Guide to Professional Liability Insurance
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Professional liability insurance will be your saving grace when things go south with a client – or even when someone comes out of left field with a bogus claim. Protect yourself: learn why you need it, how to get it, and how to use it.
You have decided that you might need professional liability insurance. This can be an exciting time for young architects and firms – a time of growth and future possibilities. It can also be a time of confusion – selecting a liability insurance policy is never an easy process.
You might find yourself wondering if you even need professional liability insurance. Is it worth the extra cost each month?
Table of Contents
- Professional Liability Insurance 101
- Do I Really Need Insurance?
- What Results in a Claim?
- What is Negligence and the Standard of Care?
- How to Pick an Insurance Policy
- What to Look for in an Insurance Firm and Policy
- Limit of Liability in Contract
- Professional Liability Insurance is Worth It!
- Additional Resources
Professional Liability Insurance 101
As an architect, people’s health, safety, and welfare are dependent on our designs. We design the spaces many people live and work in or we design spaces that owners depend on for income.
The hard truth is: no one is perfect. At some point, every architect will make a mistake and many of those mistakes will result in a lawsuit. There is inherent risk and liability as an architect.
We must protect ourselves from legal action. This is where professional liability insurance comes in. Simply put: when we mess up liability insurance helps cover the cost of that mess up.
Professional liability insurance is different from general liability insurance. A general liability policy covers any accident that could happen at any business – things like worker's compensation, auto insurance, and property insurance. General policies are standard for most businesses, while professional policies are tailored to your profession. There are as many types of professional liability policies as there are professional services.
Professional liability insurance – sometimes called errors and omissions insurance or E&O insurance – covers claims that are connected to your professional services.
If something about the project, whether through negligence, errors, or omissions, causes damage or harm to someone – physical or financial – you may be responsible for fixing the problem. Liability insurance also provides coverage for the costs to defend yourself against a claim.
Professional liability insurance helps protect your clients. Sometimes, architectural companies have no way to pay damages. Insurance helps ensure that the client will get paid.
Just like any other insurance policy, it comes with a premium, typically paid monthly. There will be a deductible that you will be responsible for covering no matter what. The insurance won’t pay out until you reach that deductible. There is also a limit on coverage. This is the coverage amount the insurance company won’t go over. A higher limit on coverage or a lower deductible will equal a higher premium.
There are several situations that can impact professional liability coverage. For some of these, you might have to look into special options for coverage. These include:
- Design and custom builds
- Many architects will do the design and the construction on projects. The liability for contractors is different than for designers, so additional coverage will be needed.
- Joint Ventures
- Say you and another architect team up on a project. You would both need separate policies. One architect’s policy will not cover the other.
- Not licensed architects
- While most policies are for licensed architects, they do have polices for design work that doesn’t require a license.
- Nonprofit work
- Most coverage doesn’t include nonprofit corporations by law. A miscellaneous professional liability policy is one solution to coverage for this type of work.
- Working by moonlight
- This refers to side work done while employed full-time. Most firms won’t allow you to do this to protect the firm from extra liability. If your firm does allow it, you will need to purchase a policy under your own name. All the work done on the side should be done with zero reference to your full-time job and no work should be done using the firm’s office or materials.
Do I Really Need Insurance?
It’s easy to feel like you don’t need coverage. As a young firm, you are often looking for ways to cut costs. It can seem like you wouldn’t even notice cutting out the insurance premium.
Small projects can seem like they come with very little risk. Maybe you do mostly residential work and you think legal problems are for the guys doing big, commercial work. You aren’t required by law to carry it and many clients don’t require it.
Maybe you don’t feel like you have much to lose anyway, so what does it matter if someone sues you?
Here are two facts from the insurance firm Victor Insurance Managers Inc. (previously known as Victor O. Schinnerer & Company) that might surprise you:
- Between 1994 and 2005 there were 15 to 21 claims per 100 firms. That’s 15% to 21%.
- Most claims in that time frame were from residential work.
Beyond just the numbers, let’s take a moment to talk about what you are really getting with insurance – peace of mind. Yes, insurance will help you with paying successful claims. They also help with the coverage of legal costs. They will provide a great lawyer to help you gather up documentation and guide you.
Dealing with a claim on your own could lead you to accidental actions that make your defense weaker. A lawyer helps with that. Even just trying to get a dismissal of a fraudulent lawsuit has bankrupted small firms. Unfortunately, it still costs you money when someone tries a completely bogus lawsuit. Many architects view this help from the lawyers as more valuable than covering negligence.
Many insurance firms also provide risk management services. This typically includes reviews of the contracts you use with clients and education on how to reduce unnecessary liability.
What Results in a Claim?
There are lots of things that could result in a claim to your insurance. They typically fall under the broad categories of negligence, omissions, and errors. It doesn’t have to be something you or your firm did. Some of the most surprising reasons for a claim include:
- Negligence of contractors or others on project
- Inaccurate cost or schedule estimates.
- Planning or feasibility studies – you don’t need to be the architect of record to have liability
- A counterclaim from a client who you are suing for non-payment
Remember, you still have to deal with and pay legal fees for completely bogus claims. The lawyer provided by the insurance firm will help deal with those claims and the insurance will help pay (once you have reached your deductible).
