If you’re an engineer who believes your work is low risk, it can be frustrating to receive a high Professional Indemnity insurance premium.
Many professionals in fields like civil, structural, or design engineering may feel that the nature of their work is straightforward, only to be surprised when they see a premium higher than expected.
So, what exactly drives these costs, and why might your premium be higher even if you consider yourself to be a low-risk professional?
1. Nature of Your Projects
Even if you see yourself as low-risk, insurers will evaluate your premium based on the type and scope of projects you’re involved in. Engineering projects – especially in construction, infrastructure, or industrial settings – are often complex and high-stakes.
Even a small oversight in design or materials can lead to costly claims. Insurers assess the potential magnitude of claims and the long-term impact of mistakes, which can explain why your premium might be higher.
- Example: A civil engineer working on roads or bridges might see a higher premium due to the potential for major incidents or structural failures, even if they’ve never had a claim.
2. Contractual Obligations and Liability
In many cases, contracts may require engineers to carry higher limits of cover than they’d normally need. For example, government projects or large commercial jobs might require a minimum level of Professional Indemnity coverage (i.e. $5 Million or $10 Million), which in turn increases the premium.
Higher coverage limits mean that the insurer is exposed to more risk, and this is reflected in your premium. Even if you’re a careful engineer, the contractual obligations you agree to can push your policy costs higher than anticipated.
3. Claims Environment in the Industry
The engineering industry as a whole can experience fluctuating levels of claims, and insurers consider this when pricing your premium. Even if you personally haven’t made a claim, the sector you work in might have seen an increase in claims due to things like:
- Changes in building codes or regulations.
- Recent high-profile claims related to design errors or structural defects.
- Evolving risks in the industry, such as new materials or technology that haven’t been fully tested.
If the industry as a whole has seen an uptick in claims, insurers will likely increase premiums to offset their potential liabilities.
4. Your Project History and Experience
Insurers will assess your claims history and professional experience. While a spotless claims history is certainly beneficial, the following factors can also affect your premium:
- Years of Experience: Insurers may see more experienced engineers as lower risk, but newer engineers or firms might face higher premiums due to their lack of experience and ‘track record’.
- Type of Projects: If you’ve been involved in high-value or high-risk projects in the past, insurers will take this into account, even if the project went smoothly. Large infrastructure projects, for example, can pose greater financial risks than smaller, less complex work.
- Subcontractor and Contractor Reliance: If your work involves managing multiple contractors or subcontractors, this can be seen as a higher risk due to the potential for miscommunication or errors outside of your control, even though you are still responsible as the lead engineer.
5. Run-Off Cover and Long-Tail Risks
Engineering projects often come with long-tail risks, meaning that claims might arise years, or even decades, after a project has been completed. For example, structural issues, design flaws, or material failures may not become apparent until long after the engineer has completed their work.
Insurers price Professional Indemnity insurance to account for these potential long-tail liabilities, which can push up premiums, even if you’ve retired or ceased trading. The need for run-off cover (insurance that remains in place after you stop practising) can also contribute to higher premiums as it extends the period during which you are covered for past work.
6. Level of Coverage
If you have chosen higher levels of coverage, such as opting for a higher limit on your professional indemnity insurance (e.g. $5 million or $10 million), your premium will naturally increase. While it’s essential to have adequate coverage to protect your business and meet contractual requirements, it’s also crucial to regularly review these limits to ensure they align with your current level of risk and project scope.
7. Specialised Areas of Practice
Certain types of engineering work are seen as inherently higher risk by insurers. Engineers involved in areas like:
- Structural Engineering: Due to the potential for catastrophic failures (e.g., building collapses or significant infrastructure issues).
- Geotechnical Engineering: Where risks associated with land stability and environmental factors come into play.
- Process Control Engineering: Businesses involved in Programmable Logic Controller (PLC) and Supervisory Control And Data Acquisition (SCADA) typically carry higher risk due to the function and industries associated with this technology
- Mechanical or Industrial Engineering: This may involve high-stakes machinery or manufacturing processes that could cause substantial financial losses if issues arise i.e. bulk handling equipment
If your work involves high-risk sectors, this will impact the insurer’s perception of your risk level, regardless of your own track record.
How to Potentially Lower Your Professional Indemnity Premium
While there are factors that contribute to higher premiums, there are steps you can take to potentially reduce your professional indemnity insurance costs:
- Review Your Coverage Limits: Ensure that your coverage limits reflect the current scope and scale of your work. If you have a higher limit than is required, you may be paying more than necessary. Discuss this with your broker to ensure you’re not over-insured (or under-insured).
- Negotiate Contract Terms: When negotiating contracts, ensure that the insurance requirements (such as coverage limits or the need to add additional insured parties) are reasonable and aligned with the project’s actual risk. Don’t be afraid to push back on unrealistic insurance obligations.
- Maintain a Strong Risk Management Strategy: Implementing clear risk management protocols and showing your insurer that you have robust procedures in place can help demonstrate that you are a low-risk engineer. This may result in lower premiums over time.
- Use a specialist Engineering Insurance Broker: Insurance brokers who work regularly in the engineering space should have the experience to obtain the most competitive and comprehensive quotes for your business.
Speak To Us Today
Even if you believe you’re a low-risk engineer, many factors influence the cost of your professional indemnity insurance, from the complexity of your projects to the broader claims environment within the industry. By understanding these factors and reviewing your policies regularly with your insurance broker, you can ensure that your coverage is both comprehensive and cost-effective.
At Engineer Insurance Australia, we work with engineers across Australia to tailor professional indemnity policies that meet your specific needs while helping to keep premiums as manageable as possible. Contact us today for a review of your current coverage or to discuss ways to potentially reduce your insurance costs.
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed insurance broker in order to assist you.
