A design firm’s professional liability (PL) risks are by far its greatest exposure – and its architects and engineer’s PL practice policy is by far its most important insurance coverage.
While there is no hard-and-fast rule as to how much PL insurance limit a design firm (or any firm) should carry, there are a number of variables and considerations that every firm will need to process, beginning with two basic questions:
- What limits does the firm need to meet its contractual obligations?
- How much do they need to protect the financial core of their business?
This latter question is a tad more abstract and difficult to answer.
How Much Do You Need?
Benchmarking data on what other architects and engineer (A&E) firms purchase for insurance limits is helpful, but every firm needs to consider their own unique risk profile, including their area of practice, scope of work, as well as type of projects and clients.
Ultimately, the A&E marketplace will often have the final say on how much PL practice limit a given firm can purchase based on the gross annual revenues of the firm.
Considering that approximately 90% of all design firms in North America have fewer than 10 employees, it’s no surprise that the vast majority of A&E firms carry PL practice limits of less than two million dollars.
It’s important to note that A&E’s PL practice policies are on “claims made” coverage forms and include a “retroactive date” which typically dates back to the date the firm was established. This means that whatever PL practice limits in place during the current policy period will need to be sufficient enough to cover all possible claims for all work the firm has ever done since the day it first opened for business.
Also, keep in mind that defense costs are inside the limits of most A&E PL policies and can and will erode a substantial amount of the available limit for any serious claim.
In short, there is no simple answer to the question of how much PL limit an A&E firm should carry. Every firm should work with their specialty A&E broker to assess their unique exposures and A&E PL limit options – every year.
Sub Consultants and Vicarious Liability
It’s prudent not only for owners to be concerned about the adequacy of their consultant’s PL practice limits, but also those consultants that hire sub-consultants and take on additional vicarious exposures.
A lot of firms have been left holding the proverbial bag by taking on underinsured sub-consultants. Any decent PL insurance policy should provide coverage for the vicarious exposures a consultant assumes when contracting with a sub-consultant.
However, the deductible expense and cost to settle a dispute – as well as the impact on the consultant’s future insurance costs – can be significant. Given this, a design firm needs to take extra precautions and have clear protocols in place when it comes to taking on sub-consultants.
Carefully selecting your sub-consultants and having a well-drafted sub-consultant agreement is extremely important.
Considering how much limit a given sub should have is also important and should be based on each sub-consultant’s discipline and scope of services. A structural sub consultant for example will most likely have a great deal more exposure than an interior designer on a given project.
Also, for those larger more complex projects where a given sub-consultant may be responsible for a significant scope of service, it would be ideal to have the owner contract directly with those sub-consultants.
While this can be a challenge when an owner wants to look to the prime as a one-stop-shop, I’ve seen firms achieve this contractually while retaining the responsibility for coordinating all subs. It is well worth the effort as it can greatly reduce your vicarious exposures.
As for taking on a sub-consultant selected by the owner, I would push back hard on this unless you are fully comfortable with the sub-consultant.
Lastly, you want to make certain to gather all certificates evidencing coverage from all your subs – throughout the period required by contract.
Two final points I would make on this subject are
- The owner should hire the geo-tech and
- The prime should get named (along with all their subs) on the GC’s GL policy on a primary and non-contributory basis.
More on these two issues in a future blog!