Unraveling the Mystery of Professional Liability Insurance

Nov. 1, 1998
Schools want assurances that the design firms on projects have professional liability insurance with appropriate policy limits, and that coverage will be through the life of the project and a reasonable time beyond.

Educational administrators and risk managers need to know that the architects, engineers and other design professionals selected for building projects have adequate and appropriate insurance. They need proof that the basic coverages - professional liability, commercial general liability and workers compensation - are in place. That is why most professional service contracts contain detailed specifications that detail the insurance design firms are expected to have.

Administrators and risk managers often are frustrated to learn that insurance specifications contain conditions that the architect or engineer cannot meet. In some cases, they can get a particular endorsement on a contractor's general liability policy, but not the same endorsement on an architect's professional liability policy.

Understandably, schools want assurances that the design firms on projects have professional liability insurance with appropriate policy limits, and that coverage will be through the life of the project and a reasonable time beyond.

Sometimes, however, specifications for professional liability insurance are written from a general liability perspective, and the coverage requested cannot be obtained. For instance, professional liability policies are written on a claims-made form, so an architect cannot agree, by contract, to guarantee that coverage will be in place in the future.

Further, professional liability insurance is tied to the professional standard of care. Therefore, an architect or engineer would be unable to persuade a professional liability insurance company to cover any act that leads to damages, rather than just the negligent acts covered in the policy language.

Naming the owner as an additional insured Project owners, seeking protection from potential lawsuits arising from injuries to construction personnel on or about the project site, often are named as an additional insured on the contractor's general liability policy. The same owners often are puzzled when design professionals explain they cannot agree to a similar request on their professional liability policies. Part of the reason lies in the nature of professional liability insurance.

To begin with, a professional liability policy covers design errors and omissions. Since the project owner usually is not a designer, and therefore incapable of making design mistakes, there can be no coverage for the owner. Also, the design firm's coverage was never designed or underwritten to cover any of the acts or omissions of the project owner, even if the owner (a large school district, for example) has its own design staff. Simply put, professional liability policies are not written to provide for additional insured status.

However, owners are still able to obtain the protection they require. What an educational administrator is most likely seeking, when asking to be named on an architect's or engineer's professional liability policy, is to be defended and indemnified if the school ends up in a claim or lawsuit due to the negligence of the design firm. The good news is that after the architect's or engineer's negligence has been established, most professional liability policies will reimburse the owner for costs of defense and indemnify the owner for any claim payments it is required to make as a result of the policyholder's negligence.

Therefore, an educational administrator's more appropriate risk-management technique is straightforward. First, require professional liability insurance.

Next, include in the contract for professional services an indemnification agreement in which the architect or engineer agrees to hold the owner harmless and indemnify the owner for all costs and claims expenses that are a result of the design firm's negligence.

Specifying maximum deductible amounts

Some owners worry that in the event of a claim, the design firm would be unable to meet a large deductible. To address this, some owners specify a maximum deductible on professional liability policies.

Actually, payment of the claim by the insurance company generally is not predicated on the design firm's payment of the deductible. It is up to the insurance company to pay the entire loss, then look to the insured for repayment of the deductible.

Choosing the right balance between the deductible, premium and coverage is a business decision that an architect or engineer must negotiate with the insurance company. In fact, depending on pricing and the design firm's appetite for risk, this choice may change from year to year. The designer needs the freedom to make the best choice for the firm. What is important to the school is that the deductible risk is between the design firm and the carrier, and does not affect the claimant.

Further, it is important to understand that the professional liability policy is called a "practice policy." Such a policy covers claims made during a policy year for all professional services performed by a design firm, subject to the retroactive date. It is a practical impossibility to have a practice policy with varying deductibles for each contract.

Specifying extended coverage

The professional liability insurance market has historically been somewhat volatile in both price and availability. Because of this, and the fact that policies generally are renewable annually and claims-made, it is unwise for a design firm to agree to a contract requirement to maintain specific levels of professional liability coverage for any extended time. The designer may not be able to comply in the future. Imagine if certain coverages suddenly became unavailable to a geotechnical engineer, for example. If she had specifically agreed by contract to carry these coverages for an extended time, she would find herself in breach of contract - through no fault of her own.

In fact, if such a situation were to be adjudicated, the court would likely find that the geotechnical consultant was required to make a "reasonable effort" to continue such coverage, or to use her "best efforts" to continue such coverage, even absent such clauses in the original contract.

With a commitment to provide coverage after the completion of the project, the owner actually is getting a promise that the design firm will continue to carry such insurance provided that it is commercially available at reasonable rates.

In fact, in the interest of fairness, an administrator may wish to include in the contract some language such as: . . . "shall maintain such coverage in effect for ___ years after substantial completion of the project to the extent it is commercially available at reasonable rates."

Possible solution: Project policy

Educational administrators looking for assurance that all the design firms on a project have professional liability insurance with appropriate limits, and that the insurance will be there through the life of the project and beyond, have one way to guarantee such coverage: a project policy.

Professional liability project policies offer several advantages that address many administrators' concerns. To begin with, project policies provide multi-year coverage, including the study, design, and construction or remediation period of the project, plus a post-construction discovery period. And, this coverage is guaranteed. A project policy generally is non-cancelable, except for nonpayment of premium.

The administrator chooses the amount of coverage and the policy limits are dedicated to the project. And, in nearly all cases, the policy covers the entire design team, even uninsured or underinsured subconsultants. This gives the administrator more flexibility in choosing consultants.

Finally, because the administrator is dealing with only one policy and one insurer, administration is easier. If there is a claim, conflict and finger pointing among project team members and various insurers are eliminated. Some project policies actually can help pay for the dispute avoidance tool called "partnering," which goes even further in eliminating disputes, facilitating communication and helping bring in a successful project, on time and on budget.

The cost of the policy is usually borne by the owner. However, this fact can become a bargaining point when negotiating design firm fees. The design firms will not have to report these project revenues on their practice policies and can adjust fees accordingly to eliminate the charges administrators typically pay to cover practice insurance.

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