Is It Time for Higher PL Insurance Limits?
The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with a qualified professional who can provide guidance that considers your own unique circumstances.
Today’s design firms have enjoyed relatively stable availability of and pricing for professional liability (a.k.a. errors & omissions) insurance. While no one enjoys paying for any kind of insurance, it is certainly a comforting feeling to know that you have financial protection in the event of a claim against your design firm.
Likely, at some point in the past, you, with the assistance of your insurance agent or broker, purchased your first professional liability (PL) policy for your design practice. You determined the amount of coverage you felt was necessary to provide adequate protection, typically in the form of annual limits. Then, since PL insurance is an annual policy, you may have continued to renew your coverage each year, with the same policy limits.
As the years pass, the question becomes: Are those policy limits still adequate? How do I know when it’s time to consider increasing those limits? And how do I determine what higher limits to choose? Let’s look at a few factors that may signal it’s time to consider raising your level of protection.
Why Raise My Limits?
We’ll be happy to help you review your current policy and help you determine whether or not your limits are adequate. That, in light of your ability to pay for higher limits, will help you reach an informed decision.
What are some of the circumstances that indicate higher limits may be prudent? Consider:
Business growth. Improvements in the economy have spurred growth for many design firms across the U.S. and Canada. That growth, unfortunately, can also spur growth in your professional liabilities.
More high-risk, complex projects. Are you working on more and more complex and bigger projects, perhaps utilizing more advanced project delivery systems? Then your risks may be getting bigger and more complex as well.
Wider scopes of services. Many design firms have broadened the type of design services they offer in order to attract new clients and keep up with current trends. Doing so, they are often practicing new disciplines in which they lack a solid history.
Prior acts. The more projects you have worked on (prior acts), the greater the inventory of projects that may lead to a future claim. While most claims occur during construction or soon after substantial completion of the project, some may be filed years later. The longer you are in business, the greater the number of completed projects that need prior acts coverage.
Unique exposures. Some risks — environmental, geographic, contractual, and the like — may be unique to a particular project, client or locale. These need to be considered in light of the increased liability they represent.
It’s not unusual to discover, after reviewing your growing liabilities and current practice policy limits, that you are indeed underinsured. If you conclude that an increase in your professional liability insurance limits is a reasonable course of action, we can help you pursue additional coverage.
You might think that an insurance carrier would like nothing more than to sell you more insurance. But that is not the case. Most prudent Insurance companies want you to maintain reasonable insurance limits, just like you do. They fear that if you have inordinately high limits, you and your PL policy become targets for potential claims and lawsuits. We can work with you and insurance underwriters to find the right limits at a price that fits your budget.
What About Client Demands?
Even after doing your due diligence and working with your agent and your underwriter to find reasonable professional liability insurance limits, you may still feel pressure to increase your limits further. That pressure can come from clients or potential clients who demand high limits from any design professional who works on their projects.
When facing such demands, try to determine the reason why the client feels it needs you to carry higher limits. Oftentimes, the perceived need is based on a project’s high construction value. In that case, a modest increase in limits may be worthwhile if you want to maintain or create a good relationship with this client. For instance raising your PL practice policy limits from $1 million to $2 million may be a worthwhile effort if affordable, and likely an underwriter would work to get that increase.
But if a client demands that you raise your practice policy limits from $1 million to $10 million, then you and your agent may have some explaining to do to the client. It could be the client believes it needs $10 million in limits because the project has a $10 million construction value. But claims against any one policy that equals a project’s construction value are extremely rare. And the cost of carrying those limits, if you can find an insurer willing to provide them, can be extreme. You’d need to try to convince the client that a $1 million or $2 million policy would be more than adequate to cover the vast majority of claims against your design firm. This could be difficult to do if the client is a municipality or large institution that insists on strict insurance requirements for all designers and contractors.
If the client demands higher limits, and you desperately want to land the project, then we can work with you to present your situation in the best possible light to the underwriter. Underwriters will likely want to see the proposed contract with the client. They’ll look for onerous clauses in the client’s favor, as well as favorable contract language that can limit your liability. Having a full scope of services, including construction observation, may help convince an underwriter to increase your limits. A long, claims free history with the client would be another big point in your favor.
If multiple clients are demanding higher PL limits on your practice policy, then you may have no choice but to make a good faith effort to secure increased limits on your practice policy. However, if it’s just one or two clients or prospective clients making such demands, then you may have to make a tough business decision and forego that particular project or client if the demands are too excessive and expensive. But before you do, here are some other options to explore that may provide those clients with added coverage without the cost to you for increasing your practice policy limits beyond a level you feel comfortable providing.
