In an effort to demystify some of the concepts and to provide a ready reference a/e ProNet put together this insurance manual. This is not intended to be an exhaustive source of information but rather a primer designed to answer basic questions and to put the reader on the right track if more information is needed. a/e ProNet strongly recommends that the reader seek advice from an agent or broker specialist who is best equipped to understand the exposures to loss of each individual design firm.
Liability Insurance Coverages:
PROFESSIONAL LIABILITY INSURANCE also known as Errors & Omissions, (E&O) or Malpractice insurance. This insurance provides coverage to defend and indemnify the design professional against claims alleging negligent acts, errors or omissions in the performance of professional services (wrongful acts). Wrongful Acts are not limited to defects in plans and specifications. Coverage usually extends broadly to encompass most of the professional services rendered by A/E firms. The policy will pay on behalf of the design professional those damages that the design professional is legally obligated to pay as a result of a wrongful act. The policy deductible usually applies to each claim and may or may not apply to the cost of defense. The policy limit of liability typically includes defense costs, meaning that the limit is eroded and can be exhausted by legal fees and other defense costs. Careful consideration should be made when deciding on an adequate limit of liability.
Policies typically exclude express warranties or guarantees; obligations under worker’s compensation laws; claims by employees for employment practices and; the costs to repair/replace faulty workmanship on construction performed by the insured. As with all insurance policies, it is important to read the exclusions to see how they may impact your business.
Coverage is written almost exclusively on a “Claims-Made” form which applies only to wrongful acts which happen, and for which claim is made, while the insurance is in force. Once the policy is canceled or not renewed, all coverage will cease. Few, if any, policies will provide retroactive coverage to the previously uninsured firm.
COMMERCIAL PACKAGE AND BUSINESS OWNER PACKAGE POLICIES Insurance companies will combine frequently requested coverages under one economical package known as Commercial Package Policies or Business Owners Policies (BOP). One policy is designed to include among other coverages:
- General Liability
- Commercial Property
- Non-Owned/Hired Automobile
- Valuable Papers and Records
- Business Interruption/Business Income Equipment Breakdown
- Accounts Receivable
COMMERCIAL GENERAL LIABILITY INSURANCE General Liability insurance is designed to pay on behalf of the insured firm, all sums which the insured becomes legally obligated to pay as damages because of bodily injury or property damage caused by an “occurrence” – defined to be an accident including continuous or repeated exposure to substantially the same general harmful conditions.
The policy typically includes coverage for “personal injury” including libel and slander.
Landlords will require their tenants to provide General Liability insurance as a requirement in a lease. Since the A/E and its employees are regularly at job sites it is important to purchase a policy that will insure against claims arising from the firm’s operations away from the office premises in addition to premises accident claims. Project owners often require A/E consultants to maintain General Liability including the owner as an “additional insured.” General Liability will specifically exclude coverage for architects and engineers professional liability.
Design professionals usually obtain this coverage as part of a package policy as described above that may include coverage for business owned property, business interruption, hired and non-owned automobiles and other coverage extensions.
WORKERS COMPENSATION AND EMPLOYERS LIABILITY INSURANCE Most states mandate that employers maintain Workers Compensation and Employers Liability insurance as soon as an employee is hired. State Worker Compensation Boards can levy serious fines against the firm that fails to provide this coverage for its employees. Part one of this policy (Workers Compensation) pays employee compensation for lost income and all medical expenses related to bodily injury by accident or disease attributed to job-related activities. These benefits will vary by state. Part Two (Employers Liability) will pay for damages (resulting directly from an employee’s job-related bodily injury) for liability to a third party for damages claimed by the employee against the third party.
UMBRELLA LIABILITY INSURANCE Umbrella policies are designed to provide excess limits of liability for General Liability, Automobile Liability and Employers Liability. In addition, coverage is provided for many exclusions and gaps in the primary Liability policies designated as the underlying insurance. The Umbrella policy will apply to a claim when the limits of the underlying insurance are exhausted. If the Umbrella policy applies to a claim that is excluded by the underlying insurance, the claim is subject to a self-insured retention (usually a minimum of $10,000) that the insured must pay before the Umbrella policy pays. Current Umbrella policies contain many exclusions that minimize the application of this coverage.
