AU 62 Chapter 7 - Underwriting Professional Liability

Exclusions - architects and engineers professional liability insurance

1. similar to other exclusions in other liability policies - punitive damages, discrimination, or dishonest or criminal acts. other exclusions designed to eliminate overlaps with the insured's commercial general liability, business auto, or workers compensation policies. 2. services performed through a joint venture - exclude services performed by a joint venture not named in the policy. separate policy or endorsement can be obtained for a joint venture. 3. no exclusion of bodily injury and property damage claims - an architects or engineer's professional negligence can result in structural defects that injure people or damage property - so it will not contain a flat exclusion of claims for bodily injury 4. construction performed by the insured - coverage is usually excluded for projects where any construction is performed wholly or partially by the insured, a subsidiary of the insured, or a subcontractor of the insured. Coverage is excluded for the design of the goods sold by the insured. 5. Express warranties, guarantees, or cost estimates - liability arising from express warranties or guarantees and cost estimates or the failure to provide cost estimates is also typically excluded. Also, coverage is excluded for advising, requiring, or maintaining of any type of insurance or bond, or failure to do so. 6. fungus or mold - an exclusion of claims based on fungus or mold is becoming common in policies covering professional liability for architects and engineers. This and all other exclusions may vary by policy.

Retroactive Date Provisions and Prior Acts Coverage

A common feature found in many claims-made policies is that the retroactive date, which is the date in a claims-made policy on or after which injury or damage must occur in order to be covered. Claims occurring before that retroactive date are not covered even if the claim is made during the policy period. Underwriters that want to compete and write new accounts must also consider prior acts coverage. Prior acts coverage pays for claims that would otherwise not be covered because they occurred prior to the retroactive date of the current claims-made policy and are not covered by the prior claims-made policy. Without such a feature, the policy's retroactive date would preclude coverage with respect to these "prior acts."

Consequential damages

A payment awarded by a court to indemnify an injured party for losses that result indirectly from a wrong such as a breach of contract or a tort or civil wrong. In a professional liability suit based on breach of contract, consequential damages, such as loss of profits, might be awarded if the professional, at the time of the contracting, was aware of some special or unusual circumstance that might occur as a result of the breach.

Liquidated damages

A reasonable estimation of actual damages, agreed to by contracting parties and included in the contract, to be paid in the event of a breach or for negligence.

It is important to ascertain who is covered under the policy because coverage provisions may differ from insurer to insurer. Although the breadth of coverage may differ from one professional liability policy to the next, they all provide coverage for

All professional liability policies cover the individual professional named in the policy.

Statutes of Limitations and Statutes of Repose

All states have statutes of limitations that set time limits on commencing lawsuits. However, in many cases, a statute of limitations does not begin to run until the negligence is discovered or the actual injury takes place. As a result, architects and engineers can face claims based on work they performed 20 or more years ago, even when the statute of limitations is only 3 years. A statute of repose requires a plaintiff to file a lawsuit within a specific time period after a wrongful act by a defendant, such as improper construction of a building, regardless of when the injury occurred or was discovered. The time limit in these statutes varies from state to state. Some time limits are as short as four years and others are as long as 15 or 20 years.

Which one of the following statements about defense coverage in the typical professional liability insurance policy is most accurate?

Although professional liability policies differ, most policies pay for defense costs as long as they fall within the limits of the policy.

Nominal damages

An award that indicates that, while the plaintiff has sustained some harm, the injury is not one warranting substantial monetary relief. They are a small amount, such as $1, awarded to a plaintiff when a breach of contract occurred but without compensable injury.

Communication of Performance Responsibilities

Architects and engineers should clearly communicate with their clients to control the professional liability loss exposures that arise out of their performance responsibilities. Liability loss exposures can develop from ambiguous contract language or unrealistic client expectations. Clear contract language, reasonable performance schedules with clearly written reports to clients as the work progresses, refusal of oral changes to contracts or orders, and completion statements from clients when work is finished.

