When Design Professionals in North America attain their degrees in the various Universities throughout Canada or U.S.A. they are made aware of the litigious nature of the North American Owner or North American public in general. Design Professionals from other countries around the world who emigrate to North America may not be aware of this until it is too late. In the many years that the writer has specialised in the area of Professional Liability Insurance, he is still mystified at the lack of awareness by the average Design Professional of the:
For those Design Professionals who may be considering purchasing this class of Insurance or may just wish to review their coverage, the writer will attempt in this article to:
The application is a signed statement of facts and actually becomes a part of the policy. The application provides the underwriter with a breakdown of the applicant's operations, fee income and claims history, if any. Usually a signed and dated application is valid only for a period of 30 days.
Applicants should complete the applications very carefully. The name of the applicant should be correctly noted on the application and it should include
all subsidiary companies where the applicant has more than a 50% interest and all holding companies and office management companies. There is generally no charge for the additional names, but you will want the your policy to provide legal and defence costs for these names. Predecessor firms in which the applicant or any director or officer had previous involvement should also be identified under the application.
Applicants should always ask for quotes for various limits with various deductibles, as this will enable an applicant to select the type of policy that will best suit the potential for suits and the company budget. Generally insurers will restrict the size of the deductible to 1% or 2% of the total gross fees. Look to selecting the highest limit you can afford and reduce the policy cost by carrying as high a deductible as is affordable or allowed by the Insurer.
When filling in the question on gross billings, the last fiscal year end fees should be used, as these are generally readily available from your accountant. Note separately, any fees for work performed or located in the USA as these are rated separately, most times at twice the Canadian fees rate. The application asks for a breakdown of the applicant's work. Soils work is the highest rated risk, followed by Structural, Civil, Industrial Process, Mechanical and lastly, Electrical and Material Testing. There may be other miscellaneous areas that fall between these categories. The writer would also advise consulting companies to utilise computers to accurately break down fees into the areas of work and to include as a separate item fees earned from work which will not result in construction, such as studies, planning, etc. These are low risk areas of work. Based on a $250,000 policy limit, rates could vary from $0.90 per $100 of billings to $3.00 per $100 of billings depending on split of work.
The application also asks whether the Design Professional is involved in actual construction or manufacturing. Both of these questions present Insurers with potential problems. At the time of writing, however, there are only a few selected Insurers who can write these high risk classes more frequently referred to as design build or E.P.C./E.P.C.M. ( Engineer, Procure and Construct/Engineer, Procure and Construction Management). Lastly, under the fee question, ensure that fees earned from projects where separate insurance has been taken out by the owner or prime consultant and referred to as a "dedicated project" insurance, are noted. Insurers will credit the applicant for these fees when rating the applicant's operations. It should be noted in passing that a dedicated project policy is not economically viable until the total fees for the project exceed $450,000.
Claims history questions should be fully answered with full explanations and information on any claims being attached to the application together with the latest status of the claim.
The insuring agreement, defines the Insurer's duties and includes the Insurers obligations to pay damages and defend the Insured. Most policies pay "on behalf of the insured" all sums which the Insured shall become legally liable to pay as damages arising out of a claim". This applies as long as the Insured's liability is the result of a negligent act, error or omission in the performance of professional services for others, in the Insured's capacity as an Architect or Engineer. The Association endorsed program used to refer to "services customary to an architect or engineer", this was later changed to "pay on your behalf .... providing your liability is the result of a negligent act, error or omission in the performance of professional services for others". Some policies may use the more restrictive wording, "professional services as described in the Declarations page of the policy" and some other policies state "services for which the Architect or Engineer is qualified." There could be questions as to whether coverage would apply if a claim arises out of a discipline that is not described in the policy declarations or the qualifications of the Architect or Engineer are in question for the category of service being provided.
The policy coverage is also subject to certain criteria:
The applicant should advise their broker to extend the activities described in the policy and amend the exclusions if the insured is involved in such areas as construction management, project management, land surveying or forestry consulting, or if they use contract employees. The new policy through the Association sponsored insurer now has a number of the extensions built into their new wording, such as contract employees.
