What is professional liability insurance?
Professional liability insurance, also known as Errors & Omissions insurance (E&O), provides coverage to defend and indemnify the design professional against claims alleging negligent acts, errors or omissions in the performance of professional services (Wrongful Acts).
Wrongful Acts are not limited to defects in plans and specifications. Coverage usually extends broadly to encompass most of the professional services rendered by architects, engineers, and other design consultants. The professional liability policy is meant to pay on behalf of the design professional those damages that the design professional is legally obligated to pay as a result of a Wrongful Act.
The policy deductible usually applies to each claim, and may or may not apply to the cost of defense. The policy limit of liability typically includes defense costs, meaning that the limit is eroded and can be exhausted by legal fees and other defense costs. Careful consideration should be made when deciding on an adequate limit of liability.
Policies typically exclude express warranties or guarantees; obligations under worker’s compensation laws; claims by employees for employment practices and; the costs to repair/replace faulty workmanship on construction performed by the insured. As with all insurance policies, it is important to read the exclusions to see how they may impact your business.
Professional liability coverage is written almost exclusively on a “Claims Made” form. Once the policy is canceled or non-renewed, all coverage will cease. In order to establish coverage, three conditions must be met:
- a policy must be in place at the time a claim is made and;
- a “retroactive” or “prior acts” date on the policy must be dated at least as far back as the services, giving rise to the claim, were provided; and
- notice in the appropriate form must be provided to the insurer within the policy term.
Sometimes the policy includes a grace period for the reporting of claims that runs between thirty to sixty days after coverage termination, but this should be defined within the policy form.
Few, if any, policies will provide retroactive coverage to the previously uninsured firm. It is therefore advisable to begin a professional liability insurance program as early as practical in one’s practice.
Why should an architect or engineer purchase professional liability Insurance?
A professional liability policy covers the cost of defense.
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. In that case, you’ll need to defend your firm against allegations of negligence. The cost of that defense can mount fast, even if your firm wasn’t in the wrong.
If you have the option to purchase a First Dollar Defense endorsement from your insurance company, you won’t be required to pay your deductible unless the insurance company ultimately pays a settlement payment on your behalf.
A professional liability policy also covers the cost of indemnification.
In the event that your firm is found to have been legally negligent, and that the firm’s negligence gave rise to the claim, your professional liability policy will step in and cover your firm for the damages you’re legally obligated to pay, up to the policy limit.
Please note: In most cases, defense costs erode the policy limit. Having adequate limits to cover both defense and indemnity is important.
Most project owners now require design professionals to have professional liability coverage.
If you’re in such a position for the first time, you probably have questions about the appropriate limits, deductibles, endorsements, etc., for your firm. We can help. Contact your local a/e ProNet broker.
What does Indemnification mean?
“To ‘indemnify’ does not mean that a claimant can profit from the A/E’s errors or negligence – it means that the claimant should be restored to the position they were in prior to the loss; they should be ‘made whole.’ As an example, if an A/E failed to specify interior doors on a new office building, the owner/client would not get ‘free’ doors as damages, but would instead be indemnified for additional expenses caused by adding the doors after the bidding process (e.g. additional shipping, extra installation charges, increased cost of the materials ordered at the later date, etc.).”
Can I add an Additional Insured to my Professional Liability policy? Why not?
“A common misunderstanding about E&O insurance involves a client’s desire to be added as an additional insured and to gain a defense through the E&O policy. A/Es cannot add additional insureds on their E&O policies because the other entities are not providing services on behalf of the firm. E&O insurers will not provide this coverage, thus a contractual obligation to do so becomes an impossible situation for the A/E. E&O policies typically also have an ‘insured versus insured’ exclusion in which there is no coverage for claims between insureds. If a client became an insured under the E&O policy, the A/E would not be covered for the client’s claim.”
What is a Contractual Liability Exclusion and does my policy have one?
“Professional Liability policies contain a ‘contractual liability’ exclusion which will not cover liability assumed by contract unless liability would exist absent the contractual undertaking. This exclusion is meant to protect the A/E from overextending themselves in an effort to protect a client.
“It is worth noting here that an Architect or Engineer does not have corporate protection (no ‘corporate veil’) from personal liability arising out of the performance of professional services. When considering the severe risks they may be assuming when providing design services, it is no wonder that the Architects and Engineers take contract negotiation and insurance coverages very seriously.”
What are some common professional liability policy endorsements?
Download our 2012 Microsoft PowerPoint presentation for the SDA on Typical PL Endorsements
When should I report a professional liability claim? Should I also report potential claims?
