As the owner or manager of an architecture or engineering firm, you are focused on providing high-quality technical work and excellent customer service to your clients. However, your business faces legal risks that are common to most businesses. Even though it may be far from your mind, legal liabilities are a reality for any business.
You may already have Errors & Omissions or Professional Liability Insurance that protects you for the professional architecture or engineering work that you do. Having comprehensive insurance coverage for you and your business can save you from financial troubles that can arise when an unforeseen accident or lawsuit arises.
This article will cover other major types of insurance available to architecture and engineering firms, including:
- General Liability Insurance
- Commercial Property Insurance
- Commercial Auto Insurance
- Data Breach Insurance
- Umbrella Insurance
- Directors & Officers Insurance and Employment Practices Liability Insurance
General Liability Insurance
General liability insurance protects your business if a client or other third party alleges bodily injury or property damage caused by your business or your employees. Third parties include most individuals and companies other than employees of your company.
General liability insurance covers the following types of liabilities:
- Bodily Injury
- Property Damage
- Personal and Advertising Injury
For example, if a visitor to your office trips over a piece of furniture and breaks their arm, your bodily injury coverage can protect your company if the visitor sues you.
Additionally, the property damage component of your general liability insurance will provide protection if your business causes damage to another person or business’s property. For example, if a fire starts in your office kitchen and burns down a neighboring office, your general liability policy will cover the damages to your neighbor’s property.
Personal and advertising injuries include everything from libel and slander to copyright infringement, publications that violate personal privacy, malicious prosecution, wrongful entry or wrongful eviction.
For example, if your interior design company publishes damaging information online about a competing design company, but that information turns out to be false, your insurance coverage would cover any libel suit that competing company might initiate against you.
Products and Completed Operations / Professional Liability Exclusion
In addition to the coverages listed above, general liability insurance usually also provides coverage for products and completed operations. This means if you provide a service to a client that causes bodily injury or property damage after the service is completed, you would be covered for any damages.
Importantly for architects & engineers, however, most general liability policies contain an exclusion for liability related to professional services. This means work that your firm does as a part of its regular architecture or engineering services may be excluded from coverage under your general liability policy. However, bodily injury and property damage claims are also commonly excluded from professional liability policies.
The question of whether bodily injury or property damage caused by an architecture or engineering firm’s work is covered under a general liability policy or a professional liability policy is quite complex. For example, if your structural engineering firm provides engineering services for a building that collapses and causes injury to several occupants, the lawsuit may or may not be excluded from your general liability policy, depending upon the specific terms of your insurance policy.
In order to fully protect your architecture or engineering firm from claims related to bodily injury and property damage caused by professional architecture or engineering services, it’s advisable to have both professional liability insurance and general liability insurance.
Deductible and Limit of Insurance
General liability insurance usually does not have a deductible. A deductible is the amount of money your business is responsible for paying before your coverage kicks in. With general liability insurance, the insurance company covers the full amount of any judgments or settlements against your company up to the policy limits.
The policy limit is the maximum amount of money your insurer is responsible for paying in claims during a given policy year. Most general liability policies have two types of limits, per year (the maximum that the insurer will pay during a policy year) and per occurrence (the maximum amount the insurer will pay for a single claim). Limits are negotiable, and you can expect that higher limits come with higher premium costs. Therefore, it’s important to give thought to how much risk you’re willing to bear when choosing your policy limits.
General liability insurance covers a wide range of scenarios that can occur in an architect or engineer’s line of work. However, there are some exclusions common to most general liability plans. Those exclusions include:
- Damage to company property
- Intentional damages
- Liability resulting from intentional lawbreaking
- Professional errors
- Employee injuries
- Employee discrimination lawsuits
- Vehicles used for business purposes
Insurers will cover the legal fees for lawsuits against your business if the cause of the lawsuit is a risk covered under general liability insurance.
General liability insurance can be useful even when your business is not responsible for damages. Anyone can file a lawsuit for any reason, and your insurer is duty-bound to cover your legal costs whether or not your business is at fault. Furthermore, under many general liability policies, legal costs do not count toward your coverage limit.
Is general liability insurance required?
In most U.S. states, the law does not require architects and engineers to have general liability policies. That does not mean, however, that it is a good idea to operate without one. For example, architecture and engineering businesses may find that landlords may require coverage when leasing office space.
Even when it is not legally required, it is financially prudent for your business to have general liability coverage. The exposure you’re subject to without a plan in place can create financial difficulties if unforeseen events occur down the line.
Property insurance can protect your architecture or engineering firm’s office space and its contents. Property insurers can cover the costs of repair or replacement of damaged property owned by your business.
Property insurance is important for architecture and engineering firms which own valuable property. Expensive artwork, furniture and fixtures, computers and other operational equipment are all examples of property that this kind of policy covers.
For example, if your engineering firm has purchased expensive specialized engineering equipment and a fire at your office destroys it, property insurance will cover the cost to replace the equipment.
Often landlords will require building tenants to have property coverage before allowing them to sign leases, and some vendors of expensive equipment might also require coverage.
Additionally, for architecture or engineering firms that own their building, office condo, or other places of business, property insurance can provide protection for damage to the structure.
What risks are covered by commercial property insurance?
There are two distinct forms of property coverage: open perils and named perils.
Open perils plans cover any and all risks associated with your business that aren’t specifically excluded in the writing of your policy contract. Named perils are the reverse: covering only those risks specifically written into your policy. Open perils policies offer broader coverage and are more expensive.
Common exclusions from property insurance policies include employee theft and dishonesty, flooding and earthquake-related damages.
