Chapter 2: Building Your Business Protection Blueprint
Part 2: Industry-Specific Insurance Needs for Architects, Engineers, and Design Professionals
Professional Liability Insurance for Architects, Engineers, and Design Professionals
Professional Liability Insurance (sometimes called Errors & Omissions Insurance) is perhaps the most important type of coverage for architects, engineers, and design professionals. It protects you when…
- You make a perceived mistake or oversight while performing your services.
- The error causes your clients' financial losses.
- Your clients sue you over their losses.
Though you're self-employed now, it's likely you started off working in a firm. So it makes sense if you've never had to worry about E&O Insurance before. This isn't because individual architects, engineers, and design professionals can't be sued. According to the Liability of Employed Engineers page on the National Society of Professional Engineers website (NSPE), for example, it doesn't matter who "signs or seals the drawings" when the courts seek to determine who is at fault for professional negligence.
The NSPE explains, "The courts generally look to whether the engineer(s) owed a duty to the individual(s) suffering damages and whether the engineer(s) breached the duty, causing all or a portion of the damages."
In other words, anyone involved with a faulty project can be found responsible — even contractors and subcontractors. The same holds true for self-employed architects and design professionals. You don't need to be the architect of record or the lead designer on a project in order to be sued for mistakes.
The NSPE also states that it's not standard practice for individual professionals to seek out and carry their own policies. This is because an employer's policy typically shoulders an employee's liability risk. But unfortunately, once you strike out on your own, you no longer have the luxury of employer-sponsored E&O protection.
Anyone involved with a faulty project can be found responsible — even contractors and subcontractors.
In 2008, small-business owners shelled out $105.4 billion in tort liability costs.
Situations that Trigger Professional Liability Claims
Be aware that even the most careful business owners can wind up in court. In fact, small-business owners bear the burden of the most of the country's tort liability costs — about $105.4 billion, according to U.S. Chamber Institute for Legal Reform study.
Luckily, an adequate E and O policy can step in and protect your finances when the following events lead to a lawsuit:
- Professional negligence. This includes any errors, mistakes, or oversights that you are accused of making while providing your services. Note that you could be held responsible for the mistakes of subcontractors or other people working on the job, particularly if you are filling a consulting role on a project.
- Faulty cost or time estimates. Whenever a projected budget or timeframe is broken, you could be on the hook for the resulting losses.
- Counterclaims. As you may know, not all clients pay their fees. After suing a client to recover unpaid fees, it's not uncommon for that client to turn around and sue you for negligence, even if you've done nothing wrong.
- Failure to manage expectations. Most claims made against architects, for example, are due to a failure to manage a client's expectations, particularly when that client is unfamiliar with the role of the architect, the scope of the project, or how construction typically progresses. But this won't stop some clients for filing suits. This is why frequent, clear communication is so important.
If a client should claim that you are responsible for one of the above transgressions, your Errors & Omissions / Professional Liability Insurance will help you pay for the legal consequences — even if you're not at fault.
Architects, engineers, and design professionals are often targets of unmerited claims, particularly when dishonest clients are trying to recoup losses on unrelated projects. Fortunately, E & O Insurance can help you pay for following expenses, whether you go to court or not:
- Lawyer's fees.
- Legal investigation.
You'll need to have a policy in force before anything goes awry to receive your insurance benefits. That's because Professional Liability coverage is "claims-made" insurance, which means it only covers incidents and claims that happen while your policy is in force.
Keep in mind that your client contracts may require you to carry this coverage before you can start work. Though some interior designers, draftsmen, and other design professionals may believe that they can't buy coverage because they are not "licensed," know that's not entirely true. Unlicensed professionals can typically purchase liability coverage as "specialty consultants," as long as they have the required experience.
NEXT: Umbrella Insurance: More Coverage, Less Hassle