Insurance 101 for Architects & Engineers Archives

Benefit from Selecting the Right Professional Liability Broker

By Lynda

For design professionals, finding the right insurance broker can present a challenge. You need someone with ample experience handling the professional liability needs of architects and engineers, and who offers a wealth of value-added services. Only if your broker has a comprehensive understanding of what you and your firm are all about can he or she be of real use to you. Lacking this knowledge can leave your firm vulnerable in a shifting insurance marketplace. A good specialist broker is committed to investing the necessary time and resources to your account. They find you the best coverage for the best price, and they save you the considerable time it would take for you to do so on your own.

What is professional liability insurance and why is it important?

A professional liability (errors and omissions) insurance policy provides coverage to defend and indemnify a professional firm against claims alleging negligent acts, errors, or omissions in the performance of professional services.

Any project can give rise to a claim. Even if your firm employs an excellent risk management strategy, it is vulnerable to being named in a lawsuit. The cost of that defense can mount fast, even if your firm wasn’t in the wrong. A professional liability policy covers the cost of defense.

In the event that your firm is found negligent, and that the firm’s negligence gave rise to the claim in question, your professional liability policy will cover your firm for the damages you’re

legally obligated to pay, up to the policy limit. (Note: In most cases, defense costs erode the policy limit. Having adequate limits to cover both defense and indemnity is important.)

Why do I need a specialist insurance broker? Shouldn’t I be able to purchase my professional liability policy directly from an insurance company?

For architects and engineers, maintaining an active and adequate professional liability insurance policy is very often a legal requirement. And while a basic professional liability policy is straightforward enough for anyone to acquire, the insurance needs of design professionals are more complex than that.

The insurance industry is full of companies who want your business, but no two professional liability insurance carriers are exactly alike. Among the major differences are:

the size of policy limits offered;
whether multiyear policies are available;
underwriting appetites for types of engineering services;
and claims service.

Some companies require a 10-year loss history from design professionals, while others only require a five-year loss run. A specialist broker knows what the markets are doing, who the underwriters are, and how to present your firm in the best possible light. He or she will have understand each insurance company’s application and is quick to assist you in providing requested information. The cost of your insurance depends on this knowledge and attention to detail used on your behalf.

Here it should be noted that insurance companies often reward longevity. If your firm has been insured by a single company for a number of years and doesn’t have an especially adverse claims history, it’s likely that your premiums have been fair and endorsements (e.g., per project limit increases) have been easy to come by when needed. This does not mean that your current insurance company should be the only one to see your renewal application, however. A specialist broker understands the importance of approaching multiple markets periodically, either to reassure you that your policy is in the right hands or to grant you the opportunity to trade up.

Whether the market in a given year is hard or soft, a skilled professional liability insurance broker’s experience will benefit your firm. You need competent advice from a broker with the right perspective, both on your industry and the needs of your firm, as well as on the insurance marketplace as a whole.

This has been an excerpt of the January 2017 issue of ProNetwork News. Download the full free PDF version of Benefit from Selecting the Right Professional Liability Broker here.

About the Author

Audrey Camp is the Web & Social Media Consultant for a/e ProNet. She spent six years with a/e ProNet member IOA Insurance Services in California as a licensed account manager, specializing in the professional liability needs of architects and engineers. Today, Audrey works as a freelance writer living in Oslo, Norway. Her work has appeared in several literary magazines, journals and anthologies, and she is a founding member of the Oslo Writers’ League (OWL). She has also written for English-language Norwegian news sites and magazines. Most recently, Audrey co-authored two books—Startup Guide Oslo (Oct 2016) and Startup Guide Vienna (March 2017)—for a Danish company called Startup Everywhere, a process that inspired her appreciation for social entrepreneurship and intrapreneurship. Audrey has managed the a/e ProNet website, blog, social media presence and other publications since 2011.

How to Avoid Invalidating Your Professional Liability Insurance

By Lynda

At a panel for the NC Bar Association Construction Law Winter Meeting, attorney Melissa Brumback and her colleagues discussed insurance issues for design professionals. One hot topic was the way architects and engineers can inadvertently invalidate their insurance by agreeing to overly broad contractual language. Frequently, this has to do with the standard of care. Melissa penned the following post for the NC Construction Law Blog, and we have reposted it here with her permission:

As most of you know, Errors & Omissions insurance (“E&O” coverage) is meant to provide coverage for mistakes you may make in performing your professional architecture or engineering services. E&O coverage is important to protect you in the event of a lawsuit because, as you know, no set of plans is perfect (nor is perfection the standard of care).