Named perils policies will commonly cover the following risks:
- Lightning Damage
- Vehicular Damage
- Leakage from Pipes and HVAC systems
- Damage from Airplanes
- Building Collapse
While those items listed above include many of the most common named perils, different insurance companies vary in their offerings. When it comes to exclusions for named peril policies, some of the most common include:
- Normal Wear and Tear
- Robbery or Burglary
- Power Failure
- Computer Failure
- Inventory Shortages Without Physical Evidence of the Inventory
- Intentional Losses
- Nuclear Reaction or War
Open perils policies, in addition to the exclusions found in named peril policies, typically also exclude damage caused by:
- Mold and Fungus
- Government-Caused Losses
- Animal Infestations
- Mechanical Problems
- Sewer Backups
Replacement Cost vs. Actual Cash Value
In addition to the two types of property insurance policies, there are two different methods your insurer can use to calculate their payments in the event of a claim: actual cash value (ACV) and replacement cost (RC).
ACV is a calculation based on the market value of your business’ damaged items, while also factoring in usage, depreciation, and obsolescence. RC, on the other hand, is a method whereby your insurer can replace your property with similar property, in kind and quality, without having to account for depreciation. Because RC is generally higher-cost for insurers, RC plans come with higher premiums than ACV.
Property insurance policies typically have deductibles. Your deductible is the amount of money you’ll have to pay to cover your own claims before your coverage from your insurance plan kicks in. For example, if your policy has a deductible of $1,000, and you experience a loss of $8,000, the insurance company will pay your business $7,000.
From an insurer’s point of view, deductibles have the effect of discouraging your and your business from being careless with your property or filing unnecessary claims. Because higher deductibles lower risk for insurers, they also reduce premium costs for businesses.
Commercial Auto Insurance
Just as it’s required to own insurance for your personal car, most states require that businesses insure their company cars with commercial auto insurance.
Commercial auto includes coverage for both liability and property. The property side covers damage to company vehicles, in cases such as theft or crashes. The liability side accounts for cases when you or an employee of your business is responsible for a crash. Also covered is any bodily injury associated with an incident.
One example of where commercial auto insurance might come in handy: for architects or engineers whose work involves traveling to multiple locations in a given week. If, while on the job, you crash with another car and are judged to be at least partially responsible for the incident, commercial auto will cover the costs necessary for vehicle repair, medical bills and, should it come up, even legal fees.
Aside from regular commercial auto insurance plans, there are also “hired and non-owned” plans. These plans cover company employees who use their personal cars for company business, or rent cars for business trips.
Data Breach Insurance
If your architecture or engineering business holds any sensitive information on computers, you should consider the benefits of having data breach insurance. Data breach insurance won’t stop a malicious agent from hacking your organization, but it will help cover the costs associated with recovering from such an event. Anyone who has been hacked before can attest: those costs will tend to add up.
Cyber security is an area of your business that, even if you don’t think about it much, opens up many different avenues for exposure. Your business may be subject to legal recourse from clients if you’ve failed to secure their sensitive information. You may not be able to operate your business for some time after a hack, as you’re picking up the pieces, leading to lost revenue. Those with reason to seek harm against your company may obtain sensitive documents, including proprietary and financial information. And that’s not even including ransomware: malicious software that can keep hold of your computer data until you’re willing to pay a hacker to get it lifted.
Data breach insurers are there to cover costs ranging from repairing or replacing disabled computers to legal costs brought on by angry clients. Because cyber-related matters generally are excluded from general liability or property insurance, data breach insurance is important for any company with digital risks.
Umbrella insurance covers liability claims that exceed your other policies’ limits. It requires that you have active underlying policies, such as general liability and commercial auto insurance.
Take, for instance, a scenario where your the lab in your environmental engineering firm explodes from an unexpected chemical fire. The fire spreads to a neighboring commercial building and burns it down. Your firm is sued for $2 million dollars. If your existing commercial general liability plan has a limit of $1 million, having an umbrella policy with a $2 million dollar limit would mean that, instead of having to pay for half of the damage costs, you’d instead be fully covered.
Because umbrella policies are used rarely compared with typical insurance policies, they tend to be cheaper overall. If you or your business are in a line of work that exposes you to significant potential financial damages, perhaps umbrella insurance would be a sensible investment.
Directors and Officers Insurance and Employment Practices Liability Insurance
Directors and officers (or D&O, for short) insurance protects the directors and officers of your company from claims made against them for actions they’ve taken related to running your company. When lawsuits are filed related to management errors made by directors, officers or other executives, this form of insurance ensures that those individuals won’t be financially ruined in the process. Oftentimes, in order to attract talented and experienced individuals to your company, you will need to offer them this type of coverage.
For example, if a former client of your architecture firm claims that a company director acted negligently and sues them personally, D&O insurance will cover the associated legal costs and any judgments or settlements against that individual.
Employment practices liability insurance (also known as EPLI) protects companies financially from lawsuits filed by employees and former employees. EPLI provides coverage for a wide variety of claims, including lawsuits alleging discrimination, sexual harassment, wrongful termination, negligent evaluation, failure to hire or promote, and more. However, lawsuits alleging violations of labor laws such as wage and hour violations, ERISA, COBRA, or WARN Act violations are excluded from coverage.
For example, say a recently laid-off employee of your civil engineering company sues for wrongful termination, claiming that the reason for their firing was related to racial or gender prejudice. Whether or not their claim is viable, employment practices liability insurance will cover the cost of the company’s defense, and damages payments.