So you're off to start your own Architectural or Engineering firm to make the big bucks?
Starting a design firm is a big undertaking but can be a rewarding experience. You must be aware of the potential risks. Errors & Omissions insurance also known as Professional Liability insurance is a necessary form of protection that all architects and engineers should consider.
Professional liability Insurance is a type of business insurance that protects architects and engineers against claims made by clients for errors or omissions in their work.
These claims can be costly and time-consuming to defend, even if it's baseless.By having professional liability in place, architects and engineers can protect the business they own and their assets from the financial consequences of these types of claims.
How does Professional Liability insurance work?
Professional Liability can be a critical safety net for architects and engineers, especially those who are just starting their firm and may need more financial resources to fall back on.
Suppose a claim was made against a design professional for an error or omission arising from their professional services. In that case, the insurance company will provide financial coverage to help pay for legal fees and settlements or judgments.
It's important to note that professional liability does not cover every type of risk that design professionals may face.
For example, it will not protect against bodily injury or property damage claims. Other types of business insurance, such as general liability insurance, may cover these risks.
Not all design firms are created equal with the risk they assume. So, what should architects and engineers consider when shopping for professional liability insurance?
Policy limits:
The policy limits will determine the maximum coverage the insurer will provide in case of a covered claim. Choosing a policy with limits that are appropriate for your business and the types of projects you work on is essential. An experienced insurance broker in the A&E industry can provide a general idea of what limits you should lean towards.
Suppose a claim was made against a design professional for an error or omission arising from their professional services. In that case, the insurance company will provide financial coverage to help pay for legal fees and settlements or judgments.
How to select the proper policy limits?
- Client Types/ Contract Requirements: This is a great starting point to understand what limits your design firm should be carrying. Most of the time, contracts with your clients (depending on who’s hiring you) will provide a general idea of what limits they expect you to have. We see that a good starting point for small firms would be $1,000,000 per claim/ $1,000,000 per aggregate. Larger firms could be required to carry $2,000,000 or higher to satisfy contract requirements. Once you get a feel for the type of clients you work with, you should have a starting point on the limits to obtain through your carrier.
- Revenue: The revenue of a design firm can impact the insurance limits that an architect should have in several ways. The size and scope of a design firm’s projects may be correlated with the firm’s revenue.
- Project Types: Some projects, such as those involving condominiums or high-rise buildings, may carry a higher risk of a professional liability claim and require higher policy limits. More complex projects may carry a higher risk of a professional liability claim, and as a result, the firm may need to carry higher insurance limits to provide adequate protection.
- Your assets: It’s essential to consider them when selecting policy limits, as professional liability claims can potentially put your assets at risk. If you have significant personal investments, consider higher policy limits to provide additional protection. Should your policy limits max out on a covered claim, you can be responsible for the remaining claim’s expenses and damages.
- Your budget: Policy limits will typically impact the cost of your premiums, so it’s essential to consider your business budget when selecting policy limits.
Deductibles:
How do deductibles work?
A deductible is the amount architect will have to pay out of pocket before their professional liability policy kicks in. Higher deductibles can result in lower premiums, but choosing a manageable deductible for your business is essential. Deductibles can come in different types in professional liability policies. We see that "deductible types" can be misunderstood when comparing options.
Dollar One Defense or First Dollar Defense (Damages)
"First Dollar Defense" or "damages-only deductible" is a provision that can be helpful for policyholders who are worried about the financial burden of paying a deductible for the costs of defending a claim. This deductible can be especially useful if a covered claim goes nowhere and an attorney's help is needed to resolve the issue. However, it's worth noting that not all policies offer this type of deductible, and the terms and conditions of this provision may vary from one policy to another.
If the policyholder is found at fault and damages are awarded, they will be required to pay a deductible. The insurance company will then cover any additional damages above that amount. An architect or engineer with a professional liability insurance policy with a "dollar one defense" deductible will not have to pay any out-of-pocket costs for legal fees or other defense costs if a client sues them. These deductible types can be desirable but require an additional cost.
Straight or Standard Deductible:
On the other hand, a "straight deductible" provision means that the policyholder will be required to pay a certain amount of money out of pocket before their insurance coverage kicks in. For example, if a policy has a $1,000 straight deductible, the policyholder must pay the first $1,000 of defense costs themselves before the carrier will start covering the costs.
Deductible Aggregate:
A deductible aggregate means that the professional liability policy sets a maximum amount that a policyholder will be required to pay in deductibles for a policy period. Regardless of the number of claims made or the amount of each claim, the policyholder will not be required to pay more than the deductible aggregate.
Example:
Imagine that an architect has a professional liability policy with a deductible of $5,000 per claim and $10,000 aggregate. During the policy period, the architect faces three separate lawsuits from clients
Since the policy includes a deductible aggregate, the architect will not be required to pay more than $10,000 for the three claims. If the policy did not have a deductible aggregate provision, the architect would be responsible for $15,000. In this case, the architect would pay $10,000 in deductibles (the total amount of the deductible aggregate)
How do you select a deductible that is best for you?
This ultimately comes down to preference related to budget and financial responsibility you want to carry for a covered claim.
The amount of your deductible will directly impact the cost of your premiums. Higher deductibles can result in lower premiums, but choosing a manageable deductible for your business is essential.
