(December, 2010)
Architects or Engineers Professional Liability insurance protects individuals or firms against certain claims that the insured may be legally obligated to pay as damages related to providing professional services as architects or engineers. The eligible event must be caused by an error, omission or negligent act.
ANALYSIS OF COVERAGE
Architects or Engineers Professional Liability insurance is a non-standard line of business. Various specialty insurers (including Lloyd's of London) offer their own (proprietary) policies and endorsements.
Insurance coverage for architects and engineers responds to third party claims against an insured. Eligible incidents involve allegations of wrongful, professional actions occurring anywhere in the world. Professional services are referred to in the coverage agreement of most architects and engineers policies and, typically, the declarations page describes the nature of the services performed by the insured. This description must be broad enough to encompass all of the services that might be provided by the insured.
Related Court Case: "Home Damaged By Blasting (Classic)".
In addition to legal liability protection for damages due to professional errors, omissions or negligent acts, such policies typically contain the Defense, Settlement and Supplementary Payments provisions common to all liability policies. The importance of the defense provision is critical. In various jurisdictions, courts have ruled that the architect or engineer who drew up the construction plans may be brought into a suit by a contractor whether there was privity of contract or not.
Consent-to-Settle - Most professional liability policies for architects and engineers give the insured the right to approve an insurer's attempt at a settlement. However, if the insured refuses to settle at the amount the insurer has offered and the claimant has accepted, that offer becomes the maximum amount the insurer will pay. If the insured continues to contest the claim on his or her own, the insurer is not liable for any further defense costs.
Defense Costs - The typical policy includes information on how it handles costs, fees, expenses related to defending a claim. Further, this is generally a defined term. Usually this items states that defense costs are handled as part of the limit that appears on the policy's declarations page and that any obligation to defend, settle or pay a claim may end if defense costs use up the limit.
EXCLUSIONS
Different, proprietary policies written for architects and engineers may contain significantly different wording. This is expected since there is no standard form. Policy exclusions are a very important means to making form comparisons that will assist an insured in choosing the one that best fits his particular practice. Generally, such policies do not apply to claims and claims expenses arising out of:
- The infringement of a copyright, trade mark or patent
- An insured's insolvency/bankruptcy
- The advising or requiring of, or failure to advise or require, any form of insurance, surety ship or bond
- Failing to complete drawings, specifications or schedules on time, or the failure to act upon shop drawings on time.
Note: The exclusion does not apply if such failures are the result of an error, omission or negligent act in the drawings, plans, specifications, schedules of specifications or shop drawings
- Liability assumed by any insured under a contract or agreement (unless specifically endorsed).
Note: Coverage for contractual liability should be added separately. Separate coverage is particularly important when a firm has made itself a party to specific "hold harmless" agreements and their consequences. An exception usually exists for such liability that is usually covered by the policy when that liability is assumed under a contract.
- Professional services performed by or on behalf of a joint venture of which the insured is a member. The exclusion is not applicable to joint ventures formed prior to a specified date in the declarations. The usual method of insuring joint ventures is by special endorsement for each separate joint venture project.
- Express warranties or guarantees; estimates of probable construction cost or cost estimates being exceeded
- Dishonest, fraudulent, criminal acts or omissions, or those of a knowingly wrongful nature committed intentionally by, or at the direction of, any insured; libel or slander. Coverage for dishonesty, etc., should be insured under a crime coverage or similar form. Libel or slander may be covered under a Personal Injury endorsement under either a CGL or an umbrella policy.
- Personal injury to, sickness, disease or death of any employee of any insured while engaged in the employment of any insured or to any obligation for which any insured or any carrier as his insurer may be held liable under any Workers Compensation or disability benefits law or any similar law.
(Protection should be covered under the Workers Compensation and Employers Liability insurance policy).
Other Excluded Situations
The policy also does not apply to claims made against the insured:
• By a business enterprise (or its assignees) that is wholly or partly owned, operated or managed by the insured; by an employee (or his assignees) of said business enterprise; or by an employer (or his assignees) of a contractor or subcontractor of said business enterprise.
