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What is Professional Liability Insurance for building design professionals?
Professional Liability Insurance protects individuals and companies providing professional advice and services from the cost of damages from lawsuits by dissatisfied clients. This insurance protects individuals and businesses that sell their expertise, such as building design firms. It covers professionals who have gained expertise through extensive training in their field and whose work is governed by standards set by client agreements, their industry, or the government. It complements basic protections provided by general liability insurance.
Professional Liability Insurance is one of the most important coverages for building design professionals, such as architects and engineers, because of the high cost of their projects and the serious consequences of even small errors. Building design professionals can include the following occupations:
- Building Inspector
- Civil Engineer
- Project Manager
- Control System Integrator
- Electrical Engineer
- Environmental Engineer
- Industrial Engineer
- Interior Designer
- Land Surveyor
- Landscape Architect
- Transportation Engineer
Even with the best intentions, mistakes can happen in your building design work. Whether it’s making an error on a blueprint or not delivering the project on time, clients may sue if they think you have made a mistake or failed to exercise adequate professional judgment. Any perceived failure by your building design company that leads to financial losses for a client can be grounds for a claim.
Why do building design professionals need Professional Liability Insurance?
When it comes to making errors and omissions, building design professionals face particular risks. Given the high cost projects and the meticulous nature of design, mistakes made by architects, engineers, and other building design professionals may be extremely costly. Even a small error by a building design professional may cause the structure to shift or collapse. Clients may sue building design professionals for errors in the actual design work to problems that arise during the delivery of the project. Examples of errors and omissions in the building design industry include:
- Failing to deliver a blueprint on time
- An error on a blueprint causes the structure to be unsound
- A faulty cost estimate for building materials delays the completion of project
- Failing to keep all necessary personnel informed of design changes which leads to design errors
Professional Liability Insurance will cover the mistakes that architects, engineers, and other building design professionals make in the course of a project. Typically, individuals will not be held liable for general business liabilities, but professional liability is a different case. Since many building design professionals are licensed to practice their specialty as individuals, they can be held personally liable for errors in their work, meaning their personal assets would be vulnerable to lawsuits. Professional Liability Insurance provides an additional layer of financial protection for architects, engineers, and other building design professionals from personal liability.
Professional Liability Insurance is not mandated by law in most states, but your building design firm will usually be contractually obligated by your clients to purchase it. Having the right Professional Liability Insurance will not only provide financial protection in the event that your building design firm is sued but also offer peace of mind for your clients.
Increase in Professional Liability Claims
There’s been a particular upward trend in professional liability claims in recent years, due to the changing nature of the building design industry. Some risk factors contributing to this trend include:
- In the design build model of building design in which architects and engineers are subcontractors, contractors can inflate professional liability claims against design professionals to bolster their own profit margins.
- When design firms relinquish many of the contract administration and site observation services to the contractor in a design build relationship, technical errors often have more serious consequences.
- A relationship between a contractor and design firm that is not well-established may be more fraught with errors because of collaboration issues.
- Architectural firms, engineering firms, and other design firms that may have trouble finding seasoned talent may hire less qualified design professionals, leading to more errors made on projects.
- Design firms who hire subconsultants are increasingly being held liable for the subconsultants’ mistakes or negligence.
- There’s been an increase in professional liability claims for small firms, possibly due to the increase in volume of work which takes attention away from stricter risk management practices.
What does Professional Liability Insurance for building design professionals cover?
Professional Liability Insurance policies for building design professionals depend heavily on the type of service the firm is offering, their specific discipline (such as architect, civil engineer, interior designer) and the specific project. For example, the design of a single family residential home will have different risks than that of a condominium project, which is known to be high risk and high cost.
Professional Liability Insurance policies are also written with the building design firm’s client in mind: what are the contractual obligations that the architect, engineer, or other building design professional has made with the project owner? Insurance policies vary from provider to provider, so it is important to read your policy carefully or consult with your broker or insurance advisor.
Some common policy coverages for building design professionals may include:
Claims of professional errors protect building design professionals if their client claims they made a damaging error while designing. This can be a perceived error or an accidental one.
- Example: A structural engineer miscalculates the amount of force the steel beams supporting the building can withstand, and the structure starts to sway in a severe windstorm.
Claims of negligence in providing services occur when a client accuses a building design professional of not performing his or her duties fully, with resulting damage.
- Example: An engineer designs a power plant that becomes a financial disaster for the client because it doesn’t generate enough energy at a sustainable cost.
Breach of duty is a claim regarding building design professionals who act in their client’s interest as a person of trust. Claims related to breach of duty would accuse the professional of neglecting to carry out his or her duties to an acceptable standard.
