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SPP Journal: Issue number 59 | Summer 2013

Feature Article

Architects – Property and Liability Insurance Coverage Issues

This article addresses some of the key property and liability insurance coverage issues faced by architects when providing their services to clients. A detailed discussion of each and every special insurance coverage need that an architect might have is beyond the scope of this article. You may need to seek expert insurance advice in order to completely tailor your own insurance program to meet your own specific needs.

1. Architects Professional Liability (Errors & Omissions) Insurance. This insurance provides coverage for liability claims arising out of an error or omission in your architect practice that causes injury or financial loss to your client or others. Claim examples include:

a. The Kansas City Hyatt Regency Hotel walkway collapse, July 17, 1981. A design flaw in the connection between the walkway support beams and the tie rods carrying the weight of 2 walkways in the hotel atrium caused the fourth-floor walkway to collapse onto the second-floor walkway. Both walkways then fell to the lobby floor killing 114 people and injuring 216. Though this is an extreme example, it illustrates the potential severity of the risk architects face.

b. The architect plans for a major hospital failed to specify that stainless steel tubing be used in the construction of the operating rooms. The contractor installed regular steel tubing instead. All the steel tubing had to be replaced at a cost of millions of dollars.

c. An architect failed to design adequate load factors into the roof of a residential house in Northern Michigan. Heavy winter snows were too much for the roof and it collapsed.

The following insurance coverage issues are important to review on your professional liability policy.

Claims Made Coverage. Architects Professional Liability coverage is usually written on a claims made basis. Under a claims made policy, coverage applies to the insurance policy in effect when the claim is made against the insured no matter when the injury occurred. For example, if a client alleges he was injured because of an error in the design of his building made in 2011, but does not institute a lawsuit until 2013, the insurance policy in effect in the year 2013 would respond to the claim because that was the year the claim was made. It does not matter that the error causing the incident took place in 2011. The 2013 policy is the one that provides coverage for this claim example.

Full Prior Acts Coverage. Most Claims Made Architects Professional Liability insurance policies provide coverage subject to a retroactive date. When a retroactive date is listed on a claims made policy, there is no coverage for any claim arising out of any error or omission that takes place prior to the retroactive date. For example, if your professional liability policy had a retroactive date of January 1, 2010, and a claim is made during the policy term, the claim would only be covered if the error or omission causing the injury or damage was made on or after January 1, 2010.

A professional liability policy that is subject to a retroactive date is restrictive and should be avoided if possible. You should seek policies that provide full prior acts coverage with no restrictions or limitations. If that is not possible, then you should seek to have a retroactive date that applies as far back in time as possible.

Coverage for Claims Arising out of Pollution, Mold/Fungus, Bacteria and Other Microorganisms. It should be confirmed in writing that your Architects Professional Liability policy provides coverage for claims arising out of pollution, mold/fungus, bacteria and other microorganisms. Some policies exclude coverage for such claims. This can create a serious gap in coverage.

Aggregate Policy Limits. The policy limits for professional liability insurance are usually stated as follows: $1,000,000 each claim and $1,000,000 aggregate. This means that the policy will pay a maximum of $1,000,000 per claim and a maximum of $1,000,000 for all claims made during the policy's term. So if an organization had a $700,000 claim, an $800,000 claim (total $1,500,000), and a policy with a $1,000,000 aggregate limit, the insurance company's maximum total payment would be $1,000,000. You need to be aware of this policy feature when deciding what policy limits to carry.

Note that catastrophe/umbrella liability policies usually do not provide excess coverage over professional liability policies. Therefore, this policy’s limits are usually the only insurance coverage available for professional liability claims.

High Liability Policy Limits. How Much is Enough?

Unfortunately, there is no “right” answer to how much Professional Liability or Umbrella Liability Insurance a sole practitioner, partnership or corporation should purchase. In today’s legal environment, courts are awarding larger and larger amounts as damages against negligent parties. I suggest you obtain quotations for higher Liability Insurance limits as part of your insurance renewal process, i.e. $ 5 Million, $10 Million, $15 Million, etc. You will then need to decide if the increased premium cost of obtaining higher liability limits is worth the benefit of protecting your assets and earnings capacity.

The severity of the previously described liability claim examples is sobering. Don’t be discouraged. Serious liability claims are rare. Still, an organization must decide how much insurance protection it wishes to secure. High insurance liability limits provide a financial cushion against the bankruptcy of the organization because of a catastrophic claim.