• That involves actual or alleged discrimination because of race, religion, color, sex, national origin, age or handicap against a past or present employee or officer of, or applicant for employment.
Note: This exclusion typically clarifies that, though the policy insures against personal injury claims, it does not pay for claims of discrimination, etc, made by employees. Broader discrimination exclusions in architects or engineers professional liability policies excluding all discrimination to employees and others would be undesirable and should be avoided.
• Alleging plagiarism, industrial piracy, unfair business practices, or unauthorized activities in connection with client's trade secrets
Note: This is due to such incidents involving either deliberate and/or criminal acts.
• Regarding projects (including any construction, erection, fabrication, installation, assembly, manufacture, or supplying of equipment or materials incorporated therein) that are wholly or partly performed by the insured, a subsidiary, or a related entity
Note: "Faulty workmanship" is excluded in the professional liability policy since it is normally covered under a CGL.
• The design or manufacture of any goods or products sold or supplied by the insured or others under license from the insured (another exposure which would normally be covered under the insured's products liability policy).
• Punitive or exemplary damages, except those rising solely out of a claim for libel or slander
• Fines or penalties assessed against the insured or refusal by a client to pay all or part of the insured's fee
• Claims for which the insured is covered under any other professional liability policy for a specific project.
DEFINITIONS
Application - includes the original application, attachments containing additional details and supplementary materials required as part of an insurer's underwriting process.
Note: One insurer's form even extended the term to apply to certain material posted on applicant websites.
Defense Costs – refers to necessary, reasonable costs incurred by an insured that are related to defending against a claim and which the insurance company is obligated to reimburse an insured. Typically it includes the cost of attachment and appeal bonds. Employee salary/wages are excluded under this term.
Entity – the organization (from sole proprietor to corporation) that appears on the applicable policy declarations.
Insured - includes the natural person or entity named insured on the policy declarations, any past or present partner, executive officer, director, stockholder or employee of the named insured while acting within the scope of their duties as such.
Professional services refer to services the insured performs as an architect (including those specializing in landscaping), engineer; land surveyor; construction manager; or as specifically defined by any policy endorsement.
Related or Interrelated Wrongful acts - refers to any acts or errors that related to each other to the degree that the insurer may treat as a single incident.
Wrongful act - refers to any negligent act, error or omission, by the insured or any entity for which the insured is legally liable, arising out of the performance of or failure to perform professional services.
POLICY PERIOD; TERRITORY
Insurance afforded by the Architects and Engineers Professional Liability policy applies only to errors, omissions or negligent acts which occur within the United States of America, its territories or possessions or Canada, except when provided otherwise by endorsement.
For claims outside of the U.S. or Canada the defense and settlement costs are paid on an indemnification basis rather than on a pay on behalf of basis. The company does not reserve the right to investigate, defend or settle the claim, but leaves these matters to the insured.
Other insurers writing this coverage may defend and pay all claims on a worldwide basis without restrictions, or limit coverage only to U.S. and Canada. However, even with a global territory, it is common that the provision requires that suits be filed in a jurisdiction located in the United States.
Most professional liability policies insuring architects and engineers are written on a claims-made basis.
Claims must be first made and reported to the company during the policy period. In this way prior acts are normally covered.
LIMIT OF LIABILITY
There are two types of limits of liability provisions found in the various architects and engineers professional liability policies. The first provides a per claim limit and an aggregate limit. The other policies provide only an annual aggregate limit, with no limitation on any single claim.
If the error, omission or negligent act occurred while a prior policy was in effect, the limit of liability for a claim for that act made under the current policy is the limit of liability for a claim stated in the declarations of the prior policy (if such limit of liability was less than the current policy). The deductible amount of the current policy is applicable to coverage for a prior act, regardless of what the deductible was under the prior policy.
Any claim or aggregation of claims resulting from an error, omission or negligent act is considered a single claim.
Minimum limits of liability usually are $500,000/$500,000 or $1,000,000/$1,000,000. Maximum limits can be arranged to $25 million or higher.
