With their years of graduate school now behind them, new architects are brimming with energy and enthusiasm to put their design skills, intellect and charm into shaping their communities and eventually the wide world. It is an exciting and scary time. The exciting part is obvious. The scary part may not yet be so obvious.
Architects face risks of all sorts, starting with whether the firm will thrive or even survive given the state of the economy and the competition for projects. As an insurance broker who has worked with many architects for over twenty years, I know that new (and established) architects also face a myriad of serious and threatening liability perils. As architects build their careers and reputations, there is also a need to establish the foundation of solid risk management within their practice.
Risk management is a term that you will become very familiar with over the years, and the better at it you become the more solid your practice and future will be. It includes exercising judgment in selecting potential clients, avoiding those with a known litigation or poor payment history. It includes sound judgment in the projects you take on, and those you may decide to walk away from, such as condos. It includes equitable contract language that does not require you to commit to duties beyond the professional standard of care. Watch what you are signing your name to. The use of AIA documents and advice of legal counsel can really help here. It includes establishing a team with talented, experienced and reliable sub-consultants. It includes selecting quality insurance coverage, especially Architects & Engineers Professional Liability (A&E PL) insurance.
A&E PL insurance will be a major source of your firm’s protection. It will also be one of your biggest expenses. Tim Corbett of SmartRisk, a former senior A&E PL insurance underwriting manager and an experienced consultant to design professionals, estimates that the cost of insurance premiums generally range from .50% to 3.25% of a firm’s gross revenues. It can be much higher for small firms due to insurance company minimum premium charges versus the typical low billings of new firms. Some insurance providers, such as Schinnerer, have a Small Firm Program tailored to new firms with billings under $300,000 that offers broad coverage with low deductibles and moderate pricing. The pricing is determined by several factors, including total billings, the types and sizes of projects, location, claims history, and risk management practices. Pricing is also influenced by overall claim frequency and severity. Both have been increasing with the downturn in the economy, as litigation is a common outcome when projects run into trouble. Know that, even if you did nothing wrong, you can still be sued.
A&E Professional Liability Insurance is structured to cover architects for their errors and omissions arising out of negligent performance of professional services, but it will also defend you against groundless claims that allege professional negligence. It covers against financial loss to clients and third parties, and contingent bodily injury and property damage. It is written on a Claims Made basis, which means that coverage must be in force both when the alleged wrongful act occurs and when the claim is submitted. So if you let you coverage expire and a claim comes in afterward, it would not be covered.
How do you select a professional liability insurance company? You can do some research yourself, contact some of your colleagues with other firms, and rely on an A&E savvy insurance broker. Tim Corbett has advised that, when selecting an A&E PL insurance provider, architects “should apply the same quality selection process they ask of clients when selecting consultants and contractors.” You are searching for high quality and not the low bid. Look to the insurance company’s financial size and stability, as rated by A.M. Best and S&P. Insurance coverage features vary, and the help of a broker can serve you well in comparing policy language and exclusions. Is the insurance company a specialized A&E PL provider? How long have they been in the industry? What is the experience and expertise of the underwriters and claims managers? Does the company provide extremely valuable pre-claims assistance, to help you manage an incident that could possibly take a turn for the worse? Does the company offer risk management services, including contract review and newsletters providing best practices guidance? Insurance companies that score high on these features are valuable business partners.