Case Study: The Real Cost of Inadequate A&E Insurance Coverage

Background

An engineering firm specializing in mid-rise office buildings faced a severe financial setback due to inadequate professional liability coverage. The firm, originally a small two- to three-person operation, had grown significantly over seven years, taking on larger contracts without reassessing its insurance needs. Their existing professional liability policy provided a $1 million per claim limit with a $2 million aggregate, which was not sufficient given the scale of projects they were now managing.

The Issue

During the construction of a mid-rise office building, a structural flaw was discovered late in the project—just before completion. The flaw caused excessive stress on the building’s framework, requiring extensive retrofitting at a cost of $2.5 million to avoid a complete rebuild.

Unfortunately, the firm's insurance policy contained multiple critical exclusions, which left them responsible for the full cost. Some of the gaps included:

• Rectification Coverage Exclusion The policy did not include rectification costs, meaning the firm could not receive financial assistance for early intervention. If this coverage had been included, the design flaw could have been addressed before construction was complete, significantly reducing the expense.
  
  
• Contractual Liability Exclusion The policy did not cover liability assumed under a contract, leaving the firm exposed to full financial responsibility.
  
  
• Lack of Risk Management Support The insurer provided no early warning support, legal assistance, or mitigation strategies, which could have helped the firm address the issue proactively.

Financial Impact

Despite carrying professional liability insurance, the firm had to pay $2.5 million out of pocket. Their policy, which had not been reviewed or updated in over seven years, did not account for their increased project size and contractual obligations.

The firm had been working with an insurance agent who did not specialize in A&E coverage, and their policy had not been properly marketed to explore better options.

Solution & Outcome

Following this costly incident, the firm sought expert guidance to realign and reset their insurance coverage. Working with a specialized insurance provider, they secured a $5 million policy, ensuring comprehensive protection for future projects. Key improvements included:

• Increased Coverage Limits A $5 million per claim policy replaced their outdated $1 million per claim coverage.
  
  
• Standalone Cyber Insurance A separate cyber policy was added to enhance protection.
  
  
• Inclusion of Rectification Coverage & Contractual Liability These key coverages were built into the new policy to prevent similar financial exposure in the future.
  
  
• Proactive Risk Management Support The firm’s new insurer offers early detection and mitigation strategies to avoid costly design errors.
  
  

While the firm’s premium increased from $15,000 to $120,000 annually, their revenue had grown fourfold, making the cost increase a necessary and manageable expense for securing long-term stability.

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