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Part 9: Liability Insurance for Your A/E Firm
Okay a little side story before we jump in. This is my favorite article I’ve written for PAEVEN so far. Not necessarily because of the topic, but more for the venue in which I get to write. I am beach side in Charleston, SC right now for a little family vacation. I’ve basically eaten my way through this town. If you haven’t been, I strongly suggest it. Great food scene, great family environment. The people here are extremely hospitable, not to mention that the architectural history in this town is worth the visit alone. Also if you’re like me and love coffee, try this little hidden gem >> The Bearded Café.
Alright, that’s my personal touch on this piece. Now on to the good stuff – liability insurance! There is nothing you will pay money for that is more important to your business. Equally as valuable are the things that go along with the insurance, such as the continuing education supplied by your provider. This stuff is gold if you are relatively new to creating and negotiating contracts. If you follow your provider’s guidelines you should be able to avoid ever putting yourself in a risky situation.
So what does liability insurance cover? Basically it covers the professional service you are offering. In short, if you are an Architect and you develop a set of plans and omit something that results in litigation, you’re covered (provided you follow your insurer’s guidelines). This coverage not only gives you peace of mind, but it will also give your clients a warm and fuzzy feeling. This assures them that you are willing to stand behind your work.
With all this in mind, I’ve compiled a list of the most common questions I hear regarding liability insurance.
What is the process?
If you are in the process of starting your business, this is a great time to meet with insurance agents. If you’ve already started your business and are practicing without liability insurance – STOP! Do not do anything more until you get coverage.
When you are looking for coverage I recommend using a broker who has access to several carriers and thus several options. You will find that in liability insurance the numbers are not always competitive. Some are close and some are very far apart. You will end up filling out a catch-all form that can be used to get multiple quotes from different suppliers so that you can make the best decision for your firm.
You will also need to know what percentage of work in a given industry you plan on doing. This is a great time to look at your business plan and figure out where you anticipate getting your revenue from. Are you doing a lot of commercial real estate? Heavy industrial? Municipal? The list goes on and on, and you will need to have some sort of percentage allocated to each of the different types of industries.
Once you have your application in and you begin to receive quotes, the remainder of the process is very straight forward and comparable to getting home or auto insurance.
Should you switch coverages?
There is no harm in switching coverage as long as you don’t have a large number of projects that you still feel could be litigious. In other words, do you have projects under construction? If so, I do not recommend switching simply for that fact you will need to purchase a tail (if offered) from your soon to be ex-insurer.
The only real reasons for switching are cost and service. If you are getting what you need and the cost is reasonable, I would not recommend switching solely for the additional heartache of the tail. At my firm we switched after our first year because our cost rose by almost 600%. We were able to switch carriers and opted do so with no tail as most of our projects were small in nature and had been completed with no issues.
One important aspect of liability insurance to remember is that even though a project was built successfully, it doesn’t mean that you still can’t be sued for something ten years down the road. For example, let’s say you’re an Architect who designed a building with a particular flashing detail on a new set of townhomes. At year 5 the owner notices some deterioration around the flashing and by year 6 they notice rotting from the inside. Guess who will still be on the hook to, at the very least, provide representation for themselves? Yep, you guessed it – the Architect. They will also probably need to prove that their detail is correct and that the installation was wrong in order to shift the liability to the contractor. This all takes money, and if you switched carriers without the purchase of a tail you could very well be on the hook to pay for trying to clear you name.
What is a tail?
A tail is simply an extension of existing coverage so that your ex-insurer is still liable for covering projects designed within a certain time-frame. Generally, the purchaser of the policy is not given a break on price so it is almost as if you are carrying two policies for a certain time-frame.
What providers do I recommend?
I have advocated previously that you will want to use a broker to determine the best carrier for you. With that, I do believe that XL Insurance is the gold standard for A/E firms. Big, small, or extra-medium. This company provides competitive rates and an excellent continuing education program. At my firm we have been through three carriers and had several others quote during our transitions, and XL continues to provide the service and competitive rates we appreciate. I should note that we did not pick our coverage based on price. We simply used that metric to ensure we were getting a square deal from XL.
I have personally also had good success with Travelers Insurance. We only held this policy for 1 year and our projects were relatively small, but when I needed anything the service was excellent. This is a great segue to brokers. In northeast Ohio we use Oswald Companies as our broker and the team there is excellent. Oswald is a national brand so I would definitely recommend checking out the branch closest to you and working with them.
How much coverage is enough?
Unfortunately, my answer to this question is that it all depends. At my firm we did work right out of the gate for heavy industrial companies, so we were $1M/$2M and have gotten $2M/$2M for certain projects. This decision depends solely on the type of clients you are servicing. If you deal mainly in residential then I would carry a smaller policy such as $500K/$1M or even $500K/$750K. Keep in mind that a large insurance policy doesn’t make you look like a 60-person firm. Instead it makes you more susceptible to having your policy chased after by lawyers when a project gets litigious.
Also, a great way to limit your liability is to include a “risk allocation” clause in your contracts. Depending on the construction value of the project you may be able to limit your liability to your fee for the project or a certain dollar amount. In instances like this, $50,000 is a typical number seen on contracts. I highly recommend this clause as a way to evaluate clients in your go/no-go process. If a client wants you to put a $750K policy on the line for a $500K project, that is a clear indicator you probably don’t want that project. Sometimes walking away is the best decision you can make.
At the end of the day, liability insurance is not an ultra-sexy topic, but it is one you need to make sure you have figured out. The policies and guidelines you utilize will shape the way you review, negotiate, and execute contracts within your firm. I also highly suggest you educate your staff as you grow as to what is included within your contracts, what you are covered for, and how that affects the projects they are working on. You can’t expect people to do what is best for your company if you don’t educate them on that very subject. I honestly don’t know another profession that needs to be as intimately involved with their job and “the business” of their job as Architects and Engineers. It’s just that important.
1. Liability insurance is the most important item you can pay money for when it comes to the longevity and legitimacy of your firm.
2. When it comes to risk allocation, always be trying to limit your liability. It has absolutely nothing to do with you standing behind your work, but it does have everything to do with the kind of litigious society we live in today.
3. Before you kick-off a project, be sure to go over the contract and its details with your staff and those working on it. This will benefit your firm and your employees. What’s not to like?
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