1. Deal or No Deal: Finding Underwriting Solutions for Challenging Risks Panelists: Bob RogersJaap VrolijkDana Brown Moderator: Barbara Sable

2. Project-Specific Professional Liability Insurance: Design Professionals’ Perspective Bob Rogers Assistant Vice President Lexington Insurance Company

3. 3 What is Project Insurance? An insurance policy written to cover the prime design professional and all of their subconsultants for the duration of the project plus an extended reporting period. Prime Designer “Lead Architect” Structural Engineer Mechanical Engineer Civil Engineer Etc.

4. 4 Why Buy Project Insurance? Dedicated Limits Long Time Horizon Coordination and Risk Management Claims Efficiency

5. Project Insurance: The Past

6. 6 Beginning in 2002, the Project-Specific PLI market dramatically changed: –Negative claims experience –Numerous professional liability insurer exits from the Project-Specific PLI market –General hardening of the insurance market –More conservative and selective project-specific underwriting –Significant premium increases –Introduction of OPPI product –Financial failure of certain professional liability insurers offering Project-Specific PLI

7. Project Insurance: The Present

8. 8 Current major primary Project-Specific PLI markets-extremely limited Major underwriting and coverage aspects of current Project-Specific PLI –Typically, only design professional is insured –Project Owner not insured, but may be entitled to certain indemnity protection –Construction Contractor and CM-at-risk – and Design- Builder not typically named as insureds –Negligence or breach of professional duty as liability/coverage trigger

9. 9 Project Insurance: The Present Joint Defense plays integral role (to the extent consistent with legal and ethical requirements) More selective underwriting and more stringent underwriting criteria and standards Macro project risk evaluated Material variation endorsement approach Increased emphasis on financial rating and capacity of Project-Specific PLI insurer More favorable claims experience

10. Project Insurance: The Future

11. 11 Project Insurance: The Future Unlikely that underwriting practices will significantly change or “liberalize” Unlikely that the number of insurers offering Project-Specific PLI will significantly increase Challenges: How can Project-Specific PLI function in the context of new contractual and risk relationships among project participants? –Project Alliancing –Public-Private Partnerships

12. Project-Specific Professional Liability Insurance: Owners’ & Contractors’ Perspective Jaap Vrolijk Vice President Zurich North America Construction

13. 13 Owner Concerns Claims-made nature of AE policies Limits provided insufficient Retroactive nature of coverage Limitation of Liability clauses

14. 14 Owner Options Project-specific Professional Liability Owners Protective Professional Indemnity Coverage Design-Build delivery method

15. Owners Protective Professional Indemnity Coverage (OPPI)

16. 16 OPPI Approach AE policies are evidenced to project owner Owner procures an OPPI policy which operates differently from the project specific alternative –It is an indemnity policy that reimburses the owner for damages that exceed the available insurance proceeds from the contracted AE firms –Damage amounts are determined through action against AE firms’ annual policies –The OPPI policy reimburses those amounts in excess of available PL insurance –All contracted professional firms on the project will be covered The OPPI format approached the problem in a unique fashion

17. 17 Contractor’s Perspective Demand for project-specific coverages appears to be less given the guaranteed cost contract offered by the Design Build delivery system The general contractor is now in the position of holding all the design contracts. As a result he has the same concerns as a project owner as it relates to the amount and availability of the A/Es’ professional liability policies

18. 18 Contractor’s Protective Professional Indemnity Policy - 1998 The policy has two coverage parts Coverage A – Traditional third party professional liability coverage Coverage B – Essentially an OPPI coverage, providing coverage in excess of what is available from contract design services Additional Contractor Pollution Liability coverage is a common addition

19. 19 Underwriting Process Significant Evolution in the underwriting process Recognition that all parties play a role in ultimate professional exposures (owner, contractor and design team) Project class plays an important role Contractual Reviews (all contracts) –Appropriate allocation of risk between parties –Proposed use of project contingencies Cultural –Historical experience of participants in similar projects –Historical experience of project team working together –Owner’s history with design and construction firms

20. 20 Underwriting Process Technical Reviews –Schedule –Change Order management system –Use of unique technologies (e.g., sustainable building) –Estimates of cost –Constructability –QA/QC protocols to be followed

21. Owners and Contractors Professional Indemnity: The Future

22. 22 The Future New players may enter market, but: –Reinsurance capacity difficult to obtain based on historical experience on project placements Coverage should be available for: –Solid project teams on best project classes –Where participants have broader relationships with carriers who offer project specific placements New Products

23. Tips for a “Deal” from an A/E Practice Policy Underwriter Dana Brown Underwriter, Architects & Engineers Beazley Insurance Company

24. 24 Tips for a “Deal”: A/E Practice Policies Underwriters DO NOT use a Dart Board!! Your premium is……

25. 25 TIP #1...Know How the Company Rates Science and Art Together = UNDERWRITING