You should consider the typical claim amounts your firm may experience and choose a deductible that makes sense for your business. A lower deductible may be appropriate for firms that expect to face less severe claims, while a higher deductible may make sense for firms that face a higher risk.
Coverage exclusions:
What does Professional Liability not cover?
It's important to carefully review the exclusions in architects' and engineers' professional liability policy to ensure that it covers the types of risks relevant to your business.
We put together a list of excluded project types and activities that are often overlooked. This may vary from policy to policy and should be thoroughly reviewed with your insurance broker.
- Bridges and Tunnels
- Condominiums
- Dams
- Express Warranties or Guarantees
- Construction, Erection, Fabrication
- Faulty Workmanship
- Industrial Waste Treatment:
- Pools:
- Naval / Marine:
- Parking Structures:
- Pre-engineered Buildings / Structures:
- Retaining Walls
- Foundation Design
How to choose a Professional Liability Carrier?
To choose a carrier, consider the carrier's AM Best rating to evaluate their financial stability and ability to pay out claims, whether they are an admitted or non-admitted carrier, and the A&E risk management resources they provide, and let's not forget the costs!
AM Best Rating:
AM Best is a global credit rating agency specializing in rating insurance companies financial strength. AM Best's ratings are widely used in the insurance industry as a benchmark for insurance carriers' financial stability and creditworthiness.
An insurance carrier's AM Best rating reflects the company's ability to meet its financial obligations to policyholders. The ratings range from A++ (superior) to D (poor). A carrier with an A++ rating is considered to have a solid financial foundation and can meet its financial obligations to policyholders. A carrier with a lower rating may be riskier for policyholders, as it may be less able to pay out claims in the event of a loss.
You can visit the AM BEST website to conduct your own research: https://web.ambest.com/home
Admitted Vs. Non-Admitted Carriers:
Admitted:
Refers to insurance sold by a licensed company to sell insurance in a particular state. Admitted insurance companies are subject to the regulations and oversight of the state insurance department. Policyholders have the right to file complaints with the state insurance department if they have issues with their insurance coverage.
Admitted carriers are insurance companies that have been licensed by a state insurance department to sell insurance policies in that state. In some cases, admitted carriers may be backed by a state-operated guarantee fund, which is a type of protection that provides financial assistance to policyholders in the event that an insurance company becomes insolvent or is unable to pay claims.
Non-admitted
Non-admitted insurance may be used to insure risks not covered by admitted insurers or to fill coverage gaps in a policy. Also known as excess or surplus lines insurance, it is insurance that is sold by a company that is not licensed to sell insurance in a particular state.
Non-admitted insurance companies are not subject to the same level of regulation and oversight as admitted insurance companies.
Policyholders may have different rights and protections than they would with an admitted insurer. It's common for design firms with high-risk profiles to go this route since it can be more affordable to place coverage with a Non-Admitted carrier. Structural Engineers, Geotechnical Engineers, or design firms that specialize in High-Rise or Condominium projects might have to place their coverage with a Non-Admitted carrier if they can't be placed with a carrier in the Admitted market.
Risk Management Resources:
- Risk assessment tools: These tools help design firms identify potential risks in their projects and evaluate the likelihood and impact of those risks. Project selection checklists and contract guides can be a good indicator of a carrier’s involvement in supporting their policyholders.
- Risk control resources: Carriers may provide design firms with guidance on controlling or mitigating identified risks, such as through contracts and waivers.
- Educational resources: Carriers specializing in architects and engineers coverage can provide educational materials and training on risk management topics, such as contract review, risk assessment, and risk control measures.
Costs:
It's worth noting that the price of professional liability can vary widely depending on several factors, including the size and scope of your business, the types of projects you work on, and the location of your firm.
- Location: The design professional’s business location can also impact the cost as certain areas may have higher risks or higher premiums due to various factors, such as the likelihood of natural disasters or the prevalence of crime.
- Risk profile: The risk profile of design professionals, including their professional discipline and its potential risks.
- Size of the firm: The size of the business, including the number of employees and revenue. Firms just getting off the ground can see premiums as low as $1,500 per year.
- Company: Different carriers can have different rates for the same types of coverage. Some insurance carriers have experienced higher claim frequency with certain project types, while another may have yet to. It’s essential to shop around and compare quotes from multiple insurers to find the best coverage at the most affordable price. Before submitting insurance applications for our clients, we look at their project types, location, and revenues to get an idea of where we might find the best balance of coverage and costs.
Design firms can secure coverage for as low as $1,500 a year. In comparison, liability policies for Engineers can start at $3,500- $4,000 per year. For more established firms, premiums can range from $10,000 - $100,000 + per year.
Where there's a risk is a reward. There's always the possibility of facing a professional liability claim from a client. Professional liability is a critical form of protection that can help protect your business and assets from financial losses due to these types of claims.
Professional liability can cover legal fees and settlements or judgments in the event of a claim, but it's important to note that it does not cover every type of risk that design professionals may face.
When exploring professional liability insurance, it's important to consider policy limits, deductibles, and the financial stability of the insurance company. By understanding your business and risk profile, you can make an informed decision about the right professional liability insurance coverage for your design firm.