Managing risks and professional liability insurance premiums

October 2009 » Features » BUSINESS STRATEGIES
Tom Owens

Controlling insurance costs
Experts explain professional liability and health insurance options for engineering firms and employees.
While the country remains embroiled in a health care debate, civil engineering firms face their own insurance dilemma —€” how to ensure adequate coverage for both professional liability and employee health benefits and control increasing policy premiums. in the following articles, three insurance experts offer timely advice and options for firm leaders:

  • Managing risks and professional liability insurance premiums;
  • Insurance and risk factors related to BIM; and
  • The changing world of employee benefits.

—€” Bob Drake, editor

Nobody wants to spend their hard-earned dollars on professional liability (PL, also called errors and omissions) insurance. A few design firms even forego this type of coverage. They take the risk that they won—€™t make errors or omissions in their professional services and, if they do, that they can resolve the problem without an expensive claim. They sometimes reason that without PL insurance, they don—€™t have —€œdeep pockets—€ and therefore a claimant will look elsewhere to find remedy.

The logic of this course of action is obviously fraught with risk. Facing a claim without adequate insurance not only puts a firm—€™s assets at risk, but the principals—€™ personal assets can also be in peril. The corporate veil cannot always protect a design professional—€™s personal savings, home, and other valuables.

The best approach to managing PL risks is to work closely with a specialist insurance agent or broker who knows the ins and outs of the architects and engineers insurance market and who can help you manage both your risks and your insurance premiums. Such an agency can help select the appropriate insurance carrier and recommend the appropriate limits of coverage and deductible. These recommendations will be based on your exposure to claims, your appetite for risk, the types of services you offer, and the annual fees you earn. An agent can then quote premium costs based on the current market conditions. Below are some areas for discussion and a few general tips to follow.

Premium credit programs
One sure-fire way to control premium costs is to take advantage of your insurer—€™s premium credit programs. These programs reward design firms with savings of as much as one-quarter or more of their annual renewal premiums by following the insurance company—€™s prescribed loss prevention measures. And remember, as your cost of insurance increases, the number of dollars you can save through these programs also increases. Following are two common types of premium credit programs:

Loss prevention education programs —€” Some PL insurers offer premium credits, typically 10 percent, for firms that take advantage of their annual loss prevention education program. Education seminar attendees generally receive three benefits: lower insurance costs, needed education credits, and perhaps most importantly, knowledge that helps avoid errors, omissions, and disastrous claims.

Limitation of Liability (LoL) programs —€” Some insurers also provide premium reductions or credits of as much as 15 percent when design firms agree to use LoL clauses in all of their contracts with clients. These contractual clauses establish ceilings on the dollar amount a design firm is liable for in the event of a project dispute or claim as a result of professional errors or omissions. Clients are often willing to negotiate such clauses when they are educated on the risk-reward inequities that most design firms face when such clauses are absent.

Alternatives to higher practice policy limits
Suppose you currently carry $2 million in PL coverage, but your new client on a large project is asking for $5 million. Can you afford to increase your practice policy limits?

With claims severity on the rise —€” not to mention the ever-growing number of projects you have worked on over the years that are now subject to potential claims —€” higher limits may be in order regardless of current client demands. Considering the potential disaster that could occur if you are hit with a severe claim or multiple claims, and the number of jobs you could lose if you have insufficient limits, you have to ask yourself whether you can afford not to increase your limits.

But if increasing your aggregate practice policy limits is simply too big of a hit on your pocketbook, consider the following options that are less expensive but provide added protection for demanding clients:

Specific-project excess —€” With specific-project excess coverage, it is possible to maintain the current limit on your practice policy while purchasing a higher limit (as an endorsement to the project policy) to cover a specific project. For example, you can maintain a $2 million practice policy and purchase a $5 million limit on one project for substantially less than raising your entire policy to $5 million.

Specific-client excess —€” Taking the previous example one step further, suppose a new client wants you to work on multiple projects but demands higher insurance limits. Specific-client excess is similar to specific-project excess, except the higher limits apply to all projects performed for a particular owner. Again, this increased coverage is more affordable than raising your entire limit.

Split limits —€” Instead of purchasing a $5 million practice policy you might purchase a $2 million/$5 million split-limits policy. Here, the policy limit on a single claim is capped at $2 million, but the total coverage for any one year is $5 million. This eliminates the chances that your policy would be wiped out by a single claim and increases the chances that coverage will be there for all of your clients—€™ projects.

Project insurance
There is one coverage option that provides a project owner the higher limits it demands, guaranteeing that coverage will be there when needed —€” and can actually reduce your insurance premiums. This unique coverage option is called project insurance.

With a project insurance policy, the owner realizes the following benefits: a single policy for a single project —€” and that project only —€” full control over policy terms, guaranteed coverage, no premium rate surprises, and single-point claims responsibility.

So what—€™s the catch? Why would an owner turn down the project policy option? Typically, project owners pay for the project policies, since they benefit most from the coverage. However, costs can be offset and shared with design firms through premium reimbursements or negotiated lower fees. (Since fees on the project likely won—€™t be counted to determine practice policy premiums, a design firm saves money on its annual insurance costs.)

Unfortunately, fewer insurance companies are offering project insurance these days. And among those that do, the cost and the required deductibles can be high. Agents, such as those in the Professional Liability Agents Network (PLAN), specialize in PL insurance for design firms and can help you find such coverage, if it is available.

Despite the advantages, owners may be unwilling to incur the cost of a project policy. A less expensive alternative may be owner protective insurance.

Owner protective insurance
An owner protective (OP) policy provides protection for the project owner in the form of excess coverage over and beyond the architects—€™ and engineers—€™ practice policies. The design team—€™s individual practice policies provide primary coverage and come into effect first. Then, if the responsible party—€™s practice policy limits are depleted, the OP policy comes into effect to cover some or all of the additional damages, depending on the policy conditions and limits.

Because the OP policy comes into force only after the practice policy of the design firm has been exhausted or is otherwise unavailable, OP insurance is typically less expensive than a project policy. OP policies can be purchased annually or for the life of the project. Retroactive coverage can often be provided on projects already in the construction phase. Environmental engineering exposures can also be covered. —€œBlanket—€ OP policies may also be available for an owner—€™s multiple projects.

Conclusion
There are a number of practice management techniques and coverage options that design firms can consider to help control the cost of PL insurance. Agents can help evaluate your needs, discuss options, and help educate your clients on the various options available. And they can even help bring a client with unreasonable or uninsurable demands back to realistic coverage expectations.

Did you know?
Agents and brokers have become almost synonymous these days. Historically, an agent represented one insurance company and a broker represented many. But today, many agencies represent multiple insurance carriers.

Tom Owens is executive director of the Professional Liability Agents Network (PLAN), an association of independent insurance agencies and brokers specializing in serving the risk management needs of design firms across the United States, Canada, and Puerto Rico. He can be reached at 831.372.3706 or info@plan.org.


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