Quality Control

Architects and engineers should establish procedures that will help to reduce or prevent the change that plans, specifications, and surveys will be negligently prepared or performed. Quality control techniques can help to fulfill that objective. i.e., computerized modeling and optimization techniques can be used to assist in project design management. In addition to quality control techniques for their work product, architects and engineers also should establish rigorous quality control procedures at the work site. Although certain quality control measure are required by various government regulations and laws, such as Occupational Safety and Health Act (OSH Act) requirements regarding the safety of operations and materials, architectural and engineering firms' procedures should exceed minimum government standards.

What is the difference between claims-made and occurrence insurance?

As a general rule, Occurrence coverage offers superior protection but it can be significantly more expensive than Claims-made coverage. Occurrence coverage protects against covered lawsuits as long as the policy is in force when the bodily injury or property damage occurs. As long as this condition is met, coverage is not jeopardized if the policy is cancelled or not renewed when the claim or lawsuit papers are subsequently filed. Claims-made coverage protects against covered lawsuits only when the following two conditions are met: 1.The policy is in force when the bodily injury or property damage occurs (just like Occurrence coverage) AND 2.The policy or a renewal of the policy is still in force when the claim is made (unless the proper tail coverage or extended reporting period has been purchased). The second condition makes Claims-made coverage much more risky than the Occurrence coverage because the policy may not be renewed if the insured manufacturer or distributor can't afford the renewal premium, shuts down operations, or if renewal terms are not offered by the carrier.

The Insurance Services Office (ISO) Commercial Lines Manual states that various professional services exclusions should be added to the general liability policies for numerous business classifications. Which one of the following is an example of classifications requiring professional services exclusions?

Barber shops

One of the primary differences between engineers and architects professional liability insurance and other professional liability coverages such as health professionals or legal professionals is that

Because of subcontractors, vicarious liability is a significant loss exposure for engineering and architectural firms, but professional liability coverage can be extended to subcontractors if they have been named as an additional insured. Virtually all architect and engineers professional liability insurance is written on a claims made basis.

Services provided by architects and engineers, unlike those of many other professionals, are almost always governed by a contract between the parties. Disputes between the parties to the contract are generally resolved by

Binding arbitration.

Exclusions in Professional Liability policies

Certain exclusions common to most liability insurance policies, such as intentional injury, employers liability, workers compensation, and pollution, are usually also found in professional liability policies. Professional liability policies for healthcare professionals, architects and engineers, and others whose professional errors clearly might involve bodily injury claims do not usually contain an exclusion of bodily injury. However, many other professional liability policies do exclude bodily injury. this exclusion can create a coverage gap when the GL policy carried by the professional contains the professional liability exclusion mandated by ISO rules, which excludes bodily injury resulting from the insured's professional acts or omissions.

Which one of the following statements concerning the legal foundations for the professional liability exposure of architects and engineers is most accurate?

Claims against architects and engineers are more likely to hinge on the interpretation of contracts than on the application of common law principles.

Professional liability insurance is written on forms developed by individual insurers and as a result differ considerably. Although they differ, the policies all provide for

Coverage for rendering or failing to render professional services.

One of the most common forms of non-insurance risk transfer used by architects and engineers to shift professional liability to others is the use of

Hold harmless agreements are almost universally used for noninsurance risk-transfer.

Distinguishing Between Contract and Tort Claims

In a contract claim, the allegation is that the defendant failed to do something that was required by the contract - for example, that an insurance agent failed to place teh insurance that it agreed to obtain for teh plaintiff. A tort claim rests on allegations that the performance of the contract did not meet the standards of reasonable professional care - for example, that although the accountant prepared the tax returns as agree, the returns contained errors that a reasonably competent accountant would not have made. In many cases, the injured party will be able to establish the professional's liability on either contract or tort principles, or both. If a professional's performance causes bodily injury, a tort action is likely to result because, in general, the injured party cannot sue for emotional damages or other pain and suffering in a breach of contract action. Statutes of Limitation - different statutes of limitation may apply to contract and tort actions making one preferable to the other, depending on the law of the jurisdiction involved. For example, Pennsylvania has a two-year statute of limitations in tort actions but a four-year limitation in contract cases.

