For every dollar of professional service fees earned by a structural engineering firm in 2003, the frequency of a claim being filed was almost three times that of other engineering disciplines.

In addition, the cost of every paid structural engineering claim ave raged almost 30 percent higher than that of other engineering disciplines.

The CNA/Schinnerer program, the nation’s largest insurer of structural engineering firms, has tracked both the frequency and severity of claims for structural engineering firms since the program’s incept ion in 1957. The 2003 statistics, shown in Figures 1 and 2 below, reflect the significant exposure faced by structural engineers.

According to claims statistics compiled by Schinnerer, the underwriting manager for CNA, structural engineering firms consistently have faced more frequent claims for the level of professional services provided, as measured by reported billings, when compared to other engineering disciplines. The percentage of claims filed that resulted in both defense and indemnity costs has consistently been higher than claims filed against other types of engineering firms. In addition, the indemnity cost of each paid claim has been higher, on average.

The claims picture for structural engineering firms, however, is not entirely bleak. The ratio of the frequency of claims to billings peaked in 1996 and has improved fairly steadily since then. Firms were able to reduce their claims-per-billing ratios by contractually limiting their exposure, charging appropriate fees for their professional services, and using other effective risk management techniques. In 2003, there were close to 30 percent fewer claims for the same dollar volume of services than at the 1996 apex.

Claims without payment still affect insurance costs

Insurance costs are based on the likelihood of a claim expense for the type of services performed and the overall dollar volume of services being provided. Although some claims are closed without any recorded insurance company payment, increasingly, claims involve significant defense costs. Despite efforts to decrease defense costs through mediation, the average transaction cost of resolving claims has increased.

In addition to increased defense costs, the percentage of claims in which a payment is made on behalf of the policyholder continues to rise. Fewer claims are closed without an indemnity payment on behalf of the structural engineer by the CNA/Schinnerer program.

Paired with this frequency of indemnity payments is the total cost of claims. For those claims to which our prog ram paid both indemnity and defense costs, they ave raged approximately $230,000 within the first $1 million limit of coverage.

Conclusion

The cost of professional liability insurance during the last five years has increased in large part because of an underperforming investment economy; insured firms have to pay more since other sources of income for insurers has been minimal. As long as indemnity payments—those payments to rectify damage or reimburse loss—continue to be high, so will the cost of professional liability insurance. Risk management efforts and adequate compensation for appropriate services are the keys to bringing down the cost of claims, and subsequently, insurance costs.

Frank Musica is a risk management attorney with Victor O. Schinnerer & Company, Inc., the underwriting manager for the CNA/Schinnerer professional liability insurance programs. He can be reached at frank.d.musica@schinnerer.com. More information on professional liability exposures can be obtained at www.PlanetAEC.com, the CNA/Schinnerer program website.