Your Revenue Went Up, So Did Your Premium. How Professional Liability Is Priced, and Why Money You Pass to Consultants Still Counts

Short answer

How professional liability is priced usually starts with your revenue, weighted by the type of work you do. The insurer then adjusts the rate for disciplines, project types, claims history, state, contract practices and consultants. Fees you pass through to consultants are often rated at a fraction of their value rather than removed. Your firm can still be named in a claim over the consultants it hires. Whether a policy responds to any claim depends on its wording and the facts.

Revenue is the starting point

Most professional liability policies for architects and engineers apply a rate to your annual revenue. Revenue may also be called gross billings or fees. It is the base number the rest of the pricing builds on.

Insurers use revenue because more fees usually mean more projects, more drawings and more chances for a claim. Expect the application to ask for your past year’s revenue and your projection for the coming year. Accurate numbers help the underwriter price your firm correctly. Our page on professional liability insurance covers the coverage itself in more detail.

What weighted revenue means

Weighted revenue means the insurer splits your revenue by discipline and project type. It then counts each slice according to how risky that work tends to be. Riskier work counts for more.

A dollar of condominium design work and a dollar of interior tenant fit-out do not look the same to an underwriter. That is why two firms with the same revenue can pay very different premiums.

Weighted revenue can also rise faster than your top line. This happens when revenue jumps or when your work shifts toward riskier project types. A firm that adds multifamily or residential projects may see its weighted revenue climb even when total fees barely change.

The factors that change how professional liability is priced

Revenue sets the base, and several other factors adjust the rate. Each insurer weighs them differently, so your results may vary from another firm’s.

Disciplines and project types: Some services and building types carry more claim potential than others.
Claims history: Underwriters review your loss runs, which list past claims and their outcomes.
State and location: Legal environments differ from state to state.
Contract practices: Written contracts and limitation of liability clauses can influence how an underwriter views your risk.
Consultants: The consultants you hire and how much of your fee goes to them affect the rating.
Limits and deductible: Higher limits generally cost more, and a higher deductible can reduce the premium.

Why fees you pass to consultants still count

Many architects and engineers assume that fees paid to an insured structural engineer should not count against them. The thinking is reasonable. The consultant carries their own insurance, so the prime firm feels protected.

Insurers see it differently. When you act as the prime, the client looks to you for the entire design. Firms are often named in lawsuits over their consultants’ work, or over how they selected and coordinated those consultants.

Many rating plans do give a credit for consultant fees. They often rate each consultant dollar at a fraction of a full dollar. The exact fraction varies by insurer, the type of consultant and how much of the fee you pass through. Rarely does a plan remove the fees entirely.

Report consultant fees accurately and separately on the application. If you combine them with your own fees, you may lose the credit.

Why your net revenue fell but your premium rose

Premium is usually based on revenue and not on profit. A firm that outsources more work can see its top line grow while its net revenue shrinks. The premium can still go up.

Here is a simple hypothetical with round numbers, not taken from any client. A firm bills $1,000,000 in fees for its own work one year. The next year it bills the same $1,000,000 and adds $500,000 in fees that it passes to a structural engineer.

The firm keeps less of each project dollar, so its profit may shrink. The insurer still sees $1,500,000 in total fees. Even if the consultant portion carries a reduced weight, it adds to the rated exposure. The total rated exposure rises, so the premium can rise too.

In renewal conversations, underwriters have explained that consultant fees are factored in at a reduced weight but are not removed. The reason is that firms are regularly named in suits over the consultants they hire. Managing larger projects as the prime is a real upside for the business. It also explains why the exposure is real.

What to do before renewal

A few steps can help the underwriter price your firm more accurately.

Break out consultant fees by discipline on the application.
Describe your project types accurately so the work is weighted correctly.
Show your use of written contracts and limitation of liability clauses.
Share consultant agreements that require consultants to carry their own professional liability insurance.
Ask your agent to request a second look, since underwriters sometimes find room when they receive better information.
Compare other markets, and ask whether a multi-year policy option makes sense if one is offered.

Starting early gives you time to gather this information before the renewal date. If you want a second opinion on a quote, you can request a quote and we will review it with you.

Questions to ask your agent

Is my premium based on gross revenue or weighted revenue, and how was my revenue weighted?
Does this insurer give credit for fees paid to consultants, and how should I report them?
Which factor moved my renewal the most this year?
Is there information we can add that would help the underwriter price this better?
Are other markets offering meaningfully different terms right now?

General education, not legal advice. Hardcover is an insurance agency, not a law firm. Whether a policy responds depends on its wording and the facts.

How is professional liability insurance priced for architects and engineers?

Insurers usually apply a rate to your revenue, weighted by the type of work. They then adjust for claims history, state, contracts, consultants, limits and deductible. Each insurer uses its own rating plan.

What is weighted revenue?

Weighted revenue is your revenue split by discipline and project type. Riskier work counts for more. Two firms with the same total fees can have different weighted revenue.

Do fees I pay to consultants count toward my premium?

Often yes, at a reduced weight. Many insurers give a credit for consultant fees but rarely remove them entirely. A firm can still face a claim over the work of its consultants.

Why did my premium go up when my profit went down?

Premium is usually based on revenue and not on profit. If your total fees grew, even through consultants, your rated exposure can grow too.

Can I ask the insurer to reconsider a renewal price?

Yes. Your agent can ask the underwriter for a second look. Better information on consultant fees, contracts and project types gives the underwriter more to work with. The outcome depends on the insurer and your account.