Res ipsa application Res ipsa - the thing speaks for itslelf

In an auto liability context, res ipsa might be applicable to an injury caused by an object flying off a speeding flatbed truck. Res ipsa would be applicable in this case because the object would not have flown off the truck if the operator of the truck had exercised due care and properly secured the object. In the context of professional liability, an example of res ipsa is leaving a surgical sponge in a patient's body.

Architects & Engineers - Professional Acts, Errors, or Omissions

In some cases the policy also specifically covers the insured for professional acts, errors or omissions of the insured's subcontractors. Because an architect or engineer could be held liable for professional errors or omissions of it subcontractors, this extension of coverage can be very important to the insured. The extension usually does not protect the contractor unless he has been named as an additional insured. If the insurer pays a claim as a result of the negligence of a subcontractor not named as an additional insured, the insurer will have the right to subrogate against the subcontractor after paying a claim on behalf of the named insured.

ABC Engineering has agreed to form a joint venture with another firm, XYZ Construction, to build a waste treatment plant for the city of Springfield. As the smaller firm in the joint venture, ABC has 20 percent ownership in the joint venture, while XYZ has 80 percent. ABC and XYZ each have separate professional liability insurance policies. Given this information, which one of the following statements is most correct?

Insurers generally exclude professional services performed by the insured as part of a joint venture, so a separate policy or an endorsement to include coverage for the joint venture will be needed by both firms.

An insuring agreement for architects and engineers insurance policies responds for damages because of liability arising out of rendering or failing to render professional services. The term "professional services" is usually

Limited to services the insured is qualified to perform.

ABC Plumbing entered into a contract with Bill to install a commercial grade septic system on his property. The installation of the septic septic was time sensitive because the rest of Bill's construction project could not go forward until the septic system was in place. The contract required that the work be done within 30 days of contract signing, or ABC would have to pay a penalty of $1,000 per day. Which one of the following categories of damages does the $1,000 per day penalty specified in the contract fall into?

Liquidated damages

Risk control - Architectures

Measures that can be used to manage the professional liability loss exposure of architects and engineers include quality control techniques and clear communication with clients. The size of the project bears little relationship to the size o the potential claims. Even small projects can produce large damage suits. The underwriter should ensure proper risk control measures are in place as a key criterion for account acceptability.

Which one of the following statements concerning professional liability insurance coverage is most accurate?

Most professional liability policies provide coverage for acts committed anywhere in the world, as long as the suit is brought in the United States or Canada.

Coverage Territory

Most professional liability policies provide coverages for acts committed anywhere in the world, as long as suit is brought in the United States or Canada. Some policies provide broader coverage by allowing suit to be brought anywhere in the world, and some provide narrower coverage by requiring that the act be committed in a more restricted policy territory, such as the US or Canada.

Some professional liability losses would be covered under a commercial general liability (CGL) policy unless an endorsement excluding professional liability was attached to the policy. For many other professions, the loss exposures

Need specific technical underwriting skills.

One of the ways that professional liability lawsuits differ from other types of general liability lawsuits is that

Plaintiffs often rely on the use expert witness testimony to establish standards of professional conduct that were allegedly breached.

Many commercial general liability insurers routinely exclude professional liability insurance coverage for insureds that have significant professional liability exposures. One of the reasons for excluding professional liability coverage is that

Professional liability loss exposures require a more specialized set of underwriting and claims adjusting skills than do general liability loss exposures.

Which one of the following statements concerning professional liability coverage under the commercial general liability policy is most accurate?

Professional liability losses may end up being excluded from coverage under the commercial general liability policy if they do not fit the definition of bodily injury, property damage or personal and advertising injury. The CGL only covers bodily injury, property damage and personal and advertising injury, and some professional liability losses may not fit that definition.