EMPLOYMENT PRACTICES LIABILITY INSURANCE The proliferation of claims by employees against their employers has created the need for insurance designed to cover claims of wrongful termination, discrimination (e.g., race, sex, age, disability, etc.), harassment, right to privacy, emotional distress and other employment practices. Although the state and federal laws can apply differently to different size firms, virtually any employer is susceptible to employment practices claims.
Claims of discrimination or harassment can be brought by prospective employees.
Underwriters of this insurance typically require the insured to establish employment practices in the form of an employee manual that include polices relating to harassment and discrimination and establishes company policies and procedures for handling employee complaints.
Coverage is usually written as a stand-alone, Claims-Made policy. However, some insurers offer the coverage, in a limited form, by endorsement to a professional liability insurance policy. This coverage can also be packaged with other coverages such as Directors and Officers and Fiduciary.
DIRECTORS AND OFFICERS LIABILITY INSURANCE With public awareness of the debacles at Enron and WorldCom more and more claims are levied against corporate officers and directors by shareholders, employees and creditors who are affected by their business decisions. D&O insurance, like professional liability insurance, is written on a Claims-Made policy form. Policies contain two separate parts. Part one pays on behalf of any directors or officers for their liability arising out of wrongful acts. Part Two is Company Reimbursement or Company Indemnification coverage, which reimburses the insured company for payment made to its directors or officers for their expenses incurred due to claims made against them for wrongful acts when provided by the company’s bylaws or required by law. Wrongful Acts are defined to include errors, omissions, misstatements, misleading statements, breach of fiduciary duty or other duty by an Insured Person while acting in his or her capacity as a director or officer. Wrongful acts also include Securities Activities and sometimes Employment Practices such as wrongful termination, failure to hire or promote harassment and discrimination.
FIDUCIARY LIABILITY The Employee Retirement Income Security Act of 1974 (ERISA) created a burden on fiduciaries and trustees of employee benefit and retirement plans. More than ever, employees and beneficiaries of retirement plans hold fiduciaries responsible for the prudent administration of fiduciary funds. Fiduciary Liability insurance protects the plans and individuals acting as trustees or fiduciaries from lawsuits alleging errors or omissions in the handling of investment funds. The performance of individual investments is not covered by this insurance. This insurance should not be confused with ERISA Bonds.
AUTOMOBILE, HIRED AND NON-OWNED AUTOMOBILE INSURANCE Businesses that own automobiles need to purchase Commercial Automobile Insurance to protect the firm and driver from claims of bodily injury and property damage caused during the operation of business-owned vehicles. Even if the firm does not own any vehicles, Non-Owned and Hired Automobile insurance should be considered in order to cover accidents involving rented vehicles or employee vehicles used during the course of business operations. Note that physical damage to the employee’s or hired auto is not automatically covered. Non-Owned and Hired Automobile insurance can be included on a Commercial Automobile insurance policy, a stand-alone policy or by endorsement to a commercial package insurance policy.
INTERNATIONAL LIABILITY POLICY Design firms that have projects outside the U.S., its territories and Canada may need an International Liability policy to insure the firm from suits brought against them in foreign countries. Typical General Liability policies insure the operations of the insured worldwide, but only for suits brought within the U.S. This territory provision may not satisfy the owner who wants protection in the location of the project.
Depending on the location of the insured’s foreign projects, this coverage is usually provided on a package policy that can insure the design firm’s property in a foreign office as well as workers compensation coverage and repatriation for employees working abroad. Many foreign countries require coverage to be written with insurers domiciled in their native country. The typical foreign liability policy may not satisfy this requirement.
Property Insurance Coverages:
BUSINESS PROPERTY INSURANCE Whether you lease or own your office; office equipment, furniture, fixtures, computer equipment, phone systems, fax and copy machinery, valuable papers and fine arts need to be insured for fire, theft and water damage. Insuring these valuables for “replacement cost” on an “all-risk form” provides the best protection that your business will be reimbursed properly for a covered loss. When leasing furniture and equipment, the lessor will require this coverage and be designated as a “loss payee.”
Landlords of rented property usually require their tenants to maintain property coverage for the rented space to cover improvements and betterments provided to the leaseholder. Since most design firms are heavily dependent on computer systems, it is important to properly inventory equipment and software. The cost to reproduce plans and specifications kept on computer files is significant when considering the insured value of valuable papers and records. However, no limit of insurance is an adequate substitute for reliable backup protection and procedures.
