Recent press cuttings all testify to an increase in premium rates:-
“Indemnity cover to soar by 50%”
“Professional Indemnity premiums are soaring for consultants, hitting the biggest on their bottom line and threatening the viability of smaller firms.”
“PI rates soar by 600% for high risk contractors….premiums for surveyors civil and geo-technical engineers are seeing rate rises of several hundred percent”
Where “It” = the increase in PI premiums. Why is It? · What is It ? · How can you deal with It?
Why has it come about?
The driving force is the poor claims experience. Under ACE scheme, claims continue to increase.
Year No. of circumstances reported 1961 39 1971 96 1981 320 1991 540 2001 674
A lot of design errors – in spite (because) of technology and in spite of QA, maybe because engineers are busier, maybe less experienced staff being supervised less
D&B claims have become a major influence – contractors are more prone to claim and very often their sub-consultants are the only people they can claim from – because fixed price there is no opportunity to mitigate loss by arguing betterment – harder to defend because difficulties in establishing the evidence
2. Speed of Settlement
3 developments all with the same broad and worthy intention – to speed up justice and the resolution of disputes
Woolf Reforms (otherwise known as the Civil Procedure Rules) – designed to bring a more open handed and transparent approach to civil litigation with a view to accelerating or even averting cases going to court.
The increasing use of Mediation to settle claims at an earlier stage
Overall these developments have been beneficial – claims which once were taking 4/5 years to settle are now being settled in maybe a year with a consequent reduction in defence costs. However there have been some adverse consequences namely a quicker outflow of cash for insurers which, combined with …
3. Lower Interest Rates and Investment Returns ..
..has served to increase underwriting losses.
Whereas previously we were in a position where underwriting losses were made tolerable by investment income earned over the 5 years it took for a claim to settle, we are now in a situation where there is nothing to subsidise the bad underwriting results. Insurers used to be able to aim for an underwriting loss knowing that investments would then steer them into profit – that is no longer the case.
4. Changes in the Insurance Market
Direct The withdrawal (either voluntary or enforced!) of some PI insurers – Cox – HIH – Independent – London and Edinburgh – SEPIA – AXA – Colonia – Admiral (effectively by withdrawing “each and every” cover), – a number of Lloyds syndicates.
Few if any major newcomers to fill the gap. The litigious nature of society, a general increase in claims, some adverse court decisions, highlighting deficiencies in policy wordings and difficulties in reinsurance arrangements have all made PI insurance a less attractive proposition to underwriters.
Of those that are left even they are reducing because of the forces of Market Consolidation
– 7 major composites down to 3 – RSA, Aviva, Zurich – Lloyds syndicates (number of syndicates down from 156 to 108 predicted by some to reduce to 50 within a year)
Amongst those insurers who are left, there is a renewed determination that they want to write for a profit. There is no sentiment for loss-making classes of business.
It would be disingenuous of me to tell you that your insurance premium has increased solely as a consequence of September 11th. No direct effects for PI but a massive impact upon insurers generally and most insurers need to increase their premiums across the board just to refurbish their balance sheets.
By contrast Enron has had a massive impact on PI – not just a big direct loss for underwriters (£250M on Andersons PI) but some major ancillary losses will also arise e.g. Bonds and Guarantees – overall loss could be $10bn.
However even if by some miracle a particular insurer had emerged unscathed from either of these 2 catastrophes then it is almost certain that their Reinsurers will not have done and it is reckoned that they alone are looking for a 25% premium increase.
The net effect is a situation where an increasingly unattractive class of business is looking for an insurer amongst a reducing number of more discerning providers all of whom are demanding a higher price. In short – a sellers market where insurers can dictate prices and terms.
Not only PI but also other classes of liability insurance. In Employers Liability the industry-wide ratio of claims to premiums is reckoned to be 150%. Public Liability rates reckoned to be increasing by 100%. Directors & Officer rates up by 300-400%.
What is the increase?
On ACE scheme the Premium increase is 1.3% of fees on top of whatever you were paying previously. Excess levels are up to 1% of net fees.