Which one of the following statements concerning coverage under the typical professional liability policy is most accurate?

Professional liability policies are designed to cover claims arising from rendering or failing to render professional services.

Extended Reporting Period for Retiring Professionals

Professional liability policies sometimes contain a type of extended reporting period not usually found in management liability policies. This type of provision provides an automatic extended reporting period when the insured retires, becomes disabled, or dies - provided, in some policies, that the insured is at least 55 years of age and has been insured with the insurer for a given period, such as 3, 5, or 10 years. When professionals cease to practice, they no longer need professional liability coverage for future actos or omissions, but if their coverage was written on a claims-made form, the do need tail coverage to cover claims that are not actually made against he insured until after the insured retires. In addition, the professional's estate may need tail coverage after the professionals's death. Having tail coverage triggered automatically, without additional premium, avoids the possibility that this important protection will be overlooked, and it also eliminated the need to make a large payment at retirement, disability, or death to fund coverage. Including automatic retirement tail coverage for policies that remain in force for five or ten years is a way to improve policyholder retention. To write this type of coverage profitably, the insurer must include an adequate charge in the preceding policy premiums to fund the retirement tail coverage.

Professional Breach of Contract and Tort Actions

Professionals have a duty to perform the services for which they were hired, and they also have a duty to perform those services in accordance with the appropriate standards of conduct. The first duty is primarily contractual; the second duty arise from tort principle of law. Consequently, a professional's violation of duty of duties owed to a client can result in a breach of contract action, a tort action, or both types of actions alleging professional liability.

Samson Cookies had a contract with ABC Sugar Company to purchase fifty tons of refined sugar at a price of 60 cents a pound. ABC failed to make delivery on schedule, and Samson was forced to purchase the sugar on the open market for 65 cents per pound. Samson successfully sued ABC for breach of contract. Which one of the following is an example of compensatory damages that might be awarded to Samson for this breach?

Samson's compensatory damages would include the difference between the contract price and the market price of sugar that Samson had to actually pay.

Professional liability can be based on breach of contract, tort principles, or statutes and regulations. The distinguishing characteristic of tort actions against professionals is

That testimony of expert witnesses often is needed

Informed consent

The consent to a medical treatment or procedure obtained after adequate disclosure that requires apprising the patient of the nature, potential benefits and risks, and alternative forms of the proposed treatment.

Ed's Tattoo Parlor has a commercial general liability policy from ABC Insurance Company with an endorsement excluding professional liability. It also has a separate professional liability insurance policy from XYZ Insurance Company. Ed's Tattoo Parlor was recently sued by an irate customer who was injured by a falling ceiling tile while receiving a tattoo. Which one of the following statements concerning the insurance coverage for the injury is most accurate?

The injury from the falling tile was not the result of the professional services, so the CGL's bodily injury liability coverage would apply.

Professional liability policies can handle defense costs in any of these ways:

The insurer has the right and duty to defend and to pay defense The insurer agrees to pay defense costs but does not have the right and duty to choose defense counsel The insurer has the right and duty to defend, and the insurer can choose when to settle Professional liability policies will include defense costs as well as the settlement itself.

Accountants professional liability

The liability arising out of harm to clients and others caused by breach of an accountant's legal duty.

Insurers routinely endorse their commercial general liability policies to exclude professional liability. Which one of the following businesses would be most likely to have professional liability excluded from its commercial general liability policy?

The medical office has the greatest professional liability exposure.

Persons or Organizations Insured

The named insured of an architects and engineers professional liability policy can either be an individual professional or an architectural or engineering firm. The policy typically covers, in addition toe the named insured, the named insured's principals, partners, directors, officers, stockholders, and employees while acting in their capacities as such. The policy will not cover an employees of the named insured that works as an independent contractor. The policy will also cover individuals who previously worked there while performing professional services performed on behalf of the named insured before their employment relationship was terminated.

