Running an architecture or engineering firm has never been more expensive. From payroll and software subscriptions to travel and consultant costs, expenses seem to increase every year. Professional liability insurance is no different. What many firms don’t realize, however, is that they may be paying premiums on revenue that shouldn’t be included in their rating basis in the first place.
As professional liability premiums continue to rise, it’s natural to focus on the bottom line and wonder whether a less expensive option exists. Before you start shopping the market, though, ask a more important question: Are you being charged premium on revenue that shouldn’t be included in the first place?
The answer often comes down to how revenue is categorized and reported on your professional liability application. The way billings are allocated among different services, disciplines, and project types can have a meaningful impact on how underwriters evaluate your firm and calculate your premium. Here’s what you need to know.
Gross Billings Don’t Tell the Whole Story
Most A&E leaders have a good understanding of their firm’s total billings. It’s a key metric they track closely and one that’s relatively easy to identify. The challenge begins when those billings need to be categorized and reported on a professional liability application.
When a professional liability carrier evaluates your firm, it looks beyond total revenue. Underwriters consider the services you provide, the disciplines you practice, and the types of projects you undertake. Not every dollar of revenue presents the same professional liability exposure, and some revenue may warrant different treatment during the underwriting process.
That distinction matters because professional liability premiums are heavily influenced by how revenue is allocated and classified on the application. If those allocations aren’t carefully reviewed, your firm could be paying premium based on revenue that doesn’t accurately reflect its professional liability exposure.
Start With What Shouldn’t Be Included
Direct reimbursable expenses provide an obvious example. An architecture or engineering firm may incur significant costs for employee travel, airfare, lodging, meals, testing, permitting, and other project-related expenses. Those amounts often flow through the firm’s gross billings, but they don’t necessarily represent professional services performed by the firm.
The financial impact can be substantial. For a smaller firm, properly identifying and allocating these expenses may affect tens of thousands of dollars in reported revenue. For larger firms managing projects across multiple states or regions, the amount can easily reach into the millions.
Consider a firm with $25 million in annual revenue, where $1.5 million consists of direct reimbursable expenses. If those costs are not properly identified during the application process, an underwriter may be evaluating the firm’s exposure based on revenue that doesn’t fully reflect the professional services actually being provided. It’s a relatively simple distinction, but one that can have a meaningful impact on how the firm is viewed and how its premium is ultimately calculated.
Not All Revenue Carries the Same Exposure
Once you’ve evaluated how revenue is reported, the next step is understanding how that revenue is allocated across the services and projects your firm performs.
Consider an architecture firm designing an apartment building versus a public library. Both projects require professional expertise, but they are not viewed the same way from an underwriting perspective. Different project types can carry a different level of professional liability exposure than others, which can influence how a carrier prices your policy.
The same principle applies when a firm’s revenue comes from multiple service lines. An organization may generate revenue from engineering, consulting, remediation, environmental services, or construction-related activities. Each of those services can present different exposures, and underwriters often consider them separately when evaluating an application.
That’s why thoughtful revenue allocation matters. The goal isn’t to find creative ways to reduce billings or manipulate the application. It’s to ensure your professional liability carrier has an accurate picture of the work you perform, the projects you pursue, and the exposures your firm actually faces. When the application accurately reflects your business, the underwriting and pricing process is more likely to do the same.
The Details Matter More Than You Think
Professional liability applications can be lengthy, technical, and time-consuming. When renewal season arrives, it’s easy to view them as just another administrative task that needs to be completed. We encourage A&E firms to see them differently.
Your application helps tell the story of your firm’s risk to the insurance market. How you categorize billings, describe services, and allocate project types gives underwriters information they use when evaluating and pricing that risk. There can be additional complexity from carrier to carrier. One carrier may base its calculation primarily on the previous year’s billings, while another may look at an average across multiple years.
Understanding those differences can also help firms anticipate how growth or changes in their project mix may affect future insurance costs. If your firm is growing quickly, that becomes especially important. A significant increase in billings today may influence your premium differently depending on how your carrier evaluates revenue. Knowing that ahead of renewal gives you an opportunity to plan rather than simply react.
Look Beyond the Premium
There’s an important distinction between price and rate. A growing A&E firm may pay more in total premium simply because the business is significantly larger than it was five or ten years ago. Looking only at the premium can make it appear that insurance has become dramatically more expensive. The rate can tell a different story.
For example, a firm might grow from $2 million in billings to $7 million, and its professional liability premium may increase significantly along the way. That’s not necessarily a sign that insurance is becoming more expensive. As a firm grows, premium dollars will naturally increase. The more meaningful metric is the rate, which reflects how the firm’s risk is being priced over time.
Most firms can calculate their gross rate fairly easily. Determining the net rate is often more challenging because carriers define and calculate it differently. Tracking either measure year after year provides valuable context and can help you understand how factors such as claims history, growth, project mix, and other underwriting considerations are influencing your insurance costs.
A More Strategic Insurance Conversation
Insurance will always have a price attached to it, and that price matters. Managing insurance costs, though, isn’t limited to asking multiple carriers for quotes and choosing the lowest number. For architecture and engineering firms, some of the most valuable work happens before the quote ever arrives.
It happens when you understand your billing and accurately classify the work you’re doing. It happens when you separate revenue that shouldn’t be rated the same way and when you understand how the insurance market is evaluating your firm’s risk.
That’s where an insurance relationship can become something more than buying a policy. The right partner can help you understand what is driving your costs, prepare for what’s ahead, and make sure the story being presented to the insurance market accurately reflects your business.
Before your next professional liability renewal, don’t just ask what you’re paying. Ask what you’re being rated on, and explore how that’s impacting the numbers.
Eric Nystedt, Business Insurance Consultant
