By USI Colorado
The ACEC’s 2014 Professional Liability Insurance (PLI) survey shows that 72% of member engineers carry $2 million or less in professional liability insurance limits. Surveys of architects show similar results. Such limits have traditionally been considered reasonable and customary for all but large design firms with annual revenues of $50 million or more.
But that may be changing. As the economy rebounds and owners bring more and larger projects to the table, we’ve recently noticed that many of our A/E clients are being asked to carry higher PLI limits.
What happens should a client demand that their architect or engineer have PLI limits of $5 million, $10 million or even $25 million? Some design firms may feel that higher insurance limits are only a phone call away, and they can adjust their fees accordingly to offset some or all of the increase in premiums. After all, wouldn’t an insurance company relish the thought of selling you more insurance and charging you more money?
Unfortunately, things are not so simple. In fact, most insurance companies would be reluctant to increase your PLI limits beyond what they consider a reasonable level. They are concerned that huge limits make you a primary target for future project claims. Therefore, your request for higher limits may be met with a flat “no.”
So how should you handle a client demand for high insurance limits?
Always Ask Why
Start by determining why the client wants higher limits in the first place. It might be that your client simply thinks higher limits are better than lower limits and is not familiar with the PL insurance marketplace. Sometimes, a simple explanation that higher limits are difficult to get, expensive and really not necessary will do.
In other cases, however, clients have what they consider valid reasons for asking for higher limits. It’s not uncommon for a client to ask for limits equal to the construction value of the project. In such cases, you can try to reason with the client that the chances of having a claim equal to the total value of the project are miniscule, and that such high limits are unnecessary — particularly when the requirements are applied to the contractor, the lead design firm and all subconsultants. Try to convince the client that insurance limits should reflect the reasonable liabilities of each party to the project, and that limits of $1 million or $2 million should be more than adequate for the majority of small to midsize design firms.
Clients who are municipalities or large institutions may have strict insurance requirements that are applied to all parties to any projects. In such cases, it may be difficult to convince the client to change policy. This may be the time to call in some subject matter experts, such as your agent or insurance underwriter, to try to convince the client that their limit requirements may be excessive and in need of reconsideration.
A/E firms that are subconsultants on a project may get a demand for higher insurance limits from the prime designer. This is typically because the prime is required to have higher limits as well. The project owner may even demand high limits on all subs in the contract. In such cases, it may be timefor all designers on a project to present a unified front and seek lower limit requirements from the project owner.
When Push Comes to Shove
Suppose, despite your best efforts to convince the project owner to reduce the PLI requirements, the client remains steadfast in its demands. Your next step is to work with your agent to present the request for higher limits to insurance underwriters in the best possible light. When reviewing the request, the underwriter will consider:
- The project contract. Explain to your client that chances of obtaining higher limits will be greatly improved if the contract does not contain onerous clauses, such as one-sided indemnities or warranties and includes a limitation of liability clause.
- Your scope of services. Having construction observation services as part of your scope could help convince an underwriter to increase limits.
- Your experience with the client and with the project type. A claim-free history working with this client or on similar types of projects may increase the underwriter’s comfort level.
- Project construction values. High values on a big project may help justify the client’s need for higher limits.
Options for Higher Limits
When a client demands higher PLI limits, your first thought may be to simply increase the limits on your current practice policy. Indeed, with claims severity on the rise, coupled with the ever-growing number of projects you have worked on throughout the years, higher PLI limits may be in order.
However, if increasing your aggregate practice policy limits is not needed for your situation (outside of pleasing one demanding client), or if the increase in premiums is simply too big of a hit on your pocketbook, you can consider these less-expensive options that may provide the added protection a client or prospect requires:
- Specific-project excess. With specific-project excess coverage, you can maintain the current limits on your practice policy while purchasing an endorsement that provides a higher limit to cover a specific project. For example, you can maintain a $2 million practice policy and purchase a $5 million limit on one project for substantially less than raising your entire policy limit to $5 million.
- Specific-client excess. Suppose you find a new client who wants you to work on multiple projects, but demands higher insurance limits across the board. Specific client excess is similar to specific project excess, except the higher limits apply to all projects performed for a particular client. Again, this increased coverage is more affordable than raising your entire practice policy limit.
- Split limits. Instead of purchasing a $5 million practice policy you might purchase a $2 million/$5 million split-limits policy. Here, the policy limit on a single claim is capped at $2 million, but the total coverage for any one year is $5 million. This eliminates the chances that your policy would be wiped out by another claim and increases the chances that coverage will be there for all of your clients’ projects.
© 2014, Professional Liability Agents Network, Inc. All rights reserved.
For more information on your options, including project insurance, contact Alfred Zarlengo, CIC, AAI