- Example: An architect designs a building that is not up to the city’s building codes.
Misleading statements refer to cases where a building design firm gives advice that misleads a client. If the client follows the advice as they understand it and suffers financially, they can file a claim that their advisor misled them.
- Example: A civil engineering firm advises a client building a shopping complex to use new type of asphalt for the parking lot that is more expensive than the typical asphalt. The asphalt overheats during the summer and requires the parking lots to be repaved.
Claims related to performance relate to clients that are unsatisfied with the level of professional services they receive.
- Example: A project manager oversees a building project that misses several important deadlines and ultimately delays the completion of the project.
Claims of bodily injury or property damage, unlike most Professional Liability policies, are covered by Professional Liability Insurance for building design professionals. Architects and engineers are especially at risk, as faulty design could easily lead to third-party injury or property damage.
- Example: An engineer miscalculates the load that a structural beam can support in a commercial building. The beam fails and the roof of the building caves in, injuring the occupants and damaging equipment and furniture inside the building.
What are the key exclusions of Professional Liability Insurance for building design professionals?
There are several common exclusions to Professional Liability Coverage. These may include but are not limited to:
Malicious, illegal, or deceptive acts
- Example: Your architectural firm designs a building that doesn’t meet the city’s most recent building codes in order to save on costs during construction. When the building owner is fined by the city, he sues you for the flawed design but your Professional Liability Insurance will not cover it because you intentionally violated the law.
Personal and advertising injury. Typically covered by a commercial general liability policy, personal and advertising injuries are typically non-physical or reputational injuries. They can include slander, libel, publications that violate privacy, copyright infringement, false arrest, wrongful eviction, and malicious prosecution.
- Example: Your engineering firm publishes a blog post comparing your services to two of your competitors. In the post, you call out deficiencies in your competitors’ services, namely how they are able to to deliver faster project timelines because they cut corners in safety and quality. Unfortunately, many of your statements turn out to be untrue, and one of your competitors files suit against you.
How much does Professional Liability Insurance for building design professionals cost?
The cost for Professional Liability Insurance will depend on a number of factors, including your specific discipline, the services that you offer, and the nature of the project. For example, civil and structural engineers are known to defend more lawsuits than other types of engineers and therefore will be subject to higher costs for Professional Liability Insurance. The scope of your services will determine the amount of risk and the cost of your Professional Liability Insurance. If you are an architectural firm, does your firm only create blueprints, or do you also supervise the building of the structure? The type of project will also influence the cost, as high-risk and high-cost projects like a bridge will be more costly to insure than a small parking lot.
What are the limits of Professional Liability Insurance for building design professionals?
Professional liability insurance will typically have a limit of at least $1 million, though building design companies such as architectural and engineering firms are often required by clients to purchase insurance with $2 million or $3 million limits, and it’s trending upwards. Your firm will want to purchase Professional Liability Insurance with higher limits for larger and more complex building design projects.
What are claims-made policies?
Professional Liability Insurance for building design professionals is a claims-made policy. With a claims-made policy, the insurance that provides coverage when the claim is filed covers the claim itself. The policy that was active when the events that caused the claim took place does not provide coverage.
- Example: Your engineering firm designs a canal in 2017 that is supposed to allow newer, larger ships to pass through. In 2018, a ship that is contracted to pass through the canal runs aground in the waterway because it isn’t wide enough. If your firm is sued for professional liability in 2018, it will be the policy in place in 2018 that covers you, not the one in 2017 when the error was made.
Please take note that most Professional Liability Policies also have retroactive dates. Work done before the retroactive date is not covered, regardless of whether claims are made when you have the policy.
What’s the importance of reporting claims?
It’s important to report any claims from dissatisfied clients or circumstances that may result in claims promptly to your insurance carrier to ensure coverage. Though building design professionals will often hesitate to do early reporting for fear that it will raise their premiums, insurance companies actually encourage policyholders to report claims or incidents that could give rise to claims early so that they can provide consultation and legal assistance to prevent escalation. When you are reporting the claim, make sure you know whether your insurance company requires written notification.
Professional Liability Insurance covers building design professionals from client lawsuits that arise from errors and omissions in their work. As an architect, engineer, or other building design professional, even small mistakes can lead to serious consequences for a structure that you have designed. The cost and coverage will depend on your specialty, the scope of your services, and the specific type of project with high-cost and high-risk projects requiring more coverage. Typically required by clients through contractual obligations, Professional Liability Insurance is one of the most important coverages for building design professionals.