However – cover is still there – using the same quality insurers who have demonstrated their long term commitment to the scheme – still able to write large Limits of Indemnity – up to £50M – cover for pollution and contamination still available as before – aggregate plus one – wider than available elsewhere – even now the average premium rate is still lower than it was in 1988 (the last “hard” Insurance market) – in real terms excesses are back to 1988 levels
What needs to be done?
1. Need to raise your fees
Not just to pay the premiums (!) but also because there is a fear that you are selling your services too cheap at a price that does not reflect the risk that you are taking on; nor one which allows you to reward and invest in your employees who, besides being your major asset, are also your prime source of liability. A lack of money in the system will lead to reduced training, supervision, and innovation which in turn will result in yet more claims.
2. Need to avoid claims
Individually for your own future insurability and viability – with such large excesses 2 claims a year is 2% of turnover!
Even if you yourself are “clean” and continue to keep yourself clean, you could become guilty by association if your profession (or your particular branch of that profession) gets a reputation for big claims. Therefore a need for collective action if you are to ensure future availability of PI.
* * * *
How to reduce claims
An analysis of all the major claims from ACE scheme in last 10 years shows that Geotechnicals are capable of producing some hefty claims at an average cost of just under £500,000.
A review of some of those major claims also provides an indication of the source of claims. Projects include highways, dams, swimming pools, high rise buildings, rivers, site investigations, landfill sites with claim costs ranging from £100k up to several million pounds.
· Design error requiring redesign after job completed · Even more expensively, a design error spotted at review but prior to commencement on site led to contract delays · Inadequate number of boreholes · Inadequate analysis of water containment properties of rock for a reservoir · Calculation error when assessing shear strengths · Overlooking the complexity of the geology on a highways project · A personal injury claim when Gas main was struck during a borehole investigation. Contract stipulated that developer client would undertake a search on services – the client had indeed established that there was a gas main on site but he decided not to tell our insured engineer about it. Whilst the client was held to be primarily responsible, the HSE also held engineer to have been partially culpable for failing to check with the client that they had undertaken the search. They reasoned that if they had checked then the problem would have been disclosed.
A review of some current claims also indicates the source of claims
· Failure to warn of possibility of solution features in chalk soil · Failure to expressly warn a contractor client that a particular method of temporary works would be inappropriate for a certain slope · Negligently describing made ground as Grade V chalk · Contaminated land investigation on a development site – a calibration error caused an overstatement of contamination present – the successful purchaser has sued for wasted costs whilst another unsuccessful bidder has also sued for lost opportunity! · Allegation that remediation contract was poorly supervised – inadequate and incomplete record-keeping
What ought you to do?
1. Don’t Make Mistakes
Nobody willingly makes mistakes but there are things that you can do lessen the chance of mistakes happening or to stop mistakes actually resulting in any loss. – train staff – supervise – Peer reviews and checks – review report formats/standard letters/site inspection reports. But it has to be said that not even that you are never going to avoid claims altogether.
2. Watch What You Sign
Be careful on your appointments. The emergence of D&B and other new methods of procurement is leading to ever more weird contract forms – for the sake of your claims experience and your insurability you need to resist such overtures.
As far as possible sign up before you do the job – at very least agree heads of terms.
Limit your liability both in money (at the very least to your Limit of Indemnity) and time (avoid going beyond 6 years). Remember if you sign up undertaking to provide £10m Limit of Indemnity there is a real possibility that in the current market you may not be able to afford that level of cover next year. 3. Transfer risk – at very least do not accept unfair risks.
Do Not Sign
Absolute obligations irrespective of negligence e.g. which allow client to recover damages which would otherwise considered to be too remote or ordinarily be reduced either by the client’s duty to mitigate or by contributory negligence or because not properly or reasonably incurred
Fitness for purpose warranties (watch out for stealth clauses)
Clauses conferring rights on Third Parties or which allow unlimited assignment
Adjudication clauses – those which whilst within the letter of the law otherwise flout its spirit
Deeds/signing under seal – extending the right to claim beyond 6 years
Loss of copyright
Unreasonable insurance clauses – either too much or too long
Net Contribution Clauses – these are being broadly accepted
“Evaporation” clauses – limit indemnity to amount recoverable from the PI policy
Sub-consultants on a back-to-back basis
Griffiths & Armour