VALUABLE PAPERS INSURANCE A/E firms have in their possession valuable papers and documents whose destruction would prove very costly. Maps, plans, specifications, books are some examples. All-risk protection is generally available excluding wear and tear, gradual deterioration and vermin. Certain valuable papers may be insured specifically, or “scheduled.” More commonly a blanket limit is established to cover all valuable papers. Articles insured on a blanket basis are covered for their replacement cost. Scheduled items are covered on a valued basis even though it is not possible to replace them with like kind and quality.
BUSINESS INTERRUPTION AND BUSINESS EXPENSE INSURANCE While Business Property Insurance covers the cost of lost property, in many instances the loss caused by the interruption of business can exceed the amount of physical damage. Business Interruption generally consists of two parts: Business Income and Extra Expense.
Business Income will pay the insured for lost earnings during a total or partial suspension of business caused by direct physical damage to the insured’s premises. The policy covers “actual loss sustained” by the insured because of the interruption of business during the period that it would take to rebuild or repair the damaged property. Extra Expense reimburses the insured for the extra costs that are necessary to continue business operations during the period of restoration.
Most small design firms can be insured inexpensively for their actual loss sustained up to 12 months with no limit on the amount of insurance. Larger firms may be subject to coinsurance clauses under which the insured agrees to carry a minimum amount of insurance unless an “Agreed Amount Endorsement” is added to the policy. Often misunderstood and neglected, this coverage should be carefully reviewed with your insurance advisor.
EQUIPMENT FLOATER Mostly purchased by contractors to cover their equipment, surveyors and engineering firms find this coverage worthwhile when expensive equipment is used regularly in the field. Each article listed on the policy is “scheduled” with a value. Coverage is typically on a Named Perils basis insuring for damage caused by fire, lightning, windstorm, hail and collision. Optional coverage for theft, riot and civil commotion is readily available.
Crime Coverages:
COMMERCIAL CRIME COVERAGES Commercial Crime coverages include several separate insuring agreements. Some or all of these individual coverages may be selected, depending on the individual needs of a design firm:
- Employee Dishonesty: This coverage pays for loss sustained by the insured employer up to a specified amount, caused by a dishonest act of an employee or employees covered under the policy. This includes dishonest acts of the embezzlement of money or property, including inventory, owned by the insured.
- Forgery or Alteration: This coverage pays for loss sustained by the insured employer for forgery or alteration of checks (including blank checks) issued by the insured. Coverage may be extended to include checks forged or altered by employees as well as others.
- Computer Fraud: Covers the loss of money, securities and other property when caused by a dishonest act of a non-employee via computer access.
ERISA BOND (PENSION BENEFITS BOND) Under the Employment Retirement Income Security Act of 1974 (ERISA) every administrator, officer and employee of any employee welfare benefit plan or employee pension plan who handles funds of the plan must be bonded. The amount of the bond must be at least 10% of the value of the plan. ERISA bonds provide coverage against loss by fraud or dishonesty. Coverage may be included as part of a Commercial Package Policy or as a stand-alone bond.
Terminology
CLAIMS-MADE vs. OCCURRENCE Most liability policies are written on an “occurrence” policy form. Occurrence policies need only to be in effect on the date that an accident causing damage occurs in order to trigger coverage. A claim asserted against the insured may be brought well after the accident. Coverage would revert back to the policy that was in effect at the time of the accident.
Claims of professional liability against design professionals often result many years after an alleged error is committed making it difficult for insurance companies to evaluate their true exposures and determine the premium necessary to cover the risk. Claims-Made policy forms were introduced whereby the trigger for coverage is the date the claim is made against the insured. Today, virtually all professional liability policies for design professionals are provided on Claims-Made forms. In order to establish coverage, three conditions must be met: 1) a policy must be in place at the time a claim is made and; 2) a “retroactive” or “prior acts” date on the policy must be dated at least as far back as the services, giving rise to the claim, were provided; and notice in the appropriate from must be provided to the insurer within the policy term or during a grace period that might be thirty or sixty days after coverage termination.
The advice of your insurance advisor is essential when reviewing Claims-Made policies with respect to mergers, acquisitions, splits and retirement.
This information is for illustrative purposes only and is intended to provide only a general overview of the insurance policies described. It is important to review actual policy terms, coverage conditions and exclusions with a qualified insurance professional.nThis article was originally published by a/e ProNet. For additional risk management publications, please visit our website at www.aepronet.org.