You, if you are a sole practitioner, the partners, if you are a partnership, or the Board of Directors if your firm is a corporation, need to make this decision based upon the cost of higher liability insurance limits and your/their individual and collective attitude toward risk. Some individuals may be risk averse and others risk takers. How do you, your partners or the board members wish to spend your limited financial resources? Do you wish to use your funds to accomplish your many business goals or do you use your funds to purchase higher liability insurance limits? A balance between the two needs to be struck and it will differ for each individual and organization based again on the individual risk taking characteristics of the owner, partners or members of the Board of Directors.

2. Commercial General Liability Insurance. This provides coverage for claims arising out of bodily injury, specific types of personal injuries, such as libel, slander or defamation of character or physical property damage caused by or alleged to be caused by your actions. However, there is no coverage for claims arising out of your professional architectural services. For example, while inspecting the construction progress of a commercial building you designed, you accidentally bump into a ladder causing a painter to fall to the ground severely injuring his back.

Another example: suppose you're working late one night at your leased office in a large office building and fail to turn off the coffee maker when you leave. The coffee maker overheats and burns down your landlord's building. Your landlord's insurance company pays the claim and then turns around and sues you to recover the damage.

3. Business Automobile Liability Insurance. If you are a sole practitioner and have no employees, your Personal Auto and Personal Umbrella Liability policies should provide coverage for claims arising out of the business use of your automobile. However, you should receive written confirmation from your personal insurance agent on this issue. There are some insurance companies who have exclusions in their personal auto and personal umbrella liability policies for the business use of your automobile.

If you are a partnership, limited liability company or corporation, you should still receive written confirmation from your personal insurance agent that your Personal Auto and Personal Umbrella Liability policies provide coverage for claims arising out of the business use of your personally owned auto. You always want your personal insurance to cover the business use of your automobile.

If you are a partnership, limited liability company or corporation, your Business Automobile policy may not provide coverage to you personally should you cause an automobile accident while driving your personally owned auto on company business unless the policy has been endorsed to add an Employees as Insureds Endorsement, Insurance Services Office Form #CA 99 33 02 99 . The legal entity will be covered, but you and your employees will not be covered unless this endorsement is issued on your Business Auto policy.

Your Business Auto policy should be amended to add an Employee Hired Autos Endorsement, Insurance Services Office Form #CA 20 54 02 99. This will clarify that should an employee rent a vehicle in his or her own name while on business for your firm, the policy will provide coverage as if the employee rented the vehicle in your firm’s name.

Note: neither Personal nor Business Automobile insurance policies provide coverage for the use of autos outside the United States or Canada, unless they have been specifically endorsed to do so.

Insurance coverage for use of automobiles outside the United States or Canada is usually provided under your Personal Umbrella Liability or Business Umbrella Liability policy. You should receive written confirmation of this fact from your both your personal and business insurance agents if you travel to foreign countries on business.

4. Business Umbrella Liability Insurance. This insurance provides catastrophic liability insurance coverage in excess of Commercial General Liability and Automobile Liability coverage. It is usually sold in $1 million increments. Depending upon the nature of your architect practice, you need to evaluate your potential exposure to bodily injury, personal injury and physical property damage claims from non-professional activities and consider purchasing higher liability limits through umbrella liability insurance.

5. Workers Compensation Insurance. If you are a sole practitioner and do not carry Workers Compensation Insurance, you should evaluate the need to do so.

If you are relying on individual health insurance or are covered under your spouse's employer's group health insurance, you will need to verify that this health insurance provides coverage for a work- related injury to you. Health insurance policies may contain an exclusion for work-related injuries. Usually, work-related injuries are meant to be covered by Workers Compensation Insurance rather than individual or group Health Insurance.

Workers Compensation Insurance Benefits pay for the medical expenses and lost wages of the injured worker. For example, you are seriously injured in a car accident while returning to your office after a meeting at your client's construction site. You should consider the need to purchase separate Disability Insurance since Workers Compensation Insurance Wage Loss Benefits will not adequately address your loss of income should you be seriously injured in a work-related accident.