Practice Policy Alternatives
There are some innovative insurance products that enable you to offer higher limits for those clients who demand them without raising your overall practice policy limit. Consider:
Specific-job excess (SJX) insurance. With SJX, you can maintain your current practice policy limits and purchase an endorsement that provides additional limits for a named project. For instance, you could maintain your current annual limits of $2 million while providing $5 million for a demanding client’s single project. The cost of this SJX endorsement is considerably less than the cost of increasing your total practice policy limits to $5 million.
Specific client excess (SCX) insurance. This is a slight variation of the SJX endorsement. Here, you can purchase the additional limits to cover all of your projects with one particular client. Again, with this endorsement option, your practice policy limit remains the same and the increased limits apply only to the projects of the named client.
Split limits insurance. This works a little differently than SJX or SCX. Here, you select an aggregate annual limit for your practice policy tied to a lower per-claim limit. For instance you might purchase a $5 million aggregate split limit policy with any one claim capped at $2 million of coverage. This doesn’t necessarily get the client the higher limits it wants for its project, but it does greatly increase the odds that your policy limits won’t be exhausted by other claims. That consideration may help convince a client it doesn’t need the higher practice policy limit.
So far, we have examined some options for increasing your practice policy limits in order to meet a client’s requirement to provide greater insurance coverage for its project(s). There are a couple of other options, though, where a client can obtain its own additional coverage.
Why would a client do this? There are actually advantages for clients purchasing their own higher limits to replace or supplement a design firm’s practice policy.
Owner Option 1: An OPPI Policy
An owners protective professional indemnity (OPPI) policy works somewhat like a SJX or SCX in that it is an excess or umbrella policy that provides an added layer of protection when a design firm’s underlying PL practice policy has been depleted and the owner still has uncovered losses. There is one important difference, however. With an OPPI, the client (owner) is the named insured on the excess policy, and the limits apply only to the named project. What’s more, the client pays for and owns this policy. Coverage can run the life of the project plus years beyond. In some instances, blanket policies covering an owner’s multiple projects may be available.
Why would a client agree to pay for this option? First, an OPPI policy can provide the total limits the client desires, typically up to $10 million — limits the individual design firms may be unwilling or unable to provide. Second, the policy applies only to the design team’s negligent acts on the named project, so there is no chance that other claims against the design firms can deplete the excess limits.
Typically, each design firm is required to secure a minimum amount of coverage in its practice policy — $1 million or $2 million, for example. If those limits are depleted, the OPPI policy kicks in as noted in the conditions. Notably, the policy does not cover litigation costs an owner incurs in bringing a claim against a design professional.
Owner Option 2: The Project Policy
Here’s an option that virtually guarantees the client gets the insurance limits it desires and that the coverage will not be eroded by other claims: A PL project policy. And it is likely the easiest policy to administer compared to the other options we have discussed so far.
A professional liability project policy can cover the entire design team, including subconsultants, for multiple years with one policy, one insurer, and one policy owner. (Compare that to the administrative burden of managing a claim with ten design firms on the project, each with its own available annual limits and each represented by a different insurer.) The project policy limits are set by the owner and are fully dedicated to the named policy. They cannot be eroded by any other claim and coverage is typically noncancelable except for nonpayment of premiums, breach of policy conditions or material misrepresentations on the application. Also, the owner can choose the duration of the policy, typically up to five years after substantial completion of the project. Premium rates are usually guaranteed.
Should there be a project error or omission by one or more of the design firms, the owner enjoys single point claims responsibility. Instead of all the design firms and their insurance companies pointing fingers at each other, the one insurance company covering all design firms can work effectively and efficiently to get the issue resolved and the project back on track.
As you might expect, the owner owns and pays for the project policy. That is often the sticking point that dissuades a client from selecting this option. But, when the benefits of a project policy are fully explained, an owner with a large important project who cannot otherwise get the comprehensive coverage they desire may very well view it as a viable option and a normal project cost.
And there is an added bonus for the design firms as well. The fees they earn on this project will likely not be added to the calculation when determining their practice policy premiums.
We’ll be happy to help you review your current premium limits and address the demands of a client or prospective client who might be pushing you for higher limits. We also have additional information on project and OPPI policies as well as the other options discussed herein.
Can We Be of Assistance?
We may be able to help you by providing referrals to consultants, and by providing guidance relative to insurance issues, and even to certain preventives, from construction observation through the development and application of sound human resources management policies and procedures. Please call on us for assistance. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help.