Because no design professional is perfect, all architects and engineers are exposed to potential claims for errors and omissions. The vast majority of design professionals purchase professional liability coverage. What should you consider when purchasing or renewing your E&O policy?
How Much Coverage Do You Need?
First, you need to consider carefully how much insurance coverage you really need. If you are primarily working on residential or small commercial projects, your insurance needs will be vastly different from a firm that works on large complex manufacturing projects. It is tempting to purchase lower limits to reduce your premium, but any liability exceeding the limits of insurance poses risk to your firm and to the design professionals who are personally involved in projects. You need to consider not only the limit for each claim but also the aggregate limit (the total limit that applies to all claims within a policy period). For example, if your practice focuses on condominium projects, your aggregate risk is higher because those projects historically generate more claims and you may experience more than one claim in a given policy period triggering application of the aggregate limit. In some instances, your clients will dictate the limits that they expect from you.
Check the Retroactive Date
Second, you should address the retroactive date. Professional liability policies are written on a “claims made” or “claims made and reported” basis. Thus, claims must be made, or made and reported, within the policy period. Professional liability policies have a retroactive date. Claims that arise from acts committed prior to the retroactive date will not be covered under the policy. The older the retroactive date, the more coverage that you will have.
Consider the Deductible
The deductible is the amount you will have to contribute if there is a claim. It is tempting to purchase insurance with a high deductible because it decreases the premium for the policy. Keep in mind though that you will have to pay the deductible if there is a claim and that your failure to make payment could be considered a failure to cooperate with your insurer under the policy, potentially risking your coverage. You need to address whether the deductible applies to defense costs or whether it applies only to the payment of the claim. If the deductible applies to defense costs, the costs will likely be incurred at the beginning of a claim as soon as the insurer hired an attorney to represent you. Many high quality carriers offer reductions to the deductible if a claim is settled at mediation.
Pick a Quality Insurer
There are a number of insurance carriers who want your business. You need to investigate the carriers that you are considering. Ask your insurance broker if the carrier specializes in design and construction policies. Carriers that focus part of their business on companies like yours provide better service and support. Some carriers provide educational programs and assistance with contract review that are valuable benefits to policyholders. Ask about the people that handle claims for the carrier. Many quality professional liability insurers hire attorneys or experienced claims employees to handle E&O claims. This provides their insureds a high quality of service in the event of a claim. Check the insurer’s rating on AM Best Company, which assess each insurer’s financial strength and ability to meet its financial obligations.
Professional liability insurance is an important risk management tool to protect the assets of your firm and the personal assets of the design professionals. When it is time to purchase coverage or to renew your policy, do not limit your purchasing decision to price. Instead, give careful consideration to the carrier and policy.
If you have any questions about insurance coverage for design and construction professionals and their projects, we would be glad to help you. The attorneys of Gibbes Burton are passionate about helping professionals and businesses to minimize risk and build success.