A professional liability claim is triggered by a demand for money or services. Once you receive such a demand, it’s easy enough to call your broker and report the claim. But what about reporting a situation that could give rise to a claim? Early reporting has many rewards. It is likely in the best interest of your firm to call to your broker anyway.
Let’s look at an actual situation:
An architect called his insurance broker to tell her that a one-ton balcony collapsed adjacent to a recreational pool area. The broker immediately notified the insurance company, who put the design firm in contact with a lawyer to start gathering information and to remind the principal of appropriate responses during the crisis. The insurer then hired a forensic engineering firm, all before the architect even pulled into the parking lot!
In addition, the broker offered her client tips on good public-relations skills when facing the media—still during their drive to the site. The architect was prepared with an alternate solution when his client wanted to sweep up and remove the debris, thereby erasing a critical part of the story should a claim be made later.
Reporting a circumstance or claim should begin your access to the power of your insurer, including its expertise, network of consultants and attorneys, and financial resources. You will not only get valuable assistance with the loss or possible loss, but you also often avoid making a bad situation worse.
What if our architect had told his client, “Don’t worry, I’ll take care of it” before his negligence was established, thereby possibly accepting financial risk without insurance coverage? Every claims adjuster has sad stories like this to tell. This is most common when a design firm receives a subpoena for testimony before being made a party to the action. Feeling they are fulfilling their civic obligation, they freely discuss matters with opposing counsel in what they may later consider an unwise fashion after they are joined in the claim and find that their casual, on-the-record comments harm their own case. Early advice from the claim adjuster can be invaluable.
Even if, later on, this policyholder discontinues their insurance or purchases coverage or options that are less favorable than they currently have, this claim will be covered under the terms and conditions of the policy in place on the date the circumstance was reported to the insurance company.
Even if you are not obligated to report a circumstance according to your policy requirements, you may still report it. By doing so, you will have more options to choose from at your next renewal. You may not ultimately decide to switch to a different insurance company, but you should have the freedom to do so. Unless the matter is reported, you are not free to consider other insurers, lest a claim arise with the new insurer from an unreported circumstance of which you were previously aware.
Who are the top professional liability insurance companies for architects and engineers?
a/e ProNet is a network of independent insurance brokers. This means we are not restricted by quotas and obligations dictated by any one insurance company. We represent the best interests of our clients by maintaining strong relationships with underwriters and staying up-to-date on the professional liability programs available in your state.
Our organization is sponsored by several insurance companies with top-tier professional liability programs. Visit our Sponsors page for links to each company’s A/E program page. Please keep in mind that this is not an exhaustive list. There are more professional liability insurance programs out there, and a/e ProNet brokers work with many of those, as well.
What’s the difference between these professional liability insurance companies?
Each professional liability program is unique. Here are a few of the factors that vary between them:
- Coverage-modifying endorsements, availability and language
- Pricing models
- Preferred disciplines (architects, civil engineers, geotechs, etc.)
- Application requirements
- Length of loss history (past claims) considered at each renewal
- Limits/Deductibles offered
- Multi-year policy availability
- Billing thresholds
- Premium credits
Can you explain the Professional Liability application process?
Professional liability insurance premium rates usually depend on four things:
- Annual Billings
- Type of Practice
- Claims History
- Project Types
You’ll complete an application that provides all this information. Your insurance broker will take this year’s application and place it side by side with last year’s. This can provide the kind of overarching perspective needed to secure fair renewal terms for your firm. Your broker will obtain quotes for insurance from both from your current insurance company and from other companies for your comparison. It’s a drill, certainly, but it can save you money and ensure that your firm is appropriately covered based on its unique practice.
Will my professional liability premium be going up this year?
Each year, the ACEC Risk Management Committee works with the American Institute of Architects, the AIA Trust, and the National Society of Professional Engineers to survey the leading professional liability insurance carriers. The results of the survey are presented in Engineering, Inc. This year, with construction spending higher than it’s been recently and expected to rise, the number of insurance companies providing professional liability insurance to architects and engineers is also growing. New markets increase the competition for more established companies, and keep rates stable, which means Eric Moore, President of a/e ProNet and Vice President of Moore Insurance Services, is optimistic.
“Nonrenewal is about the only reason Moore would suggest changing carriers” this year. “If you do see a claim, a carrier you’ve been with a few years is less likely to drop you, he says.”
Read the full article in the January/February 2016 issue of Engineering, Inc.