DEDUCTIBLE
Every Architects and Engineers Professional Liability policy is subject to a deductible clause, which applies to the total amount of claim and claims expenses, including attorney's fees, other fees, costs and expenses resulting from investigation, adjustment, defense and related appeals. The insured must make payment of the required deductible amount upon demand from the company.
An analysis of the architect's or engineer's loss experience would indicate that a firm's deductible should be directly related to its volume of work. Before requesting a specific deductible, an architect or engineer should carefully review the firm's complete financial picture with special emphasis on cash flow. Deductibles on most architects and engineers policies range from $5,000 to $25,000 and higher.
IMPORTANT CONDITIONS
Cancellation - The policy may be cancelled by the insured and earned premium is computed on a short-rate basis. The company may cancel on a pro-rata basis with not less than 30 days' written notice to the insured (or less than 10 days' notice if cancelled for non-payment of premium).
Cooperation - The insured shall cooperate with the company and, upon the company's request, attend hearings and trials and assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits. Except as an out-of-pocket expense, the insured may not voluntarily make any payment, assume any obligation or incur any expense, unless incurred with the company's consent.
Interpretation – This was an interesting item found in at least one form. It stated that any ambiguities or differences in opinions on how policy wording was understood were an item to be resolved between the insurance company and the insured. Such instances were not to be construed as favoring any particular party.
Note: this is a creative approach to try to minimize a popular point of litigation, but it is unlikely to prevent the standard treatment of courts to construe ambiguous language in the insured's favor.
Notification - As soon as practicable after receiving information about an alleged error, omission or negligent act, written notice should be given to the company. The notice should contain full details of any claim arising from the negligent act, error or omission. If suit is brought, the insured must immediately forward to the company every summons or other process received.
Other Insurance - The policy is in excess of all other valid and collectible insurance and may not be called on to contribute with other policies.
UNDERWRITING
ACCEPTABILITY
Market placement is often difficult for this exposure as claims against architects or engineers tend to be severe as well as more frequent. The architect's importance continues to increase. These professionals' decisions affect our physical environment. They must deal with new materials and new structural and mechanical systems. As an architect or engineer's influence and responsibility increase, so does his or her potential liability (consider the explosive growth of building and design decisions fueled by "green" concerns).
Certain factors have contributed to the increasing claim activity against architects and engineers. They are:
• The growing sophistication of the plaintiff's bar's ability to successfully try complex claims against architects and engineers
• The use of more complex and novel building and structural designs (including sustainable [eco-friendly] structures)
• The development of turnkey construction and project management concepts
• The use of modular designs, prefabricated components
PROPOSAL
The proposal or application for Architects and Engineers Professional Liability insurance must be filled out and signed by the prospect and submitted to company underwriting. The questions asked in the proposal supply the necessary information for the underwriting and rating of the risk. It is a formidable amount of information with the following typically requested:
• Name and address of the insured firm; date established or incorporated
• Full names of all principals, partners or officers and their professional qualifications
• Aggregate limits of insurance and deductible desired
• Total number of principals, architects, engineers, inspectors, surveyors, draftsmen and office employees. . . .
• Claim information, whether the insured has any knowledge of prior acts that might give rise to a claim, and if insured has been cancelled or refused coverage by any insurer
• Whether similar insurance has been previously carried by any firm principals
• Professional society memberships and states in which principals are registered as architects or engineers
• Nature of operations (it is often desirable to attach a brochure that the prospect uses to describe his firm)
• A listing of the ten largest projects worked on during the past ten years
• Extent of participation in joint ventures
• Whether the firm or any parent or subsidiary is engaged in actual construction, manufacturing, fabrication or real estate development operations
• Professional services for projects for owners acting as their own contractors, or for package or "turnkey" contractors
• Billings for feasibility studies, master planning, reports or opinions
• Percentage of work devoted to: boundary surveys, surveys of subsurface conditions, ground testing, contractual liability and foreign projects
• Whether professional services are performed for the following: bridges, tunnels, dams, or fairs and exhibitions
• Total construction values of projects for which professional services were rendered during past 12 months, and also for the next 12 months
• Total billings for professional services rendered during past 12 months, and estimated billings for next 12 months.
