When Should a New Architecture or Engineering Firm Get Professional Liability Insurance?

Short Answer

For a new architecture or engineering firm (A&E firm), it can make sense to consider professional liability insurance before beginning professional services on the firm's first projects, especially once contracts are being signed or substantive design work is starting. Waiting until the firm generates enough revenue to justify the cost often means the firm has already performed work before coverage was in place because these policies are generally written on a claims-made basis, when the policy starts and what retroactive date applies can matter for whether that earlier work is covered.

The chicken-and-egg problem for New A&E firm Insurance

Many new architecture and engineering firms face the same problem when considering new A&E firm insurance. An architect or engineer leaves their employer, starts moonlighting, or opens a small practice. Initially, the firm may only have a few small projects and limited revenue.

An architect or engineer leaves their employer, starts moonlighting, or opens a small practice. Initially, the firm may only have a few small projects and limited revenue. Paying for professional liability insurance can feel hard to justify when the business isn't making much money yet.

So the owner thinks: I'll complete a few projects, generate some revenue, and then buy insurance.

The problem is that the firm has now performed professional services before the insurance policy was purchased. Even if the work seemed minor, such as consulting, schematic design, preliminary layouts, or a small fit-out, it can still create professional liability exposure. This is one reason new A&E firm insurance should be considered before the firm begins taking on professional services.

Can a small design project create a large claim?

Potential professional liability exposure isn't necessarily proportional to the fee an architect or engineer earns.

A firm might collect only a few thousand dollars for a project, but an alleged design error could contribute to damages significantly greater than the firm's original design fee. This is one reason new firms should think about exposure based on the work they're performing, not only on how much revenue the business has generated so far.

What happens if you buy E&O insurance after you've already completed projects?

This is where the retroactive date and prior-acts coverage become important.

Professional liability insurance for architects and engineers is generally written on a claims-made basis. If a firm purchases its first policy after it has already performed professional services, it should understand whether the new policy provides any coverage for work performed before the policy's inception.

Depending on the carrier, application, underwriting, and policy terms, prior work may be treated differently. A new firm should disclose its prior professional services accurately during the application process and review the applicable retroactive date and prior-acts provisions.

Example

A new architecture firm has three projects ready to begin and expects to move into construction documents shortly.

Rather than starting the projects and purchasing professional liability insurance later, the firm applies for coverage before beginning those services. That gives the firm a chance to understand its insurance program before taking on the new professional exposure, rather than trying to sort it out retroactively.

What to check before buying New A&E Firm Insurance

Before deciding when to buy, a new firm should look at:

• Whether professional services or contracts are already underway or about to begin
• What retroactive date and prior-acts provisions a policy would offer
• Whether prior work needs to be disclosed accurately during the application
• What the requested limits and deductible should be based on project types
• What projected revenue, client types, and contract terms underwriters will ask about
• Whether waiting even a few weeks could mean starting work before coverage is bound

These are some of the factors that can affect when new A&E firm insurance should be purchased and what coverage the firm may need.

Related Questions

Do I need E&O insurance before my firm has revenue?

Revenue is only one consideration. If the firm is already performing professional services, it may already have exposure even if revenue is still limited.

Does professional liability insurance cover projects completed before I bought the policy?

It depends on the policy's retroactive date, prior-acts provisions, underwriting, and other terms. Don't assume previously completed work is automatically covered.

Should I wait until I have larger projects before buying coverage?

Project size and design fees don't necessarily determine the potential severity of a claim. Smaller projects can still create meaningful exposure.

How quickly can a new firm obtain professional liability insurance?

Timing depends on the firm's operations and underwriting requirements. For straightforward small A&E firms with a completed application and the required information, quotes may sometimes be available relatively quickly.

What information will I need to get a quote?

Expect underwriters to ask about the firm's professional services, revenue, project types, client types, prior experience, prior work, claims history, and requested coverage.

More on This Topic

Professional Liability

Helps respond when a client alleges your professional services caused a financial loss, project issue, or other damages.

Architects

Design liability, specification disputes, and ADA compliance allegations are among the most common exposures.

Project Specific Professional Liability

A standalone policy covering one project under its own limit, separate from your annual program.