Social inflation has been a hot topic across the insurance industry over the last few years as claims frequency and severity continue to increase across nearly every line of business.
While some lines, such as commercial auto and general liability (GL), have been more regularly discussed in the context of social inflationary trends, professional liability (PL) carriers are also seeing a substantial increase in claims costs.
Industry segments that were once considered “safe” for high-limit policies, like architects and engineers (A&E), are now an attractive target of the plaintiffs’ bar looking for deep pockets to pay inflated claims.
According to the Insurance Information Institute (I.I.I.), social inflation “encapsulates how insurers’ claims costs can rise above general economic inflation, and it also includes the shifts in societal preferences over who is best placed to absorb risk.” A number of factors influence social inflation, as noted by I.I.I., including third-party litigation funding, nuclear verdicts from sympathetic juries and the proliferation of class-action lawsuits.
In general, the public is becoming increasingly distrustful of large companies, with a recent Gallup poll finding 53% of Americans now view “big business” negatively, the highest percentage in more than a decade. This negative viewpoint is having a significant effect on jury awards, with the average size award increasing by 1,000% between 2010 and 2018, according to Verisk.
Insurers are feeling the brunt of the costs and now have little choice but to pull back on capacity and raise rates. According to Ames & Gough’s 2022 architects and engineers professional liability insurance market report, 63% of A&E insurers saw an increase in claims severity in 2021.
Here are several evolving claims and litigation trends related to social inflation that are currently affecting design firms.
Broad claim allegations that include multiple parties. The plaintiffs’ bar is pursuing everyone involved in a project to draw in as many parties as possible, not just those at fault. The strategy is to pull everyone to the table and compel them to pay to get out of the claim. Plaintiffs’ lawyers are also becoming very creative in how they word lawsuits in an attempt to access a design professionals’ professional liability policy and increase the claims payout.
Exposures related to lack of documentation. It is becoming increasingly difficult to defend or extract design firms involved in claims when there is no clear documentation stating their roles and responsibilities. To create a defensible position for the claim, design firms must have documentation supporting their activities.
Project owners escalating claims payouts through betterment costs. Over the last five years, some unscrupulous project owners have been significantly increasing betterment costs to increase claims values.
Lawsuits against design firms that bid on projects. There have been sizeable losses against design firms that bid unsuccessfully on a project but may have been involved in an ancillary matter and ended up involved in the claim or had to participate in the global settlement. These firms are typically involved in an ancillary matter related to the project and get drawn into the lawsuit or claim.
An increase in bodily injury and property damage claims leading to higher payouts on PL policies. The increase in claim payouts thanks to social inflation is exhausting GL limits, and design firm PL carriers are increasingly being brought in to settle claims.
These social inflationary trends are putting pressure on the architects and engineers segment, with firms having to pay higher rates for less coverage. Capacity is tightening across the board. According to the Ames & Gough report, 56% of insurers reported “modest rate increases of up to 5%” in 2021. However, 44% of insurers hiked rates by 6% or more, “including 13% with rates that rose by more than 10%.”
Berkley Design Professionals, like other providers in this space, is currently seeing more claims and is also experiencing an increase in settlement values as compared to the amounts similar claims were worth only a few years earlier.
Mostly larger design firms are being targeted. But small to medium-sized firms with under $30 million in annual revenue are feeling the impact of higher rates. And as social inflation continues to accelerate, smaller firms with low policy limits are a growing target, even if they have only a minor role on a project.
The industry needs to raise awareness by educating our clients on social inflation. We need to invite clients into the conversation and help them understand why the problem is growing. Agents and brokers should work closely with carriers to share information and resources with clients. Carriers must commit to having policyholders’ backs, including defending them against nuisance litigation.
There are other opportunities for the industry to make a difference as well, such as engaging with policymakers and lawmakers on litigation reform and exploring syndicated placement options where insurers can spread around the risk for design firms that need large limits.
We know the risk of social inflation isn’t going away anytime soon. Participants in the insurance industry — carriers, agents and brokers, and policyholders can work together to curb its impact on the A&E market. This collaboration will allow us to continue to offer a strong product to design firm clients for the foreseeable future.
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