The insured's signature on the proposal does not bind him to complete the insurance. However, it does certify that the statements and details contained in the proposal form are true. If a policy is issued, the applicant is then accountable because the declaration is the heart of the contract. The applicant/insured also declares that no material facts have been suppressed or misstated.
Soil engineers, testing laboratories, fire and safety engineers and turnkey operations are very difficult classes of business to write, but subject to complete information some such risks are written. Other classes that are difficult to place are marine architects and engineers and petroleum natural gas engineers, due to the extremely high cost and complexity of the work they perform.
RATE AND PREMIUM
Rates are based entirely on the type of work done by the insured. All of the questions in the application are carefully evaluated in ratemaking. In the event the insured desires coverage for such activities as bridge construction , tunnels and dams, the preparing of boundary surveys, soil testing or ground testing, such exclusions in the policy may be deleted for the payment of additional premium charges. Total construction values, the insured's annual billings, aggregate limit of liability and amount of deductible also have a bearing on the premium calculation.
ARCHITECTS AND ENGINEERS DISTINGUISHED
Studying lawsuits filed against architects and engineers indicate that the distinguishing characteristics of the two professions have had no effect on liability. Both the architect and engineer face claims brought by both direct action and by third party action. However, architects are usually named in more direct suits and they have become primary targets in construction cases. The engineer, whose particular field is that of structures, usually acts as a consultant and, typically faces a lower exposure to liability than the primary plaintiff. Structural foundations, simple or extremely complicated, are within his realm. He designs and supervises the construction of bridges and huge buildings, tunnels, dams, reservoirs and aqueducts.
INCREASE IN CLAIMS
Judgments faced by architects and engineers arising from errors in their work have involved liability to the person hiring the professional service and privity of contract is no longer an absolute defense. In other words, the fact that the relationship between the design professional and the party alleging harm are not established via a contract, does not shield that professional against legal liability. Instead, the law has been broadened to extend the duty owed by an architect or engineer beyond the client and to third parties who can demonstrate how they were affected by the architect's or engineer's profession-related errors. These third parties might be contractors, subcontractors, construction workers, adjoining landowners or pedestrians walking by a construction site.
In broadening the scope of responsibility, the courts have not only increased the group of persons to whom duty is owed but also have altered perception concerning what can be considered foreseeable. This change is based (at least in part) upon recognition of the technological advances in the field of architecture and engineering and the increasing social awareness given architects and engineers. The American courts have also expanded the concept of supervision beyond the scope originally contemplated by the architect.
LEADING COURT DECISIONS
Among important negligence rulings against architects and engineers are the following:
Privity, Less Relevant - The architect's defense of lack of contract privity was rejected in a suit by a third party who was injured as a result of an architect's careless building design. (Inman v. Binghamton Housing Authority, 3 N.Y. 2d 137, 164 N.Y.S. 2d 699, 143 N.E. 2d 895, 1957).
Meeting Professional Expectations - "An architect implicitly warrants not only that he has the skill, knowledge and judgment required to produce a result that will meet the needs of his employer, but that in the preparation of plans and specifications and in the supervision of the work he will employ that skill, knowledge and judgment without negligence. For negligence in the performance of his work he is liable to his employer if damage results." (Drexel Institute of Technology v. Boulware, No. 1611 Court of Common Pleas, First Judicial District, Pennsylvania, 1954).
Project Supervision - An architect must use reasonable care to prevent material deviations from the plans and specifications and to prevent substandard workmanship. If he fails to use reasonable care, he is liable to the owner for the defects which could have been eliminated if he had properly performed his obligations. (Palmer v. Brown, 127 Cal. App. 2d 44, 273 P 2d 306, 1954).
