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State Explores Costs of Malpractice Insurance : Small Construction, Design Firms Are Among Professionals Struggling With High Premiums

May 07, 1987|BRUCE KEPPEL | Times Staff Writer

Small construction and design firms continue to be plagued by prohibitively costly malpractice insurance, a panel of state officials was told Wednesday during a hearing in Los Angeles on the availability of professional liability insurance.

The state Department of Insurance called the hearing to assess the insurance needs of engineers and architects and of corporate directors and officers. A follow-up hearing next week in San Francisco will focus on the insurance problems faced by churches and private schools.

"The department continues to get many complaints advising that commercial liability insurance is not available in a number of classes, including directors and officers, engineers, architects, churches and private schools," Insurance Commissioner Roxani Gillespie said in a statement announcing the hearing. "If we determine that certain classes of commercial liability insurance are not readily available in the marketplace, the department has the authority to create a market assistance program to deal with the problems."

Rising Costs

More companies are offering insurance for engineers and architects and for corporate directors and officers than was the case a few years ago, the panel was told, but the cost has risen sharply and policies are becoming more restrictive.

Wayne Hall, a Torrance broker representing the Independent Insurance Agents and Brokers of California, said a survey by the group found that six insurers now offer coverage for architects and engineers, up from just two last year.

But he added that the cost of the coverage quadrupled from about 2% of the gross revenues of such professional firms in 1983 to more than 8% last year.

Everett M. Brookhart, chief of the Department of Insurance's consumer affairs division, acknowledged that previous hearings have indicated "an intertwining" between availability and pricing that can put available coverage beyond the reach of some who need it.

Moreover, Hall said, insurers are being "very selective" in choosing clients. Small firms are suffering "quite severely" and disproportionately, he said.

Most in Small Firms

According to written testimony submitted by the California chapter of the American Institute of Architects, more than 80% of the state's architects work for firms with fewer than 10 employees. For them, it said, the cost of insurance has become "unreasonable," and urged the department to find a way to "break the crisis cycle" and fill "the unmet need" for professional liability coverage.

More improvement was reported in liability insurance protection for corporate directors and officers, but most of the improvement is being enjoyed only by the "superior risk," said Charles Collinge of Torrance, representing the Professional Insurance Agents of California and Nevada.

"What you have is higher rates, restricted coverage and (availability only to) superior risks," he said.

Daniel N. Milazzo, a vice president of Harbor Insurance, said his company has offered coverage for directors and officers since 1967 and that until 1980 "we made a decent buck." In 1981, however, litigation exploded against directors and officers "and all hell broke loose."

As a result, Milazzo said, rates for coverage have doubled and tripled.

Even with the increased prices, however, Harbor won't know for "a few years yet" whether they are adequate because settlement of claims arising from directors-and-officers insurance takes an average of about five years.

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