Professional Liability policies provide coverage for architects, engineers and consultants for acts, errors or omissions in services rendered, or that should have been rendered. Retaining Professional Liability insurance, also referred to as errors & omissions insurance, is a common practice among design professionals today, and has been for years. However, how many engineers, architects and consultants actually understand the terms associated with the policy that covers their professional services and daily operations? How fluent is the technical professional in the insurance industry’s language? A risk manger who deals with insurance policies probably has an understanding of the insurance buzzwords; however, the typical design professional may not.

This article is intended as an overview of Professional Liability insurance policies -- what they mean and what they do and do not cover. Although each insurance company’s Professional Liability policies generally provide similar coverages, each company needs to determine their company-specific risks and ensure those risks are properly addressed in their policy through discussions with their broker and underwriter.

Insuring Agreement

The most important feature of a Professional Liability policy is the insuring agreement. The insuring agreement essentially summarizes the coverages provided by the policy by addressing the who, what, where and when of policy coverage. The "who" of a policy is often referred to as the "Named Insured" or the firm conducting services. Under most Professional Liability policies, both the professional firm and the individuals affiliated with the organization are insured. However, it does not end there. Additional Named Insureds can be added to the policy and can include any subsidiaries or sister companies associated with the firm, does-business-as names the insured provides services under, and any previous names the firm conducted services under. Each of these names needs to be formally added onto the policy. Additionally, Joint Venture arrangements should be added as an Additional Named Insured to ensure coverage for the insured’s interest in the venture. Coverage for the Named Insured(s) includes coverage for current and former partners, executive officers, directors, trustees or employees of the Named Insured; leased workers; and individuals retained under a personal service contract. Coverage is also typically afforded to persons no longer affiliated with the company when a claim arises out of services conducted by that individual during employment.

Services Covered

The services covered under Professional Liability policies is an important element of an insuring agreement. There are three approaches that can be taken to address what services are covered. A broad statement of coverage, in which "all professional services" are endorsed, affords coverage to companies for professional services that the insured knowingly performs and, maybe more importantly, for services that they may perform incidentally. This broad coverage may not be available from all insurance carriers. Insurance policies can also endorse covered services as a general statement of services, which includes typical professional services conducted, or a specific statement of services, which provides coverage only for the services identified. However, if general or specific services are endorsed onto the policy they may be limited by the policy’s definitions to include only a select few disciplines, and/or restrict the performance of these services by individuals who are "legally qualified." Careful attention should be paid to what professional services are covered under the Professional Liability policy. Additionally, the insured should remember to include professional services that are contracted out as part of their professional services; otherwise, a claim arising out of subcontracted work may not be covered.

The "where" of an insuring agreement applies to where the professional services are performed and where the claim is initiated. Most policies afford coverage for work performed and suits instituted in the United States, its territories or possessions, or Canada. However, specific endorsements can be added to expand this provision if international work is conducted.

Finally, the "when" of the insuring agreement stipulates the time period in which coverage will apply. This time frame of coverage is established through two separate provisions: the policy period and the retroactive date. The policy period is simply the period of time that coverage will be valid. It is defined by the effective and expiration dates on the policy. All claims must be reported during the policy period.

The retroactive date is the earliest date when a negligent act, error or omission in professional services can have occurred and still be covered under the policy. Typically, the retroactive date is the same date that a firm first purchased professional liability insurance. Therefore, to summarize, coverage should apply to a firm for any claims made and reported to the insurance company during the policy period as long as the negligent act, error or omission in a covered professional service occurred subsequent to the policy’s retroactive date.

Claims Made vs. Occurrence Policy Forms

There are two different types of insurance policies: claims-made and occurrence-based forms. Currently, coverage for professional liability is available only on a claims-made basis. As discussed in the previous section, this means that the claim has to be first made and reported during the policy period, regardless of when the harm occurred. An occurrence form covers a claim, no matter when it was filed, as long as the harm occurred during the policy period of the occurrence-based policy. Occurrence forms are available for Contractor’s Pollution Legal Liability (CPL) coverage and General Liability (GL).

The type of policy purchased should depend on various factors, including if the company anticipates maintaining continuous insurance coverage in subsequent years and the nature of the work performed. A claims-made policy has several advantages over the occurrence policy for the insurance company, including easier identification of projected losses from the policy period.