The following are other situations involving some level of professional supervision:
- An architect was found liable when sued by a contractor for negligence in supervision. In this instance, the architect negligently construed and interpreted reports of tests on concrete, He then, negligently, approved of that concrete's use in structures when he should have known that the specifications were not being met. The court further stated that, "...the position and authority of the supervising architect are such that he ought to labor under the duty to the prime contractor to supervise the project with due care under the circumstances, even though his sole contractual relationship is with the owners..." (United States v. Rogers & Rogers, 161 F. Supp. 132 S.D. Cal. 1958).
- In another high-stakes case, an architect was held liable for a workman who was killed as a result of a boiler explosion. It was alleged that the explosion occurred because the architect had improperly and negligently supervised the job. Although the subcontractor also was found guilty of gross negligence in installation of the heating system, the architect was found liable because he had not noted the improper connection during his supervisory inspections. (Day v. National- U.S. Radiator Corporation, Affirmed, 117 So. 2d 104, La. Ct. App. 1959).
- In an Illinois case, the court concluded that where an architect undertakes (by contract) supervisory responsibilities, has free access to the construction site and has the authority to stop operations, he owes a duty to those working on a job site to see to their safety. The architect defendant contended that he undertook only a duty to see that a building is constructed to meet the plans and specifications and is the building for which the owner contracted. This decision is also an extension of the "foreseeability" concept. (Miller v. DeWitt, 208 N.E. 2d 249, Ill. App. 1965.)
Financial Oversight
- Careless certification on the part of an architect may be sufficient to support a cause of action by the surety. When an architect was careless in accepting the contractor's word on unpaid claims and released money to him that was used for personal reasons, he violated a duty not only to the owner but also to the surety. (State of Mississippi for the use of National Surety Corp. v. Malvaney, 221 Miss. 190, 72 So. 2d 424, 1954).
- An architect was liable for a negligent disregard of his duty in the preparation of plans and specifications where actual cost exceeded the estimate by $125,000. (41 S.W. 2d 697 Tex. Civ. App., 1931).
- A designer cannot hold up construction by late completion of plans without subjecting himself to a claim for damages for delay. An exactness of performance in this regard is required from architects and engineers. (Edwards v. Hall, 293 Pa. 97, 141 Atl. 638, 1928).
THE IMPACT OF DESIGN/BUILD CONSTRUCTION OR PROJECT MANAGEMENT CONCEPTS
The concept of Turnkey Construction or Design/Build Construction and Project Management teams has been gaining much favor with owners who want a building project completed quickly and with a close control over cost and quality of construction. The team is usually under the supervision of a general contractor, who is responsible for the project from its inception, through the design and construction stages, to completion.
The design/build construction firm may have its own in-house design capability, may own a subsidiary design firm, or may use an independent architecture or engineering firm. The team architect or engineer is general manager of design, with authority and control to exercise his professional capabilities. He and his project staff engage in creative design and the production of the construction documents. The construction portion is handled by another member of the team.
Several markets are available to handle the professional liability insurance protecting both the general contractor and the architect or engineer member of the team for their involvement in the design functions, either directly or indirectly, as in the case of the general contractor.
One such policy protects the insured contractor against claims arising out of negligent acts, errors or omissions committed by the insured solely with respect to plans, drawings, designs, or specifications prepared by the insured solely in performance of professional services. There is no coverage for outside architects or engineers, nor is their full Architects and Engineers Professional Liability coverage under the policy. The policy excludes liability arising out of supervision.
PROJECT LIABILITY INSURANCE
Under this program, which is available to firms insured in the professional liability programs recommended by the American Institute of Architects and the Professional Engineers in Private Practice Division of the National Society of Professional Engineers, coverage is designed to provide protection only for a specific project.
Since the larger and more serious claims generally occur during or just after construction, the policy is issued to cover claims made during the construction phase of the project, and within a one year period after the project is completed.
The Project policy is not intended to replace a firm's professional liability coverage to protect the practice. However, the Project policy is important in that it identifies professional liability costs for the project itself. Premium for the practice policy will reflect a credit that considers the work covered by Project policies. Generally, basic limits for the Project policy are $500,000. Most coverage is subject to a minimum deductible of $5,000. Limits of liability and deductibles increase in accordance with the value of the project.
