Unraveling the Mystery of Professional Liability Insurance
Nov 1, 1998 12:00 PM, Thomas L. Vance and Jack Doran
Educational administrators and risk managers need to know that the architects, engineers and other design professionals selected for building projects have adequate and appropriate insurance. They need proof that the basic coverages - professional liability, commercial general liability and workers compensation - are in place. That is why most professional service contracts contain detailed specifications that detail the insurance design firms are expected to have.
Administrators and risk managers often are frustrated to learn that insurance specifications contain conditions that the architect or engineer cannot meet. In some cases, they can get a particular endorsement on a contractor's general liability policy, but not the same endorsement on an architect's professional liability policy.
Understandably, schools want assurances that the design firms on projects have professional liability insurance with appropriate policy limits, and that coverage will be through the life of the project and a reasonable time beyond.
Sometimes, however, specifications for professional liability insurance are written from a general liability perspective, and the coverage requested cannot be obtained. For instance, professional liability policies are written on a claims-made form, so an architect cannot agree, by contract, to guarantee that coverage will be in place in the future.
Further, professional liability insurance is tied to the professional standard of care. Therefore, an architect or engineer would be unable to persuade a professional liability insurance company to cover any act that leads to damages, rather than just the negligent acts covered in the policy language.
Naming the owner as an additional insured Project owners, seeking protection from potential lawsuits arising from injuries to construction personnel on or about the project site, often are named as an additional insured on the contractor's general liability policy. The same owners often are puzzled when design professionals explain they cannot agree to a similar request on their professional liability policies. Part of the reason lies in the nature of professional liability insurance.
To begin with, a professional liability policy covers design errors and omissions. Since the project owner usually is not a designer, and therefore incapable of making design mistakes, there can be no coverage for the owner. Also, the design firm's coverage was never designed or underwritten to cover any of the acts or omissions of the project owner, even if the owner (a large school district, for example) has its own design staff. Simply put, professional liability policies are not written to provide for additional insured status.
However, owners are still able to obtain the protection they require. What an educational administrator is most likely seeking, when asking to be named on an architect's or engineer's professional liability policy, is to be defended and indemnified if the school ends up in a claim or lawsuit due to the negligence of the design firm. The good news is that after the architect's or engineer's negligence has been established, most professional liability policies will reimburse the owner for costs of defense and indemnify the owner for any claim payments it is required to make as a result of the policyholder's negligence.
Therefore, an educational administrator's more appropriate risk-management technique is straightforward. First, require professional liability insurance.
Next, include in the contract for professional services an indemnification agreement in which the architect or engineer agrees to hold the owner harmless and indemnify the owner for all costs and claims expenses that are a result of the design firm's negligence.
Specifying maximum deductible amounts Some owners worry that in the event of a claim, the design firm would be unable to meet a large deductible. To address this, some owners specify a maximum deductible on professional liability policies.
Actually, payment of the claim by the insurance company generally is not predicated on the design firm's payment of the deductible. It is up to the insurance company to pay the entire loss, then look to the insured for repayment of the deductible.