26. 26 Underwriting 101 Main Areas Underwriters Focus: –Business/Operational Risks –Claims/Loss History – 5 & 10 yr –Risk Management Philosophy

27. 27 Business /Operational Risks General Risk Factors Size of Firm – “the bigger they are, the harder they fall” Location, Location, Location! Branch offices Mergers/Acquisition Activity Length of Operation

28. 28 SIZE Does Matter Annual Billings BEST Claims History = Small Firms – typically annual billings < $1 Million WORST Claims History – Large Firms – typical annual billings >$20 Million

29. 29 Location, Location, Location High Exposure Areas Source: Beazley Insurance Company

30. 30 Merger/Acquisition Activity Due Diligence/Culture *Review business practices *Loss history of the firm *Structure of “tail” coverage…and, how open contracts are to be covered

31. 31 Business /Operational Risks Specific Risk Factors –Revenues »True Professional Revenues –Services »If you have a higher risk service or project EXPLAIN! –Project Types –Delivery Methods

32. 32 TIP #2…Accurately Report Revenues »Direct Reimbursable Expense »Sub consulted Work charged at a reduced rate »Abandoned projects usually removed from rating »Separately Insured Projects *policies vary…excess desired?

33. 33 TIP #3 …Be Proactive & Explain the Tough Stuff Take the time to explain any higher exposure services or projects you have:

34. 34 Disciplines of Services…BEWARE Severity Geotechnical: soils/foundations/ inspections Structural Engineering Architecture Civil – Road/Bridge Frequency Architecture Specialty Consultants: roof/building envelope systems Geotechnical Structural Civil Services that create a high potential for claims Frequency and Severity

35. 35 Project Types…UW RED FLAGS Projects that create a high potential for claims Frequency and Severity Severity Airports – runway and terminals Amusement Rides Bridges >250’ Condo’s/Townhouse Convention Centers Dams Harbors/Piers/Ports Jails/Justice Centers Severity Parking Structures Pools/Playgrounds Water/Waste Water Sports Complexes Roads – Bodily Injury Frequency Condos Convention Centers Schools/Colleges Hospitals Jails/Justice Centers Sports Complexes

36. 36 Risk Management Approach…RISK MITIGATORS Client/Project Selection Process Managing Client Expectations Internal Evaluation –QA/QC –Project Auditing Training/Professional Development Contract Protocol

37. 37 TIP #4…EXPLAIN Large Losses/Reserves If frequency OR severity (over $100K) – take 5 minutes to explain what happened. MOST IMPORTANT…LESSONS LEARNED -There is always a story – make sure it is heard!

38. 38 TIP #5…Carefully Evaluate Coverage Options Keep in mind… –the decisions you make about the deductible/first dollar defense likely will impact claims history…and, ultimately the viability of future competitive insurance programs & carrier options

39. 39 Know the Carrier’s Program Features Beazley Group A&E Program Credits can be earned for: Multiple Policy Credit (D&O or EPL) – 2% credit Longevity with Beazley - >3 yrs w/ LR% <50% = 5% credit Education – participation in approved CE Program –5% credit: 1 st renewal –10% credit: 2 nd year & subsequent year renewals Removal of Mediation Provision – 5% credit Removal of CPL – 3% credit Removal of Miscellaneous/Technology Coverages – 5% credit

40. 40 Do A&E firms need a different policy form? Technology is everywhere! –Websites, emails, electronic transfer of docs etc… Where are the A&E going to insure this exposure? –Traditional A&E Policy? –Standalone Technology E&O Policy? –GL? Exposures are only going to GROW!

41. 41 A & E Professional Liability Form- TECHNOLOGY COVERAGES Technology Based Services – computer and electronic services including data processing, internet services, tech consulting, customer software programming and network management to name a few. –Electronic transfer of data – processing documents back and forth Technology Products – failure of Tech Products to perform the function or serve the purpose intended –Production of software products for client Computer Network Security – Cyber Liability, hacking, denial of service, transmission of virus to third party –Website hosting & document control systems Multimedia and Advertising – advertising injury, personal injury + IP cover including copyright, trademark, trade dress, misappropriation of trade secrets –Affirmative copyright infringement coverage

42. 42 Questions? Thank you for your time! Contact Information Bob Rogers Jaap Vrolijk Lexington Zurich 100 Summer St.3600 Minnesota Dr., Suite 200 Boston, MA 02110Edina, MN 55435 (PH) 617-330-8564(PH) 952-229-3622 (FX) 617-772-4533(FX) 952-229-3610 robert.rogers@aig.comjacobus.vrolijk@zurichna.com Dana BrownBarbara Sable BeazleyAmes & Gough 1600 Market St., Suite 14308300 Greensboro Dr., Suite 980 Philadelphia, PA 19103 McLean, VA 22102 (PH) 860-839-3217 (PH) 703-827-2277 (FX) 215-446-8469(FX) 703-827-2279 dana.brown@beazley.combsable@amesgough.com