Professional Liability Policies 101
Larry R. Leiby, Esquire
Even competent architects, engineers and other design professionals make mistakes. This is why there are professional liability policies. These policies provide an additional layer of protection for those hiring design professionals. However, there are several unique aspects of professional liability policies that can limit the coverage - and monetary compensation -that is available.
Policy limits Reduced
A typical professional liability policy is written so that the costs of defending a potential claim against the policy are deducted from monetary value of the coverage. This is intended to make' a settlement more attractive early on while the available coverage is at the highest amount. This feature of a professional liability policy should be kept in mind when pursuing a professional liability claim.
First Cost Defense Exclusion
A claim against a design professional may be impacted by the "first cost defense." The first cost defense is the concept that if the design professional had designed the assignment properly and without error, then the cost of the properly designed assignment is a cost that the owner would incur despite any error of the design professional. lf an architect improperly designed a column with insufficient reinforcing steel, then the cost of the column with the proper steel would have been incurred by the owner anyway. What the policy would cover is any additional expenses to construct the column properly.
Certificates of Insurance
It's not enough to obtain a certificate of insurance from a design professional to ensure they have an adequate professional liability policy. Certificates of insurance do not typically provide all the information about a design professional's specific policy, particularly unique exclusions. This can lead to expensive surprises down the road if a claim is denied due to one of these exclusions. Additionally, a certificate of insurance is typically issued by an insurance agent, not the insurer. The insurance agent does not have the power to grant additional coverage to what is in the issued policy. For these reasons, it is important to request a copy of the design professional's full professional liability policy as part of the contract process.
Research the Insurer
The due diligence process for hiring a design professional should also extend to their professional liability insurance carrier. The insurer should be licensed to write professional liability coverage in the state where the policy is written; and is an insurer who has adequate reserves if a claim is made. Insurance companies are also not immune from bankruptcy. Any contract should stipulate that the insurer be listed
at a certain level by the A.M. Best Company, which rates insurers on financial strength and credit and can be verified online.
Verify the Expiration Date
Both the event that gives rise to a claim against a professional liability insurance policy and the making of the claim itself must occur within the policy's effectiveness period. Therefore, it is important to know how long a design professional's coverage is effective. The policy and the policy tail (described below) should cover the length of the project, and optimally the applicable statute of limitations and seven-to-ten year statutes of repose for latent defects. The expiration date should be monitored to be sure that coverage does not lapse and is renewed where required.
Since most professional liability insurance coverage is written for a one-year period, it may be advisable to require that a policy tail be purchased for an extended reporting period. This is particularly advisable where the project will not be concluded within a one-year policy period, or where the project is a condominium. With a condominium, when the un it owners take control of the condominium association they typically have an engineering inspection of the building, which should turn up any defects, including design defects (unless latent).
That inspection may not take place for a period of years from completion of the design, and often years from the completion of construction. There is also the issue of latent defects that are not manifested until
years after the design and construction is finished as described above. The party hiring the design professional must consider at the start of the policy, but not later than the end of the initial policy period, the economics of the cost of an insurance policy tail versus the exposure for potential damages from defects.
One concern about a standard professional liability policy with stated dollar limits of coverage may be that there is the potential for claims from other projects against the same policy that may reduce or eliminate the amount of available insurance coverage. That professional liability policy usually covers all of the work that the design professional has done, and is doing, within the policy period. If this is a concern, a project policy should be considered. The project policy only covers the stated project and there is no concern about the policy limits being invaded or reduced due to claims on other projects. Multiple claims involving a particular professional within the same year are not common. A project policy would cover only the particular project(s) specified in the policy and would not be available for claims from other projects.
Due Diligence Required
Those hiring design professionals spend significant time on due diligence to ensure the competency of the individual being hired. That same attention to detail should be applied to reviewing the design professional's professional liability insurance policy. This review should be a part of any bidding and awarding process. Taking time before the contract is signed can prevent significant future problems.