, some can’t even get work with it.
According to Chandarana, project owners are requiring ever higher professional liability limits for design professionals who contract with them.
“We might see a small architect with $500,000 in billings required to carry a $10 million limit for a project,” he says. Although there is capacity in the line for insurers to provide such limits on a primary and/or excess basis, “carriers are hesitant to provide them if the scope of work and billings are not proportional to the limit requirement.”
For this and other reasons, Chandarana recommends that design professionals seek stand-alone policies for cyber liability and other exposures, so they will have more comprehensive coverage for those risks and avoid the dilution of their professional liability limits. In this case, he notes, many architects and engineers are forced to pass up jobs they are otherwise capable of executing.
There certainly seems to be plenty of financial capacity to support expansion and innovation in professional liability insurance.
In words that could apply to every segment of the market, Chandarana characterizes the market for architects and engineers coverage as “ultra soft, with too much capacity available. The large number of available markets is driving pricing down to unsustainable levels,” he says. “We’re seeing a lot of irresponsible underwriting to sustain market share.”
Blue at Great American agrees. “The current professional liability marketplace is extremely competitive,” he says. “There are a lot of choices for placing a risk. My advice to agents and brokers is to work with an underwriter with a track record of delivering timely solutions. Evaluate your carriers based on their financial strength, their commitment to support your business, and the additional services they provide.”
“There’s no shortage of outlets that cover exposures and losses,” says Probolus at Travelers. “With that comes buying pressure, and hard decisions on how much insurance to buy.
“The span of products out there makes for a challenging purchase decision, and a good agent or broker can help with the assessment,” he adds. “Many clients find that the purchase of insurance gives them access to experts who will help them through what will likely be a traumatic and time-consuming event.”
For more information:
Great American Insurance Group
Private Risk Management Association
Professional Underwriters Agency
Joseph S. Harrington, CPCU, is an independent business writer who specializes in property and casualty insurance coverages and operations. For 21 years Joe was communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.