The following article was written in association with Victor Insurance Managers LLC.
Risk management in architecture and engineering has always been about foresight - anticipating challenges, mitigating exposure, and ensuring financial resilience. But in today’s economic climate, predicting and preparing for risk has become significantly more complex. Just as an engineer must account for evolving material properties, new design methodologies, and shifting regulatory standards, architecture & engineering (A&E) firms must now reassess their insurance strategies in the face of rising claim severity and economic volatility.
The cost of materials, labor, and litigation has increased dramatically over the past few years, pushing claims severity to record levels. In response, firms are reassessing their insurance strategies - not just to protect themselves, but to maintain their competitive edge in an industry where coverage limits have become a competitive differentiator. Firms need to demonstrate sufficient financial backing to secure high-value contracts. Those that fail to adapt risk being left behind in an industry where clients are increasingly prioritizing well-insured partners.
Brandon Perry, senior vice president, manager of A&E Large Firms at Victor Insurance says, “The decisions firms make today regarding coverage and risk management will determine their financial stability years from now. We’re seeing a fundamental shift in how firms approach liability limits and risk mitigation.”
With the cost of rebuilding skyrocketing, underinsured firms are finding themselves vulnerable. Perry emphasizes the importance of risk management and strategic policy planning to mitigate rising costs. “You can’t just keep the same limits you had five years ago and assume they’ll still be enough.”
The data tells a clear story. Between 2019 and 2023, severe claim reserves - claims exceeding $1 million - increased by 146%. Meanwhile, the average indemnity payment rose by 41.7% from 2021 to 2024.
A major contributor to this trend is the surge in construction costs. Between February 2020 and April 2024, input costs for construction rose by more than 40%, meaning that even small disputes now carry significantly higher financial stakes. “The same office building, the same road costs significantly more to build today than it did five years ago,” Perry explains. “That increase in cost is directly reflected in the severity of claims.”
At the same time, legal costs are also rising, driven in part by social inflation. “We’re seeing things like the erosion of caps on punitive damages, better-organized plaintiff attorneys, and private equity firms funding certain legal cases,” says Perry. “All of this contributes to more expensive claims and higher insurance costs.”
In response to these challenges, A&E firms are adjusting their insurance strategies. Coverage limits are increasing across the board, particularly among firms handling large-scale projects.
“In 2015, only 7% of A&E firms with annual billings between $5 million and $10 million carried $5 million in coverage,” Perry notes. “By 2023, that number had jumped to 41%. That’s a significant shift, and it’s driven by both client expectations and firms recognizing that their previous limits aren’t sufficient anymore.”
Larger firms, in particular, are leading the charge in increasing their limits. “For major firms, higher limits are an expectation, not a choice,” Perry says. “Clients want to see that you have the financial backing to handle any potential issues. If you don’t carry the right coverage, you’re not even in the running for certain projects.”
He recalls a conversation with a firm that has worked on major sports venues. “They know that if they don’t carry a specific coverage limit, they won’t be considered for upcoming projects. To be in the running with major firms, they’re making that investment because it’s necessary to stay competitive.”
Specialized brokers have insights into what industry peers are carrying and can help firms benchmark their coverage accordingly.
“If you’re a smaller firm and you have one major project that requires a $10 million limit, spreading that cost across your business is tough,” Perry explains. “That’s where we’re seeing firms getting creative - either negotiating with clients or working with brokers to explore alternative policy structures.”
The pressures driving these insurance changes aren’t expected to ease anytime soon. Labor shortages, supply chain disruptions, and macroeconomic volatility will likely keep construction costs elevated, further increasing firms’ risk exposure.
In addition, insurers are tightening policy terms, with exclusions creeping into coverage. “We’re already seeing PFAS exclusions in pollution coverage, which could be a major issue for firms working on water and wastewater projects,” Perry warns. “Firms need to be paying attention to these changes to avoid unexpected coverage gaps.”
To stay ahead of these trends, Perry advises firms to reassess their coverage in light of rising project values. “If construction costs have increased by 40%, but your insurance limits have stayed the same, you’re increasing the chance your firm takes a hit to the balance sheet,” he cautions.
The rising cost of construction and increasing claims severity represent a fundamental shift in the financial and legal landscape of the A&E industry. In failing to adapt, the consequences are more than just higher premiums; firms risk becoming uncompetitive, and financially vulnerable in a marketplace where risk transfer is a prerequisite for success.
The firms that thrive in this market will be those with advisors who don’t just place coverage - but who shape smarter, more resilient insurance strategies that stand up to the pressures of an increasingly volatile climate.
