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Professional liability insurance: When to get serious
The decision to buy professional liability insurance is a watershed moment for most architects and young firms. It often means that the firm has been awarded a project at a significant scale or with a significant budget, or that a client has contacted the firm with concerns about a particular project. Or it may simply mean a firm is getting serious about the future.
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Professional liability insurance is coverage that protects an architectural firm and its employees against claims alleging negligent acts, errors, or omissions in the performance of architectural services. This is different from commercial general liability, or CGL, insurance, which covers the types of accidents or property damage that could happen at any business. CGL policies are relatively standard regardless of the type of business and usually exclude professional liability claims. In contrast, professional liability policies are as specialized and diverse as the variety of professional practices that exist.
Why firms “go bare”
According to the insurer CNA/Schinnerer, each year between 1994 and 2005 there were between 15 and 21 professional liability claims filed for every 100 firms. And yet, architects who are starting a firm on their own often don’t get insurance either because they think the risk is low on small projects, they believe their assets are so limited that they don’t have much to lose, or because their clients haven’t required it.
Strictly as a cost-benefit analysis, architects generally overestimate the costs of insurance while underappreciating the benefits. The most valuable benefit of professional liability insurance is coverage for legal costs to defend against a claim. The insurance company can provide a lawyer to help the architect gather and retain necessary documentation, and avoid taking subsequent actions that could weaken the architect’s defense. When a claim does go to trial, a small firm can be bankrupted just trying to get a dismissal. Legal assistance may be even more valuable than having coverage to pay for actual negligence.
In addition, professional liability insurers offer ongoing risk management services to insured firms. These include legal review of standard and client-provided contracts, and targeted continuing education on ways to reduce or avoid unnecessary liability.
What actions result in claims
Many young architects are surprised to learn that an architect can be held liable for the negligence of contractors and others working on a project, or that negligence claims can be based on faulty cost estimates or delays in construction. Claims can also be based on planning or feasibility studies and do not require that the architect be the architect of record for a project. And, not all clients pay their fees; it is common for an architect who brings a suit to recover fees to be subject to a counterclaim that the architect was negligent.
In general, professional liability claims are more likely to be the result of a failure to manage expectations than due to a spectacular construction failure, particularly where the client has little experience with other construction projects. Their understanding of what comprises an architect’s scope of work and the quality and timing of the final product may be unrealistic, but that does not prevent claims from being filed and even going to trial or arbitration.
An architect may be reluctant to explain delays or cost overruns to a client, hoping to “catch up” elsewhere on the project. That lack of communication may result in a bigger surprise for the client. Even where a firm has clear expertise on a certain project type, too many commitments can result in client frustration and lack of trust. These are all examples of situations that can generate professional liability claims without an obvious failure on the part of the architect to design a safe, high-quality building.
Minimizing costs
A variety of factors go into establishing the premium for a particular design firm’s policy, including the firm’s primary project type, claims history, whether they use standard written contracts, specialty coverage, and the extent of coverage required for prior acts. Project types such as condominiums, which have high litigation costs relative to design fees, or skate parks, which are unique projects with a high propensity for injuries, will typically increase the premium costs. However, documenting and reporting internal practices such as training and structured supervision of employees can demonstrate a lower risk and decrease premium costs. Although the application forms for insurance are often lengthy, completing the form accurately and thoroughly can allow the agent to more accurately assess the risk posed by a firm and justify a lower premium.
The factors in the application allow the agent to determine a fractional number or rate, which is then multiplied by a measurement of the firm’s annual billing or total project costs to quantify the annual premium in dollars. When reporting a firm’s annual fees for this calculation, architects should subtract costs such as travel or copying, or fees for work on projects that were abandoned before construction and thus do not add to liability. For new firms without a significant history of billing, the multiplier is typically a reasonable estimate of the firm’s anticipated billings for the coming year. If the premium creates a financial hardship for the firm, the agent may be able to respond creatively to an individual firm’s needs.
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