Be careful, though. Do not promise to provide a higher standard of care than the “professional standard.”

If you are asked to sign a contract that states you will use your “professional best,” “best efforts”, “highest care” or similar, you are being asked to sign something that could cost you your E&O coverage.

Examples of such language:

[Architect] [Engineer] shall perform the Services in accordance with the highest standards of professional competence in the industry.

[Architect] [Engineer] shall exercise a high degree of care and diligence in providing the professional services.

[Architect’s] [Engineer’s] services shall be of first class quality and free from defects.

E&O policies cover you for failing to meet professional standards, but not in cases where you agree by contract to provide a higher/better/best standard.

Explain the risks in such language to your owner clients. No owner will want to put your insurance policy in jeopardy, and they should be willing to strike or modify that language to ensure that your work on the construction project is fully protected and covered by your E&O policy.

Some examples of coverable standards:

All services to be performed shall be performed in a manner consistent with that level of care and skill ordinarily exercised by members of Designer’s profession.

All services shall be performed in a manner consistent with that level of care and skill ordinarily exercised by members of Designer’s profession currently practicing in the location of the project for which the services are rendered, or similar locations.

Remember this, and make sure your future construction contracts contain favorable language that will actually be insurable. You know–the whole reason you have professional liability insurance in the first place!

About the Author

Melissa Dewey Brumback, who blogs at www.constructionlawNC.com, is an attorney at Ragsdale Liggett in Raleigh, North Carolina, where she represents architects and engineers in risk avoidance, contract negotiation, and construction litigation.

The Temptation to Cut Corners on Insurance

By Lynda

wood-jetty-landing-stage-sea When it comes to insurance, cutting costs without determining the risks can leave your design firm vulnerable. In a recent IA Magazine article called Are Your A&E Clients Cutting Coverage Corners?, editor Jacquelyn Connelly outlines three crucial “coverage developments” pertinent to architects and engineers:

Cyber liability
Design-build contracts
Stricter insurance requirements

These categories are rapidly changing and expanding. Knowing where the risk comes from isn’t always clear. Design firms, especially a small ones, can easily underestimate their exposure. Connelly quotes Barbara Sable, assistant vice president of the RLI Design Professionals Program (an a/e ProNet sponsor):

“Even the smallest of A&E firms—which often are buying insurance because they’re contractually obligated to, not because they perceive any real exposure—can be in the wrong place at the wrong time. For example, a small A&E firm may be responsible for the maintenance of traffic on roadways or bridges. In the event of an accident, “they may be one of the deepest pockets available associated with that crash.”

We encourage you to read the full article and consider your own firm’s professional liability coverage today. If you have questions about whether your limits are adequate, be sure to contact your local a/e ProNet broker and ask. That’s what we’re here for.

Design Professionals and the Give-and-Take of “Standard Contracts”

By Lynda

The word standard implies many things. A bar to be cleared; a rubric to be followed. But for design professionals, the word becomes tricky when applied to contracts. Project owners often want to keep things simple by requiring so-called Standard Contracts for all parties. This is a problem for architects and engineers, especially from an insurance perspective.

Construction contracts cause problems for design professionals.

The following are a few Frequently Asked Questions we see from architects and engineers on this issue:

My project Owner insists on using their own contract for hiring my professional services. They are adamant this is a Standard Contract. How should I respond?

There is no such thing as a Standard Contract. Be sure to read each contract submitted by your clients carefully. You need to understand both the client’s expectations and your firm’s rights and responsibilities. It is a good idea to have all owner-drafted agreements reviewed by your attorney and/or insurance broker. This will help to determine whether you are accepting responsibility beyond what common law would hold you to in the absence of the agreement. If, for example, you agree to accountability beyond the protection afforded by your professional liability insurance, that’s a problem.

When I perform professional services for a Contractor in lieu of an Owner, should I be concerned?

Yes. Construction contracts are not meant to be used in this arrangement; they are not designed to meet the needs of the design professional.

What are some of the problems with using “construction contracts” for design services?

Construction contracts are problematic for design professionals. A General Contractor’s contract with a project Owner includes certain requirements (e.g. means, methods, procedures, sequences, safety, etc.). These requirements trickle down to construction subcontractors the verbiage of construction contracts. Beyond that, none of these requirements meet the test of what a design professional should required to do on the same job.

Contract document libraries available via the AIA and EJCDC can be a good place for design professionals to begin. These are standard in the sense that they are templates. However, it’s still important to seek individualized guidance from your attorney and/or insurance broker.

What are some of the other problems with utilizing “construction contracts” for design services?

