Entrepreneur Architect Academy 011 | Professional Liability Insurance: The Risk and Reward

Following these comments is a guest post; originally published in the AIA Trust educational booklet, Making The Transition To Running Your Own Firm. I am publishing it here at Entrepreneur Architect with permission, courtesy of Ann P. Casso, Executive Director of AIA Trust. I am grateful for the Trust’s support of our mission and their contribution to the profession as a whole.

Architects are inherently burdened with risk and liability for the services we provide. As licensed professionals we are legally responsible for the health, safety and welfare of the people using the structures we design. We practice under legal contracts requiring us to meet very high standards and provide services putting us at risk. We make thousands of decisions during the development of a typical architectural project. Perfection is impossible.

We must protect ourselves, our firms and our families from the risk of legal action. We must have strict standards, policies and procedures to reduce possible errors and omissions. We must create business systems that make these processes routine and automatic during the development of every architectural project. We must be diligent and we must limit our exposure to action with a comprehensive professional liability insurance policy.

I am not a big fan of insurance… or any other expense where I don’t see an annual return on my investment. That being said, I understand the risk and rewards of the profession I chose to practice. As a business owner, partner, employer, husband and father, I recognize that having the security of an insurance policy is, in fact, good business.

As a profession, we need to work to find ways to reduce the cost of insurance. The high cost of insurance is a complicated subject; one that we may explore in depth another day. It is painful though to look at the books each year and see the cost of insurance at the top of the list. Relative to the other expenses of a small firm, professional liability insurance is down right expensive… until you need it.

Recently, Annmarie and I experienced a situation where, if not for our diligent record keeping and some very valuable advice and support from my friend, AIA Westchester Hudson Valley Chapter General Counsel David Kosakoff, Esq., we would have been required to exercise the protections our professional liability policy provides. It was a horrifying experience, but knowing that our insurance policy had our backs was a very comforting reward.

I hate to imagine our fate if we practiced without protection. If our business systems failed and the firm was required to defend itself without a policy, we certainly would have been crushed by the costs involved in such a legal action. Fivecat Studio would have been history. I am fully aware, from personal experience, the value and importance of the information presented in the post below.

Several small firms I know, mostly serving the residential market, are taking the risk of practicing without coverage. Without affordable policies available, they have determined that there is no other choice. This dilemma is certainly one of the issues that needs to be addressed by the profession as we recover, rebuild and move forward.

Oh… by the way, our recent liability scare was caused by a residential project. If your firm is practicing without insurance, you should reconsider your decision. It may take only one dissatisfied client to destroy all that you have struggled to build.

Let’s talk… Do you practice without a policy? Have you experienced a situation where your policy saved your firm? Please share your thoughts and ideas in the comments section below.

A guest post by AIA Trust:

Protecting Your Firm with Professional Liability Insurance

In operating a professional practice as a private business, a licensed design professional faces many risks.  A prudent design professional entering private practice should consider insurance to cover certain exposures, including professional liability, the risk of property loss, and the risk of personal loss. Additionally, as firms grow and consider providing benefits to staff, they may participate in health insurance, life insurance, and pension plans.  Sole proprietors consider acquiring insurance to protect themselves and their families from injury or financial harm.

As a participant in the highly complex design and construction process, a design professional encounters a variety of risks that can result in financial losses to numerous people.  Insurance is a means of managing those risks by transferring them to an insurance company in return for a premium payment.  While not all risks that challenge a construction-related professional service firm are insurable, a new firm must identify, assess, and plan for how its exposure to risk will be handled.

Professional Liability

A key set of professional and business risks arises from the possibility of causing harm because of negligence in performing or furnishing professional services.  Negligence, when referring to the services of design professionals, is a legal term stating that the design professional breached an obligation to a client or others to provide services in a reasonable manner as required by a contract for services or by operation of law.

Negligent acts, errors or omissions may cause damage to owners, contractors or other third parties.  If such responsibility is established, the firm and its owner may be liable for correcting these damages.  In buying a professional liability insurance policy, sometimes inappropriately called errors and omissions or E&O insurance, the firm is asking a broader financial entity—the insurance company—to absorb a portion of the costs of claims in exchange for a premium paid to the insurance company.

Not all firms elect to purchase professional liability insurance.  This business decision is made as part of the firm ownership’s overall approach to managing its practices and risks.  Even those firms that do buy professional liability insurance retain the risk for expenses that fall within their deductibles or exceed their policy’s limits of liability—or that are excluded from the scope of coverage.

Sources of Professional Liability Insurance

Most design professionals purchasing professional liability insurance coverage do so through independent brokers.  These brokers represent the interests of their client and not those of the insurer.  By contacting a broker experienced in design professionals’ professional liability insurance, a firm can shop around for insurance, and usually obtain access to many insurance markets and, with the professional advice of the broker, decide which carrier best fits its needs.  Some insurance companies are represented by agents who are authorized to place policies on behalf of that company in a predetermined territory.  These insurance agents represent the interests of the particular insurance company and may not have access to the entire insurance marketplace.

Regardless of whether a firm chooses an independent broker or an insurance carrier’s exclusive agent, the firm will want to select its broker or agent in much the same way it selects its lawyer and accountant—with care and scrutiny of qualifications, services available, cost, and, not least, chemistry and commitment.

In evaluating insurance options, design professionals will find that each professional liability insurance policy is different in some respects from all the others.  The design professional must reconcile coverage and cost, but the variety of coverages available through endorsements, exclusions, and the core policies themselves makes reasonable cost comparisons very difficult.  It is important to carefully evaluate endorsement options, coverage limits, and deductibles.  The added costs for some of these add-ons, including increased limits, can be minimal.

In addition, the service and stability of the insurance carrier must be considered.  Services provided by professional liability insurance companies range from extensive educational and management assistance programs such as those offered by the Schinnerer and CNA program to little or no information, advice or guidance.  Some firms buy insurance policies while others prefer a total risk management program that includes professional liability insurance coverage.  The true value of a professional insurance policy probably is best defined by the claims handling process.  The specialized expertise of a claims manager familiar with design and construction issues and the knowledge, interest and sensitivity of defense counsel may be the most critical characteristic for selecting an insurer.

While it is often difficult to rank competence and service above the cost of coverage, the “low cost” insurer may be quite like a “low bid” contractor.  Certainly, the attraction of a lower initial premium cost should be weighed against the potential of future, significant rate increases and the risk that the carrier might not continue to offer professional liability insurance.  In the insurance industry, carriers enter and leave the professional liability arena as business conditions change.

The practice of architecture, like other businesses, requires firm managers take the time to identify, assess and manage risk. Insurance is only a part of that risk management approach – yet an important vehicle for transferring risk so that a firm can focus on delivering responsive and valuable professional services.

In addition to professional liability insurance coverage, the architect must also consider other types of insurance to manage risk. For example, liability exposures can arise from a design professional’s office operations and nonprofessional activities at the job site. To cover such exposures, design professionals should carry a general liability policy — which can be expanded to cover employee liability, workers compensation, business auto, and other coverage in addition to property and casualty. In addition, employee health, life, and disability insurance are also important considerations.

For more information about professional liability and other insurance vital to managing a firm successfully, see the entire booklet on Making The Transition To Running Your Own Firm. This is only one of the many resources available to you at TheAIATrust.com – click on Member Resources, the all-new Professional Liability Insurance Database, and the AIA Trust Newsletter to find a host of useful risk management information for you and your firm.

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You may browse and compare all professional liability insurance providers here. Please don’t forget to leave a comment. – Mark