What is Negligence and the Standard of Care
Negligence is a legal term that is typically defined as failing to fulfill a duty or obligation to a person. You said you would do something for someone and failed to do it? That’s negligence.
However, it is a little bit more complicated than that. According to Victor Insurance Managers Inc. there are four things that must exist to prove negligence.
- The existence of a duty (typically in the form of a contract)
- A breach or violation of that duty
- Evidence that the breach or violation was what caused the injury
- Measurable damages
While analyzing your actions when dealing with an allegation of negligence, you will be held to the standard of care. What this means is you will be held to the same standards as every other architect. The standard of care has been developed through the actions of all the previous architects before you. You won’t be held to a higher standard than that. If you did the best you absolutely could, ideally you shouldn’t be punished for that.
Take care that your contract or words don’t contradict this standard of care – unless you are prepared to go above and beyond. Statements like “I will give you completely mistake-free work” could work against you.
Why does all this matter for insurance? Picking a policy can be difficult – there are a lot of options. Finding the right option requires fully understanding when and how you might need to use it.
How to Pick an Insurance Policy
When shopping for architect's insurance there are two main options for agents.
- Independent broker
- Insurance carrier’s exclusive agent
We think the independent brokers are the best option – they are certainly the most common. An independent broker works for you and not for the insurance company. They have access to all the markets and can work with you to find a company and policy that best fits your needs.
Sometimes you will find agents who represent only one insurance company. These are the exclusive agents. They have the insurance company’s interests in mind – meaning you are priority number two. They don’t have access to the entire marketplace, which means you won’t be able to shop around.
Take care and time when selecting an insurance company. Remember, these people will have your back if things go wrong, and things always – eventually – go wrong. You want someone you trust because the peace of mind they can give you will be invaluable.
What to Look for in an Insurance Firm and Policy
When shopping around, comparisons between the companies can be difficult, because the coverage can vary depending on how you set up the policy. The broker will be your greatest asset at this point when comparing.
They will help you look at and compare endorsement options, coverage limits, and deductibles. You should be looking for that perfect balance between coverage and cost.
Don’t be afraid of add-ons, like an increased limit. The cost for some of this can be small and the benefit great.
You also want to look at both the service and stability of the insurance firms. Firms can provide lots of educational services and management programs or they can have little to no services – what you want will depend on your needs. If you feel like you don’t quite have a grasp on it all and might need some help navigating, find an insurance company that will give you that.
You might be looking only for some insurance coverage or you might be looking for a total risk management program that includes professional liability insurance coverage.
One of the most important things to review is their claims handling process – what the insurance company does when a claim is submitted. Is it a hassle? Have other companies had issues with this stage? Are they familiar with the issues specific to your business? You want someone managing your claim who has the knowledge to help carry you through. Even if they are stellar in the other aspects, this one should be a deal breaker or maker.
Don’t necessarily go with the lowest bid, just like you wouldn’t immediately go with the lowest bid for a contractor. Keep in mind that those low bids can come with rate hikes in the future or even the company not offering professional liability insurance in the future.
It’s common for insurance companies to frequently start and stop offering professional liability insurance. Going with a well-known, stable company will help prevent headaches when you find yourself searching for a new insurance provider.
Limit of Liability in Your Contract
For most architects, they prefer to add language to a contract to limit the liability to their fee. If there is an issue, you would not be liable for more than the amount you had received from the client. Sometimes, a client will request to change it to the limits of the insurance coverage, which they are within their rights to do. After all, that is the purpose of the insurance.
You should never completely give up having a limit of liability in your contract, whether it’s set to your fee or your insurance limits. Otherwise, you could find yourself having to pay more than your insurance will cover.
There is a chance the client could push back to limiting the liability to your fee. In this case, you can work with the client to negotiate terms that you both like.
If your clients ask you to raise your coverage (this is often due to ignorance), you can politely let them know that you will get them a quote on how much it will cost them for you to increase your coverage. If they want higher coverage than is reasonable, it should be on them to pay for it. If they decide to pay for it, great, but most likely they won’t.
You can also limit the amount of time the client has to submit a claim in your contract – commonly it’s limited to one year. This would protect you from claims from a project you did years ago.
Lastly, add a clause in your contract that states the client must pay your fees even if there is a dispute. If the client doesn’t like that, explain that you need your fees to pay for your insurance – insurance that protects you and them.
Your insurance agent (if they are good ones) should be able to give you some guidance on what to include in your contract. Keep in mind that the laws in each state are a bit different and it’s your responsibility to know the local laws. Some courts don’t uphold limits of liability at all and others have restrictions. As an example, in California, you can’t have limits of liability on public projects.
Professional Liability Insurance is Worth It!
No one want to think they will make mistakes or be sued. Unfortunately, both are likely to happen as an architect. It’s the nature of the game. When you do find yourself facing a problem, it feels a lot better to have someone standing with you versus standing alone. Professional liability insurance means peace of mind that you won’t go bankrupt fighting a claim. We think that makes it priceless.
- Do Small Firm Architects Need Professional Liability Insurance?
- Professional Liability Insurance for Architects: When to Get Serious
- The standard of care: Should I care?
- Professional Liability Update- Limitation of Liability A Proven Concept
- Legal Liability of Design Professionals