Most construction contracts contain warranties/guarantees, and some have performance standards. To our knowledge, all professional liability insurance policies for design professionals exclude coverage for warranties/guarantees and (likely) performance standards. Remember: if you commit your design firm to more responsibility than the law expects of you, your insurance policy cannot protect you the way that it should.

We hope you’ve found this helpful. As always, be sure to contact your local a/e ProNet broker if you have further questions.

Certificates of Insurance: Why You Can’t Always Have It Your Way

By Lynda

Design professionals are often asked by their clients to sign contracts that include comprehensive—sometimes unreasonable—insurance requirements and indemnification terms. These are usually drafted with the goal of protecting owners, clients, contractors, or other project participants. But how does this work when the required coverages aren’t found in the commercial insurance marketplace?

Certificates of insurance (COIs)—which are also often requested in those professional service contracts—provide summaries or verification of current coverage, including policy effective dates, insurers, and certain policy limits. A certificate gives a snapshot to the requestor (usually known as the certificate holder) for informational purposes. It’s important to understand that in no way does a certificate endorse, amend, alter, or extend coverage; nor does it act as a contract. Certificates are often provided using a set of industry standard forms produced by ACORD (formally known as the Association for Cooperative Operations Research and Development), which indicate:

THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS ON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE REPORTED BY THE POLICIES DESCRIBED BELOW.

Issuers of COIs generally strive to accurately reflect the insurance policies that are in effect, but those who are relying on the forms need to keep in mind that it’s virtually impossible to summarize an insurance policy of over a hundred pages in a form that contains a few boxes. Adding to this, those who are issuing insurance certificates often struggle as they try to confirm in a COI that specific and detailed contractual requirements are—or aren’t—being met.

One common challenge is meeting a request that an insurer provide notice of a policy’s cancellation to the insured’s clients. To do so, the insurer would need to track all such requirements for all insureds for the duration of each contractual requirement—which may even be unspecified. With this in mind, ACORD made changes in 2010 to clarify that insurers’ notification duties are as defined in the insurance policy, not in the professional services contract.

Generally, courts agree that a certificate of insurance is not a contract. One fundamental reason is that no consideration—or payment—is given by the certificate holder to the issuer. However, there is a duty to make accurate representations within the confines of the overall system. To consider this, we’ll review a few recent cases interpreting the obligations for COIs and their issuers. Continue reading “Certificates of Insurance: Why You Can’t Always Have It Your Way”

Commercial Auto Policy Myths

By Lynda

Company cars. Employee drivers. MVRs. Hired and Non-Owned Auto Liability.

Commercial auto insurance is an important coverage for design firms, and it’s also a deceptively simple one. In a short article, a/e ProNet member Walker & Associates Insurance urges design professions to be “aware of the top commercial auto insurance myths. What you don’t know can cost you.” For example:

MYTH: Your insurance covers all employees driving company vehicles.

Many commercial auto insurance policies cover only employees who are specifically named on the policy. When in doubt, check it out before handing the keys to an employee. According to a recent study from the Insurance Research Council, after a period of decline, commercial vehicle personal injury protection claims are on the rise. Should your company vehicle become involved in an accident resulting in injury, expect to pay more to settle that claim if it’s not covered by insurance. — Read the rest of the Walker & Associates Insurance post here

You can find an overview of commercial auto insurance, along with other Typical Coverages for Design Professionals, on our website. If you have additional insurance-related questions, don’t hesitate to call your local a/e ProNet broker.

Insurance for Design Professionals vs. General Contractors

By Lynda

When it comes to the world of construction contracts, there is no one-size-fits-all solution regarding insurance. The Design Professional’s insurance policies cannot and should not anticipate the needs and risks of a General Contractor, for example. This comes up all the time at the beginning of contract negotiations. You can sidestep disputes further down the road if you understand the way your insurance policy and carrier will respond in the event of a claim. Here are a few Frequently Asked Questions:

The General Contractor has requested to be named as an “Additional Insured” on my professional liability policy. Can I accommodate this request?

It is not a good idea to name the contractor as an additional insured in the sub-consultants design E&O policy. The principal reason involves the “insured vs insured” exclusion found in virtually all design E&O policies. If the contractor believes he has a cause of action against his sub-consultant design firm, this exclusion will eliminate coverage for both the contractor and the design firm.

How can the General Contractor protect themselves?

The General Contractor may purchase “Contractor’s Professional Liability insurance.” This will protect the General Contractor from vicarious liability claims from third parties and also solves the problem of the “Insured vs.Insured” exclusion that would apply if the contractor would bring an action against the sub-consultant design firm, when named as an additional insured. Another benefit is a separate set of insurance limits. The General Contractor would have their own set of insurance limits that would not be subject to dilution or reduction from other claimants against the design professional’s errors & omissions policy covering their general practice.

