On occasion an architect and/or engineering (A&E) firm may take on a project where the prospective client is requiring higher professional liability (PL) insurance limits than what the firm currently has in place. Given that an A&E’s PL insurance policy is arguably the only asset an owner can look to in the event of a PL-related claim, it’s certainly reasonable for any owner to question the adequacy of the A&E firm’s PL insurance limits.
This blog is in follow up to a recent blog I did titled “Architect & Engineer’s Professional Liability Insurance Limits” and will attempt to address the options available to a design firm and owner when it comes to increasing PL limits and insuring single projects.
When Practice Limits are Inadequate
Regardless of what a given owner determines is the “right” amount of professional liability insurance limit its design team should carry, there are a finite number of options available to obtain these limits in the event the practice limits of the design firm(s) are deemed inadequate.
When an A&E firm considers how much PL insurance limits to purchase to cover their practice they should contemplate a variety of factors, including
- What they need to meet their contractual requirements
- What they will need to protect the financial core of their business
Cost will of course also be a factor as well as how much insurance limit a given firm can qualify for from their insurance carrier provider(s).
Claims-Made Policy Forms
Smaller firms tend to purchase lower limits of PL coverage and larger firms higher limits. What all A&E firms have in common is this: Their PL practice policy is written on a claims-made policy form, and the limits of this insurance will be exposed to cover claims for all the work the firm will do during the annual policy period of the policy – as well as all their “prior acts” back to a retroactive period of time – typically the inception of the firm’s practice.
Because an A&E firm’s PL practice policy limits can be eroded by any future and past projects, an owner may want to consider whether these in-force policy limits are adequate coverage for their specific project.
Aside from increasing the limits on the firm’s PL practice policy, there are essentially two products an A&E can secure to raise their PL limits:
- Specific Job Excess – SJX
- Project Specific – PSPL
Specific Job Excess (SJX)
Often referred to as an “SJX”, specific job excess is a product the A&E firm can purchase to add additional limits of coverage over and above their in-force PL practice policy for a specific project. This is often the easiest and most cost-effective way for a firm to increase their practice limits.
Cost will vary based on the scope of the firm’s work, their projected design fees for the project as well as the type of project. Some other features and issues to consider:
- Coverage needs to be bound prior to the start of construction.
- While the additional SJX limits purchased are typically only exposed to a single project, all of the underlying practice limits are not and can be eroded by claims on other projects.
- Coverage will typically run concurrent with the underlying PL practice policy for any future renewals of the SJX.
- An SJX is subject to renewal every year, and there is no guarantee these additional limits will be available or at what cost in the future.
- The A&E should consider and negotiate how long their owner will require for the firm to carry the additional limits after substantial completion – and how these future (and uncertain) costs will be covered.
Specific Client Excess
In addition to an SJX, a firm can also purchase a specific client excess or SCX. This works in essentially the same way as an SJX but can be used to raise limits on all the projects a firm does for a specific client.
Also, some carriers may offer a specific primary option allowing these additional limits to sit primary which can be favorable to the firm in that its practice limits won’t need to be depleted first.
Project Specific Professional Liability (PSPL)
A project-specific policy (PSPL) is an entirely different product than the SJX and provides certain benefits to both the design team – and the owner – and should be considered on any larger more complex projects.
Some features of the PSPL are as follows:
- A PSPL is in the name of the design team, with the first named insured typically being the prime. Any and all sub-consultants (except for possibly the geo-tech) are typically added to the policy as additional named insureds.
- A PSPL will provide a dedicated limit of PL coverage for all members of the design team a single project. Note, in the event the PSPL limits are exhausted, the individual practice policies of each design team member may or may not sit excess. There are pros and cons of either option. Regardless, this should be addressed up front as some A&E PL practice policies automatically provide excess coverage while others will not. This can typically be altered by endorsement.
- The term of a PSPL will be the policy period with an additional extended reporting period (ERP) or “tail policy.” The ERP incepts at substantial completion, and you will have the option of purchasing various lengths of this tail coverage. Typically the total PSPL policy and ERP period you can purchase is up to 10 years.
- After the expiration of the PSPL – including the extended reporting period – the individual practice policies still in force of each design team member will repatriate and provide coverage per the terms of these individual policies.
- A project-specific policy offers a single point of claims handling and joint defense for all claims against any member of the design team on that project. This is a very important feature and benefit of this product for the owner. In the event of a claim, rather than every design team member triggering their individual PL practice policies – and engaging their respective attorneys – the PSPL can more efficiently address any disputes.
- Most project policies are auditable and may include a material variation endorsement (MVE). For this reason it’s very important to provide the underwriter with as much information on the project scope as possible and to be conservative when completing the application, especially with projected construction values, gross design fees and projection-completion dates. The term of project policy will run to the date of substantial completion at which point the extended reporting period will incept. The longer the ERP the greater cost of this insurance with the total coverage period typically not exceeding 10 years.
Owners Protective Policy (OPPI)
An owners protective policy, also known as an OPPI, is a product that is purchased by and in the name of the owner for single projects covering PL-related claims in the event the A&E consultant(s)’ PL practice limits are not adequate. The following are some features of this product worth noting:
- Unlike the project specific policy (PSPL), the OPPI is in the name of the owner. This product will be triggered in the event of a third-party claim against the owner or if the A&E’s PL practice policies are exhausted entirely (or to a certain limit level of the A&E’s practice policy) typically a pre-determined limit of the A&E’s PL practice policy limit of $2million or more.
- The OPPI can be written to cover not only the design team but other disciplines as well including consultant’s hired directly by the owner (e.g. curtain wall consultant), and PL-related exposures of the contractor, CM and specialty consultants including geo techs., (etc.).
- Unlike a PSPL, there is no joint defense provision under an OPPI, and in fact the OPPI carrier will often have limited if any involvement in the initial claims handling of any given PL- related dispute until the underlying PL practice policy limits of the prime architect and possibly other specified sub-consultants are depleted.
While an OPPI makes sense for certain projects and owners, it provides little if any direct benefit to the design team – and having their PL practice limits exposed as essentially the primary layer of coverage can be a concern.
To address this, firms might do well to place the OPPI excess of a project-specific policy –versus the design firm(s) PL practice policy.
You may want to consult with your legal counsel on ways to limit the liability of A&E team to the proceeds of the PSPL.
This is a fairly basic review of these products. The importance of having a broker that specializes in these products to assess all risks, coverage options and product design cannot be overstated.
Managed properly, these products can be very useful tools in managing and transferring risk for single projects.