In professional liability, the difference between a contract claim and a tort claim can be an important distinction. Which one of the following statements pertaining to the difference between tort claims and contract claims is most accurate?

Tort claims and contract claims may be subject to different statutes of limitations, making one type of claim preferable to the other.

Tort Principles of Law

Under tort principles of law, members of a skilled profession are liable for injury resulting from their failure to perform with reasonable professional care and competence. A professional is not liable merely because of any unfavorable outcome. He or she must be found to have made an error or omission that a reasonable competent professional in the same field would not have made.

Underwriting architects and engineers professional liability

Underwriters normally request certain information on an application for architects and engineers professional liability insurance: - description of practice - gross billings - type of professional discipline, such as fire protection, engineering, HVAC engineering, and land surveying - type of projects, such as bridges, manufacturing, office buildings and shopping centers - types of services, such as conceptual design, feasibility studies, and inspection and certification - types of clients such as commercial clients; contractors; and federal, state or local government - size of total staff and number of principal partners, and employees; architects, engineers and other technical staff ; and clerical staff - whether prior acts coverage is desired - loss history

Claims-Made Basis

Virtually all architects and engineers professional liability policies are written on a claims made basis and defense costs are usually payable with the limits of liability. Consent-to-settle provisions (requiring the insured's consent for an insurer to settle a claim) vary from policy to policy in the same manner as they do in other professional liability policies.

Compensatory damages

are intended to indemnify a person for injury or damage sustained. Unlike compensatory damages in negligence actions, compensatory damages in breach-of-contract actions do not normally include amounts for intangible general damages such as pain and suffering. Compensatory damages in contract actions are generally limited to the monetary loss sustained by the party alleging a breach of contract.

Noninsurance Risk Transfers and Contract Language

hold harmless agreements are almost universally used as a noninsurance risk transfer technique by architects and engineers. Because architects and engineers typically provide written reports to their clients, they can include disclaimers stating that the report has been prepared in accordance with the generally accepted practices in their locality and that the report is for the exclusive use of the client for the specific purpose for which it was commissioned. Although such contract clauses cannot protect the architect or engineer from all liability, they can prevent some claims and discourage others. The standard of care for most professionals is the ordinary and reasonable skill usually exercised by someone in that profession. Some project owners request that contract language be changed to require the architect or engineer to exercise the "highest professional standards". This language can set a much higher standard than "ordinary and reasonable skill." An important risk control component is thoughtful review of the language in all contracts. It is also important to include a contract provision stating that the firm will not be responsible for delays or default in teh performance of design services that are beyond the firms's control.

Professional liability coverage is

sometimes included in a CGL policy, but only under certain conditions. Some professional liability losses would be covered under a CGL policy unless an endorsement excluding professional liability is attached to the policy.

The law that terminates the right of action against design professionals at the end of certain number of years after a project is completed is known as

statute of repose

Contract law

the contract law approach to establishing professional liability is based on the contractual relationship between professionals and their clients. The contract may be a formal written agreement, but even if it is not, the law will assume that a contract exists, based on the relationship between the parties. Most professional contracts are promises to perform services fro clients. If a professional fails to perform the services agreed to, a breach of contract occurs. If the client suffers harm as a result of the breach, teh client is entitled to be restored, as nearly as practical, to the position that he or she would have occupied had the contract been performed as promised.

architects and engineers professional liability insurance

there is no standard policy form for providing coverage - insurers offering the coverage draft their own policies. Nonetheless, the coverage provisions of the different policies tend to be similar. The American Institute of Architects (AIA) - provides best practices for architects including risk control and risk transfer recommendations. Includes checklists for each phase of the project.

Architects & Engineers - Professional Services

usually limited to those services that the insured is legally qualified to perform - those that are within the insured's capacity or those services that are specifically described. It is important to determine that the definition or description of professional services in the policy is broad enough to meet the insured's particular needs.