Why would the General Contractor need Professional Liability coverage?

The General Contractor has the same “Vicarious Liability” for the negligent acts, errors or omissions of their professional sub-consultants as they do for the non-professional subcontractors. The General Contractor cannot rely solely on the hold harmless indemnity clause in the contract document. The hold harmless may not be enforceable in certain jurisdictions because of the language of the indemnity clause. The Sub-Consultant may not have sufficient insurance or their policy limits may be reduced or exhausted from other claims. The policies may be cancelled by the carrier giving notice or for non-payment of premiums. The General Contractor is then left with a false sense of security if they rely on the general liability insurance of the sub-consultant, which excludes professional design activities and responsibilities.

If you had more questions about this common issue, call your local a/e ProNet broker.

How should a design-build project be structured?

By Lynda

Risk management best serves design professionals when it’s put in place prior to the acquisition of risk. Not damage control strategies, but damage avoidance strategies. In the case of design-build projects–arguably some of the riskiest in the business–this preemptive management of risk should include a number of questions asked by all parties involved. Among those questions: How should the design-build project be structured?

At Victor O. Schinnerer’s most recent Annual Meeting of Invited Attorneys, Jonathan C. Shoemaker, of the Lee & McShane law firm, answered this question and others based on his own research “on the contractual and professional risks of participants in design-build projects.”

According to Shoemaker, there are many ways “to structure design-build teams, including teaming agreements, joint ventures, partnerships, and newly-formed companies owned by the design-build team.” The following is an excerpt from a post on the Schinnerer website:

[Shoemaker] defines the organization of a design-build team as either a vertical relationship (e.g., a traditional prime contractor/subcontractor organization) or a horizontal relationship. And he points out that the vast majority of design-build teams are contractor-led, with the design firm serving as a subcontractor to the contractor.

According to Shoemaker, a horizontally structured relationship is where a contractor and a design firm come together to form a joint venture, a partnership, or a new company to provide fully integrated design-build services. He defines the most common horizontal structure, the joint venture, as “a business undertaking by two or more persons engaged in a single defined project.” A joint venture structure typically includes:

joint control over the joint venture’s decisions (as opposed to the prime contractor having control);

liability for the joint venture’s losses (as opposed to liability for only the design professional’s losses);

and profit sharing (as opposed to only the profit earned under the design agreement).

Shoemaker also examines the risks to the design professional on a design-build project and discusses how the risks vary depending on the design firm’s involvement.

Visit the Schinnerer website to read the entirety of the post.

Managing Employee Benefits: A Three-Legged Stool of Protection

By Lynda

For many design firms, the ability to offer and maintain competitive employee benefit programs continues to be one of the keys to attracting and retaining the best available talent. Yet, the regulatory and legal environment within which these benefit plans are being designed and administered is more complex than ever. Not only are there ERISA issues, but there is a literal alphabet soup of COBRA, FMLA, HIPAA, etc. With this greater complexity and heightened scrutiny comes risk: risk for the company itself, and the executives and administrators responsible for overseeing and administering the benefit plans.

The good news is that the risks are manageable and design firms with employee benefit programs can take advantage of a three-legged stool of insurance protection – Employee Benefits Liability Insurance, ERISA Bonds, and Fiduciary Liability Insurance. Many executives and administrators are confused about what each of these covers and whether or not they need them. This article will explain how each coverage evolved and what specific exposures they address. We also examine some risk scenarios based on actual litigation.

Employee Benefits Liability Insurance

Employee Benefits Liability insurance (EBL) very simply provides protection against claims arising from errors in the administration of employee benefit plans. This coverage was developed in the mid-1970s largely in response to exposures that arose from the 1962 court decision in Gediman v. Anheuser Busch. In this case, an employer was held accountable to the estate of a former employee for providing incorrect information to the health insurance company, which then in turn denied the employee’s claim. Thus, EBL insurance addresses claims arising out of errors or omissions in the administration of benefit plans. Three typical exposure scenarios covered by EBL insurance include:

An employer failing to properly enroll an employee for health insurance coverage, resulting in a denial of coverage.
An employer not providing an employee with the appropriate COBRA information after termination, resulting in the ex-employee being unable to continue participating in the health insurance plan as required by law.
An employer incorrectly calculating the amount of an employee’s pension benefit so that the employee decides to retire early only to find that the amount is much less.

Continue reading “Managing Employee Benefits: A Three-Legged Stool of Protection”