Professional liability insurance is designed to protect architects, engineers, surveyors, and consultants (also known as design professionals) from potentially costly lawsuits or claims from clients or third parties. Many design professional purchase this coverage begrudgingly because 1) the extra cost to their business and 2) it can be difficult to understand and does not always seem useful.
However, professional liability insurance is a great tool for design professionals to protect themselves and their firm. That is why it is our mission to take the frustration out of understanding and purchasing professional liability insurance for firms like yours.
So, today, we are going to breakdown professional liability insurance: the what, why, how and where.
What is professional liability insurance and why do you need it?
Professional liability insurance is like any other type of insurance. It is the transfer of risk from you, your firm and the design professionals working for your firm to the insurance company. What makes it different is professional liability insurance is intended to cover a design professionals negligent acts, errors, or omissions arising out of the performance of professional services. In other words, if an incident resulting from your design occurs, and a client demands that you pay for the damages or if a third party is injured. The insurance company providing the professional insurance will take the financial burden to defend and make those legally obligated payments and not the firm.
There are two very good reasons why you need it:
1) Personal liability
The first reason for having professional liability insurance is because of your personal liability. If you make a mistake or a client is not satisfied with your work then your firm has to endure those financial burdens. In addition, like doctors and lawyers, you can become personally liable for any neglectful acts or errors and omissions.
Now, I’ve never met an architect who expected to make a mistake. Additionally, design professionals are not legally required to design to perfection. However many design professionals contractually agree to provide the “perfect” design with “perfect” outcomes. In other cases, you may just have a difficult client who wants you and your firm to design for free. This is where a lot of the frustrations with buying insurance comes from, because most design professional believe “it will never happen to me, or our firm is meticulous and will not make a mistake.” But mistakes do happen, and some clients are just tough to deal with.
A simple miscommunication of change orders can cost big. In fact, the average claim from change orders was approximately $300,000. (http://insurancemarketsource.com/asktheexpert/ask-the-expert-shedding-light-on-architects-and-engineers-eo-insurance/)
Personal liability is not something to take lightly as it could put your personal assets at risk.. (you can learn more about personal liability in this article)
2) Client requirements
If protecting your business from financial ruin wasn’t enough of a reason to have professional liability insurance, you also have to consider your client's requirements of you.
Before a client hires your firm, they often want to see a certificate of insurance. A certificate of insurance is issued by your insurance broker on behalf of the insurance company. This offers some assurance to your client that your design negligence or errors will be covered by an insurance company.
In other words, your firm needs professional liability insurance to meet your client’s contractual obligations of their project. This way, if anything should happen, whether it is a mistake, miscommunication, wrong decision or simple error turned huge issue, all parties can have confidence that it will not create a financial disaster.
How does professional liability insurance work?
Now that you understand why you need professional liability insurance, it’s time to discuss how it works. From a basic level of understanding, professional liability insurance works like most insurance policies:
- An incident arises resulting from your professional services
- Your firm files a claim
- Money to defend you and your firm as well as any payment obligation is paid out to your limit (subject to the terms and conditions of your policy), by the insurance company. If the amount exceeds your limits it will be covered by you.
When it comes to professional liability insurance, keep in mind that there are some things that are covered and other things that are not. Here are some examples:
- Liability for negligent acts, errors, or omissions from the performance of professional services.
- Covers the entity, partners, officers, and directors, employees (past & present).
- Defense costs for covered claims.
- Cost of covered settlement.
- Faulty workmanship, construction or installation by the design professional (Means & Methods)
- Actual products designed, manufactured or sold/distributed by the design professional.
- Warranties or guarantees made by the design professional.
- Contractual obligations unless you would have been legally liable
- Claims arising from projects prior to securing professional insurance.
All design professional policies are issued on a claims-made basis
- This means a policy must be in effect at the time of the claim and arise from a project worked on after the coverage placement.
- Coverage ceases when the policy is cancelled or not renewed even if at the time of the project insurance was in place.
Cost of Insurance
- The cost of insurance can be impacted by the services offered, types of projects, billings, and claims history.
- Most insurance companies have minimum premiums and in general you can expect to pay between $1,000 to $1,500 in premium for smaller firms.
- It should be noted that all policies are not created equal. Many insurance companies offer cheaper policies that include significantly less coverage.
The purpose of professional insurance is to protect your firm and the design professionals working for your firm, from claims resulting from professional services. Coverage is subject to the terms and conditions of the policy. Having the right insurance broker to help navigate and evaluate your insurance buying is critical given the many nuances involved with professional insurance.
The Best way for Architects and Engineers to Buy Professional Liability Insurance
By now I hope you see how professional liability insurance is an asset to your firm. But it’s important to understand that there are different ways to buy this coverage and it will dramatically affect your experience.
Buying professional insurance through a generalist agent - There are a number of good agents that can handle your personal or small retail business insurance. However, most will lack the expertise to understand the unique exposures facing design professionals
Buying online – Over the last few years there have been many companies offering insurance solely online. While this is convenient at first, many design firms run into problems. For starters, it can be a challenge ensuring all the information you are filling out is right. But the real issue comes down the road when your firm has questions. Customer support is often extremely poor for many online insurance companies and it makes it extremely difficult to get answers when you really need them.
Finding a specialist that fits your business – The best way of buying professional liability insurance for your design firm is to find a specialist in design professional insurance. One that offers the coverage you need and understands your business, but also can offer the services you need to help your business flourish. Services like:
- help with completing the professional application,
- review of client contracts that can include one sided verbiage and
- coverage analysis when it comes time to proceed with a claim.
Working with an insurance agent who is a specialist can make a huge difference.
Don’t be fooled into thinking that everywhere you buy insurance will be the same. Having the right insurance broker can help you manage risks, attain lower premiums, and find the right companies to protect your business.
Professional liability insurance is there to protect your firm against professional mistakes related to your work. It is typically a requirement of your clients, in some states a professional obligation, and a sound choice to protect your business and personal assets.
It can be frustrating and challenging to know all the ins and outs of your professional insurance coverage, but this is why it is essential to having a broker who is as specialist in professional insurance that you can trust at your side.
If you have questions, or need help with your professional liability insurance, you can leave a comment below or contact us directly.