For the insured, the advantages of a claims-made policy are lower premiums and generally adequate limits. Whereas, occurrence policies are advantageous to the insured because (1) higher limits may be available, (2) coverage for past incidents is present in the event that changes in the marketplace occur and insurance coverage is not available or is voluntarily dropped, and (3) coverage is in place for services rendered when the company ceases operations. The advantage of an occurrence-based policy can be easily seen for a project-specific policy. In this case, coverage is often not maintained much past the duration of the project. Therefore, an occurrence policy provides coverage for incidents occurring during the duration of the project, even if the claim occurs after the project has been completed. However, the greatest disadvantage of the occurrence-based policy is that due to inflation the limits established at the beginning of the policy period may not be adequate five, 10 or 20 years in the future when harm occurs and subsequently a claim is submitted. Another disadvantage is the potential for the insurance company to no longer be in business when the claim finally occurs. An occurrence policy will typically cost more than a claims-made policy because the insurance company is taking the risk of paying out on a claim long after the premium has been collected.

Exclusionary Provisions

Professional Liability insurance policies, as with all insurance policies, include some type of exclusions, i.e., services, operations or liability that is not covered by the insurance policy. Exclusions typically fall into one of three categories: not insurable, such as intentionally negligent or dishonest acts; modifiable, such as worldwide coverage; or covered by other insurance policies, such as fiduciary or product liability. If an exclusion is considered modifiable, an endorsement may be added to the policy to provide additional coverage, or in some cases restrict coverage further. Typical modifiable exclusionary endorsements range from coverage for projects in which the insured has an ownership interest, pollution and first dollar defense coverage (meaning that the deductible does not apply to defense costs, only to indemnity payments). Most insurance companies have standard endorsements that can be added, while other companies will even develop insured-specific endorsements to meet an insured’s unique needs. The addition of endorsements and exclusions on an insurance policy can effect the policy’s premium depending on the amount of risk the insurance company is accepting.

Covered Costs

The costs associated with a claim can vary and are not limited to the settlement or indemnity amounts. Costs occurring as a result of a claim include both damages and claims expenses. Damages are the monetary judgement, award or settlement of compensatory damages. Damages also include the costs, charges and expenses incurred in the investigation of a claim, as well as the removal or neutralization of a pollution condition, if pollution coverage is afforded under the policy. Fines, taxes and penalties assessed against a third party for which the insured is legally liable can also be incurred under damages. Claims expense include legal fees and expenses incurred during the investigation, defense and appeal of a claim by attorney(s) and the insurance company resulting from the investigation, adjustment, defense and appeal; however, the time and expense of the Named Insured’s personnel are not included as a claims expense. Damages and claims expenses are typically covered by the Professional Liability insurance policy after the deductible has been met.

Extended Reporting Provisions

The industry standard of an extended reporting provision, or often referred to as tail coverage, for a Professional Liability policy is typically an automatic period of 60 days from the date of non-renewal or cancellation. An extended reporting period allows for coverage in the event that written notification of a claim is received after the policy period has ended. In addition to the automatic tail coverage, the insured may be able to purchase additional tail coverage. If an insured plans to continue blanket coverage with the same or a different insurance carrier, the purchase of an extended reporting period is generally not necessary, unless only restrictive coverage can be purchased at renewal. Extended reporting periods are typically purchased for projects or if a company is acquired so the acquiring company does not take on the company’s past liability. A company should determine the requirements of purchasing tail coverage, even if they do not think they will need the coverage, because some carriers may not disclose the cost of purchasing the tail coverage until the end of the policy period, or may revoke the offer at the end of the policy period or only offer a one year period.

Summary

Professional Liability policies are available to architects, engineers and consultants in order to provide coverage for their negligent acts, errors or omissions in services rendered, or that should have been rendered. Since the company providing this service, and not the individual professional often purchases this coverage, the professional often does not realize the coverages that are afforded to him or her under these policies. Professional liability coverage provides the individual professional and his or her company defense and damage costs in the event of a claim of negligence against the insured party. Some policies cover claims made during the policy period (a claims-made form) and different policies cover injury that occurred in the past (an occurrence-based form), while other policies provide coverage after the policy period ends due to an extended reporting period. As long as allegations of a claim are in accordance with the policy’s terms and conditions, Professional Liability insurance can assist with the financial burden of a non-intentional negligent incident caused by a professional. Therefore, it is important for the design professional to inform management of the types of services being conducted so that in conjunction with the company’s broker and underwriter, an evaluation of the company’s specific risks can be conducted. This evaluation should be used to determine if risks associated with the insured’s nature of business are thoroughly and adequately addressed in their Professional Liability policy.