AE Blog - Thoughts on Insurance Requirements

A significant business risk can occur when a design professional accepts insurance requirements in the client’s contract that are vague, improperly crafted, or are unattainable at a reasonable cost.  Unacceptable insurance requirements most often occur when clients use insurance requirements adapted from construction contracts or other procurement operations.  This is particularly problematic for professional liability insurance.  I always recommend that design professionals do not attempt to “go it alone” when it comes to evaluating the insurance requirements.  As soon as you receive the contract from the client, immediately forward the section dealing with insurance to your insurance broker for review.  Set a deadline for receipt of comments from the broker such that if the insurance requirements need to be addressed, there will be time to do so with the client before completion of negotiations.  Worst case scenario is to reach agreement with the client, accepting the insurance requirements, and then not be able to obtain the agreed to insurance.

The following are some thoughts on insurance requirements:

• General Liability Insurance – This insurance provides protection from claims arising from other than your professional services activities.  This insurance is readily available and is usually not a controversial contract requirement.
• Automobile Liability Insurance – As the name implies, it protects against claims resulting from damage caused by a motor vehicle used in the performance of your services.  If some of your staff use their privately owned vehicles, their insurance carrier will often provide a certificate of insurance naming the client as an additional insured.
• Workers Compensation – This insurance is required by statute so this should already be in place for your firm.  Having the client named as an additional insured is generally not available.
• Professional Liability Insurance – This insurance protects your firm from damages resulting from your negligent errors or omissions.  There are multiple ways that this insurance may be obtained but in most cases, the coverage is for a specific aggregate amount during the policy period.  That means that the face amount on the policy is the total amount of money that will be available to cover all costs associated with any claim paid during the policy period, not “per claim”.  Some clients incorrectly believe that the entire face amount of the policy will be available for their project.  This is where a careful review of the wording of the insurance requirements by your insurance broker is so important.  Having the client named as an additional insured is rarely available.
• Project Insurance – This insurance provides professional liability coverage for the entire design team for the length of the project from design through construction and the face amount of the policy is dedicated solely to a particular project.  Because coverage is provided for all design parties working on the project for an extended period of time, project insurance is frequently difficult to obtain and almost always very expensive.

This information has been provided to Hall & Company by John Lowe, President of Lowe Consulting, LLC.