Gibbes Burton is delighted to introduce our guest blogger for this week, Barbara Sable with RLI Insurance – www.rlidesignpros.com. This article was developed by aePronet – www.aepronet.org. Local professional liability broker IMCI was gracious enough to provide us with this amazing blog topic. You can find out more about IMCI at www.imcipls.com. We hope that you enjoy!
The Background
It’s an age-old question that defies an answer. The best answer—but not one that makes anyone feel better—is that you’ll know if your professional liability insurance limits are adequate when the worst case scenario claim happens. At first blush, many design firms find this answer extremely frustrating. Professional liability insurance has been available for 60 years. Why has no one been able to create a formula to determine appropriate limits?
The answer is that settling or adjudicating claims is as much art as science. We could probably determine an average claim payment for many project types as a percentage of construction values. However, there’s significant fallacy in that analysis for the following reasons:
- Like many averages, it falls within a very large range of possibilities. If your claim ultimately turns out to be on the high end of that range, the average is now meaningless to you.
- The breadth of the range is caused by a wide array of factors, the most significant of which include:
- The state in which the claim occurs. State laws and their interpretation vary widely and substantially impact liability;
- The type of damages. A claim that involves loss of life or a catastrophic collapse can drive up the indemnity costs, even for a design firm that is only peripherally involved;
- The chosen dispute resolution mechanism. Mediation, arbitration, and litigation are the most common methods to resolve disputes. Mediation often, although not always, reduces costs. The outcome of arbitration and litigation can be far more risky and far less predictable;
- The tenacity of the claimant pursuing the claim. A claimant with a vendetta or an unlimited litigation budget can materially increase your exposure; and
- How much insurance is available through other sources. If your firm turns out to be the only one with available insurance proceeds, you may pay more.
Some firms look at that last fact and conclude that they don’t want to be the “deep pocket” or the “lightning rod.” Principals of those firms may not be aware that some claims settle above policy limits, so writing your own check once insurance has been exhausted is well within the realm of possibilities.
So, Are My Limits Adequate?
The adequacy of limits is determined by many factors. In this section, we’ll explore some of those factors.
Contractual requirements
One of the primary reasons that firms look to increase their liability insurance limits is to meet contractual requirements. The good news is that it’s generally relatively easy to find underwriters who are willing to help you comply. The bad news is that it requires analysis to determine whether or not you want to or should comply. Here’s an example: a civil/survey firm with roughly $10 million in annual revenues is providing an ALTA survey for a new mixed use project. Their fee? Less than $15,000. The limit required by the developer? $5 million. What the surveyor needs to think about is what happens if these services actually generate a $5 million claim? Will they be able to get insurance after that? The answer is maybe not. Is it worth it to put the future viability of your firm at risk for a $15,000 fee? That said, once you make a commitment to maintain a certain limit in your contract, you’re required to abide by it for the duration of the obligation.