Professional Liability insurance 101 for policyholders
Your clients may think that being a named insured on your PL policy will protect them against third-party claims. Since they do not perform professional services, they do not assume the risks that your policy covers. Your policy does not make payments to you. Instead, your policy pays on your behalf due to your negligence in rendering professional services. If your client was an insured under your policy, they would be unable to collect damages since an insured cannot make a claim against itself and recover under the policy.
Can you include your client as an additional insured?
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What are claims-made vs. occurrence triggers?
What kind of indemnification does the policy offer?
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Can you include your client
as an additional insured?
Professional liability (PL) policies are designed for a specific risk—the risk of loss caused by the negligent performance of professional services by design professionals. To help prevent conflicts and potential claims, it is critical that you and your clients understand the limits of professional liability coverage. Risk Management Consultant, Mika Dewitz-Cryan, explains four commonly misunderstood PL policy features.
Here’s an example of a contractual provision to address the design firm’s professional obligation to the owner:
Many project owners opt not to pursue status as an additional insured on the design professional’s liability insurance policy.
Instead, those owners choose to rely on common law indemnity or a contractual provision that tracks with the design firm’s normal liability in the performance of professional services.
Such a provision also tracks with available PL insurance coverage. Sometimes, owners may request professional liability insurance requirements or endorsements without realizing that they are inappropriate, like requiring an indemnity obligation that is broader than the coverage provided in the professional liability policy.
The following provision reasonably delineates the firm’s professional obligation:
“The design firm shall indemnify the client from and against damages, losses and judgments arising from claims by third parties, including reasonable attorneys’ fees and expenses recoverable under applicable law, but only to the extent they are caused by the negligent acts or omissions of the design firm and its consultants in the performance of professional services under the agreement.”
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Why isn’t contractual liability covered by the PL policy?
Why isn’t contractual liability covered by the PL policy?
What are claims-made vs. occurrence triggers?
What kind of indemnification does the policy offer?
Can you include your client
as an additional insured?
Why isn’t contractual liability covered by the PL policy?
What are claims-made vs. occurrence triggers?
What kind of indemnification does the policy offer?
Can you include your client
as an additional insured?
What kind of indemnification does the policy offer?
Can you include your client
as an additional insured?
Why isn’t contractual liability covered by the PL policy?
What are claims-made vs. occurrence triggers?
Victor's professional liability solution provides indemnity coverage to cover you to the extent that you cause damage through your negligence in performing or furnishing professional services. It does not cover you if you contractually agree to expand your liability by either indemnifying your client for claims, damages, and losses not caused by your negligence or by indemnifying your client for their negligence.
What kind of indemnification does the policy offer?
All PL policies are written on a claims-made, not an occurrence, basis. Under a claims-made policy, the availability of coverage is determined by the date a party first files a claim. Conversely, a claim made against an occurrence form policy is determined by the date that the situation that caused the claim occurred, not the claim filing date. Therefore, if your client refers to the limits of coverage on a per-occurrence basis, it’s misleading for them because it may imply that you’re obliged to provide unavailable coverage. The appropriate language for stating the limits of coverage under a PL policy is “per-claim with an aggregate limit.”
What are claims-made vs. occurence triggers?
Defense counsel believed that many of the allegations were defensible on a technical engineering basis, but the engineer’s contract with the museum contained an onerous indemnification provision. The provision obligated the engineer to provide full indemnity to the museum for damages caused by the engineer’s negligent conduct, even if that fault was concurrent with the fault or conduct of any other entity, including the museum or architect.
There were $3 million in change orders, with the museum acknowledging $2.3 million in enhancements. Of the remaining amount, the museum alleged the MEP engineer was responsible for an additional $679,000 in costs based on allegations that the documents were incomplete, drawings were not coordinated with the other consultants, and the design did not comply with city codes.
A museum board retained an engineer to provide MEP and fire protection design services on a new museum. Bidding began before completion of drawings so the contractor submitted change orders as soon as the engineer issued final drawings.
Here’s an example of a claim involving broad-form indemnity:
Essentially, the museum contended that if the engineer’s fault caused any change order amount, the engineer might be liable for the entire amount. The engineer agreed to settle the claim for $300,000.
ANSWER: Claims-made.
The claim occurred in 2019, while Main St. Insurance’s policy was in effect. Main St. would respond to the claim.
ANSWER: Occurrence. The event leading to the claim occurred in 2018, while XYZ Insurer’s policy was in effect. Thus, XYZ would respond to the claim.
QUESTION: Assuming that the allegations are within the PL policy’s coverage, which insurer—Nation’s, XYZ, or Main St.—would be obligated to provide defense for ABC and possibly pay the client’s damages?
ABC Engineering has had claims-made policies for the last three years. Nation’s Insurance Co. provided coverage during 2017, XYZ Insurer provided coverage in 2018, and Main St. Insurance provided coverage in 2019. In 2019, ABC received notice of a claim from a client, even though the event leading to the claim occurred in 2018 (see the timeline below).
Visualizing claims-made vs. occurrence triggers:
Although defense counsel felt that the architect had minimal liability, his greatest exposure was due to his contractual guarantee that he would complete the restaurant within a certain time and budget. There was concern that if the claim went to arbitration, the award might exceed the architect’s remaining policy limits. The claim finally settled for $400,000, with the remaining $600,000 in policy limits spent on expenses, leaving no insurance money should future claims arise.
The partnership filed suit against the architect for $2 million, claiming lost profits from the delay, future lost profits from the lost seating, cost overruns, delays, and defective design. The father and son made the claim difficult to settle in mediation.
An architect agreed to design a restaurant for a “partnership” between a celebrity chef and a father and his son. The architect contractually agreed to turn over a fully completed restaurant within 15 weeks at a cost of no more than $1 million for design and construction.
Here’s an example of a claim involving contractual liability:
If your client requests coverage that goes beyond what your PL policy already covers, they are forcing you to assume an uninsurable business risk. Your client benefits from having insurable contractual obligations so that there is an increased chance of availability of a remedy to address any claim caused by your negligence.
Why isn’t contractual liability covered by the PL policy?
After the project was underway, the chef demanded a new “state-of-the-art” kitchen. He also demanded that the architect enlarge and relocate his office, originally located in the kitchen. These changes took seven seats from the restaurant and delayed the opening by a month, increasing costs to $1.7 million.
Start of services
Event leading to claim
Claim
made
Nation's 2017
XYZ 2018
Main St. 2019
This information is for illustrative purposes only and is not a contract. It is intended to provide a general overview of the program described. Please remember only the insurance policy can give actual terms, coverage, amounts, conditions and exclusions. Program availability and coverage are subject to individual underwriting criteria.
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