The applicant should also look at the policy defence agreements. Most Canadian Insurers provide first dollar defence; where the Insurer pays ALL legal and adjusting costs without application of any deductible. This can represent significant dollars, sometimes up to 50% of the sums of money the Insurer is called upon to pay. The writer has seen claims in Canada where the legal/adjusting costs incurred have exceeded $1,500,000.
The territorial limits of the policy should also be checked. Some Insurers provide cover only in Canada, others will provide world-wide cover provided suit is brought in Canada or the USA. If coverage is provided outside of Canada, the applicant should be aware that the deductible usually applies to defence and adjusting costs. Another restriction found in most policies where coverage extends outside of Canada is that the limit of liability includes defence and adjusting costs. Some Canadian policies cover Canadian claims for defence and adjusting costs in addition to the limits of liability, if limits of $2,000,000 or less are selected.
For instance if a limit greater than $2,000,000 is chosen the defence costs become part of the total limit available and are no longer in addition to the selected limit. When purchasing limits, consider the following increments: $500,000; $1,000,000; $2,000,000; $3,000,000; $5,000,000; $10,000,000; and $15,000,000. It is unlikely that limits in excess of $50,000,000 are obtainable at this point in time.
The exclusions in the policy basically address:
Most policies exclude:
In buying insurance consider the three "C's", policy COVERAGE, COST, and the insurance COMPANY. While all of these are important, the reputation and financial position of the Insurer is the most important. If the insurer becomes insolvent and there is a serious claim that is not paid, the future financial security of both the individual Design Professional and the applicant company may be destroyed. The Insurer's financial position is of great importance when arranging professional liability insurance. While property insurance claims (such as fires) are usually settled in months, professional liability insurance claims often take up to seven years to investigate and work their way through the courts. An insurance company, which was marginally acceptable at the time insurance was placed, could be in severe difficulties or unable to pay the losses by the time a professional liability claim settlement is negotiated.
While insurance brokers do not guarantee the financial security of the Insurers with whom they place business, most brokers carefully monitor the finances of the Insurers they deal with. Unfortunately not all brokers set the same standard and there are some brokers who are prepared to use Insurers who do not meet high standards of solvency or stability because the Insurer is willing to underwrite at very low rates or the Insurer offers a higher commission.
To protect against these problems, it is recommended that applicants make specific inquiries about the Insurers who write their business. There are a number of ways in which this can be done. There are several independent organisations, such as the A.M. Best Company that provide financial ratings for many insurance companies or the TRAC Report. This type of rating takes into account both quantitative and qualitative factors. In the quantitative evaluation they consider such factors as profitability, leverage and liquidity, all of which are compared with acceptable standard norms. In the qualitative evaluation, such factors as spread of risk, adequacy of reinsurance, quality of investments, adequacy of loss reserves and management are considered.
In Canada there is an annual report called the "TRAC" Report, which measures 8 different financial ratios for insurance companies. It is not unusual for companies to fail to meet an acceptable standard for one or two of these ratios. Companies that fail to meet the acceptable standard for several of the ratios should be carefully reviewed as in some cases this failure may indicate serious problems.
We urge all applicants have their broker make proper inquiries regarding the financial stability of the Insurers with whom they place business and have them provide copies of the information that they obtain. Recently the Ontario Association of Professional Engineers warned their members against using certain Insurers that did not meet a specific criteria. It is worthwhile noting that since 1980 there has been eighteen (18) insurers writing this class of insurance. Since then nine of these insurers have either gone bankrupt or pulled out from writing this class of business. Four have changed their name or only write certain classes of Architects or Engineers. There are presently only four to six serious markets for this class.
Finally, we urge all Architects and Engineers when considering this class of insurance to ensure that they are dealing with a broker who can access most of the available markets.
The information contained herein is believed to be accurate, but individual circumstances, local business and insurance practice and the Law can vary extensively and Jardine Lloyd Thompson and its associated and subsidiary companies are not responsible for any errors and omissions or any loss or damage arising from the use of this information. In the event of situations such as are described in this bulletin, the reader should seek legal counsel and specific advice from Jardine Lloyd Thompson or your Insurance Broker.