6. Property Insurance on Your Business Property. If you are a sole practitioner and your office is in your home, your Personal Homeowners, Condominium Owners or Renters Insurance will usually provide coverage for damage or theft of property you own used for business purposes. However, this coverage is limited to a specific dollar amount. The amount varies from insurance company to insurance company. It may be as little as $500 or as much as $2500. You should check with your personal insurance agent and receive written confirmation as to the amount of coverage you have for this exposure. You may be able to endorse your personal policy to provide a higher limit for damage to business property or you may need to purchase separate Business Property Insurance.

7. Valuable Papers Coverage. This provides coverage for the cost to research and reconstruct valuable paper records. Valuable Papers mean blueprints drawings, manuscripts, diagrams, maps, photographs, administrative files and any other kind of paper documents. The need for this coverage should be evaluated within your organization. If you have Valuable Papers Coverage, the limit needs to be evaluated for its adequacy.

Key irreplaceable documents should be copied on a regular basis and kept off site from the location of the original paper documents. Such loss prevention procedures will help reduce the need for Valuable Papers coverage.

Standard property insurance policies, both personal and business, provide no coverage for this exposure.

8. Computer Media and Data Coverage. This provides coverage for the research, reconstruction and re-entry of information stored on computer media. The need for this coverage should be evaluated within your organization. If you have Computer Media and Data Coverage, the limit needs to be evaluated for its adequacy.

The need for Computer Media coverage can be greatly reduced by regular backup procedures and storage of backup computer data and media in a geographically separate location that is not going to be affected by the same perils/disasters that could damage the location where your main computer data/media is stored. Using some kind of “cloud” data/media storage procedure should also be considered.

Standard property insurance policies, both personal and business, provide no coverage for this exposure.

9. Car-Rental Insurance: Should You Purchase the Loss Damage Waiver From the Car-Rental Company?

When renting an automobile on business or on vacation, you will be asked whether you would like to purchase the Loss Damage Waiver. This Waiver relieves you from being responsible for physical damage to the rental car and its loss of use as long as you comply with the contract's terms regarding use of the vehicle. The cost of purchasing this option can run $25 or more per day.

Many businesses and individuals rely on their business or personal automobile insurance Comprehensive and Collision Coverage rather than purchase the Loss Damage Waiver. Some credit card companies offer car rental damage coverage as a benefit of using that credit card to rent the automobile and some individuals rely on this coverage instead of purchasing the Waiver. Business Automobile Insurance can provide some coverage for physical damage to rented/hired automobiles if the policy has been specifically endorsed to do so.

These practices create potential uninsured loss exposures. The car rental contract holds the renter responsible for several charges not covered under your personal auto insurance, business auto insurance or in the credit card car rental insurance protection. The car rental contract makes the renter responsible for the following charges not covered by personal auto insurance, business auto insurance or credit card car rental damage coverage:

a. Diminution in Value. This represents the reduction in the vehicle's market value due to its having been in accident. When the repaired car is eventually sold, it brings a lower price. This can result in thousands of dollars for today’s cars.

b. Before and After Value. In some cases, a damaged vehicle is not repaired, but just sold in its damaged condition. For example, an individual rented a van with an estimated value of $36,500. It was seriously damaged and the car-rental company chose not to repair it. It was sold at a salvage auction, where it brought only $21,700. The car renter received a bill for $14,800. This represented the difference between the before and after values. The car renter's personal auto policy paid the estimated repair costs of $7,000. The car renter was responsible for paying the balance of $7,800.

c. Administrative Expenses. The car rental contract usually makes the renter responsible for claim adjustment expenses, appraisal fees, storage costs, towing costs and other administrative costs incurred by the car-rental company. None of these costs are paid for by the credit card car-rental insurance benefit, and only some of these costs may be covered under personal or business automobile insurance coverage.

d. Loss of Use. Most personal and business automobile policies provide restricted coverage for Loss of Use. Coverage is limited to a maximum of $20 per day /$600 per loss in many policies. The credit card car-rental insurance usually provides no coverage for this charge. In one case, a business associate of mine damaged a rental vehicle and received a $2,500 bill from the rental company for the vehicle's loss of use.

e. Other factors. If you rely on your personal or business auto insurance, any recovery will be subject to the deductible you have chosen for your physical damage coverage. Any claim payment will go against your personal or business loss experience. If you do not purchase the Loss Damage Waiver, the car-rental company will require immediate payment for any damage. They may charge your credit card for the damage. Can your credit card handle a charge of $35,000 to $50,000 for the value of a seriously damaged car? In addition, you will also likely miss your flight in order to deal with a damaged rental car if the Loss Damage Waiver is not purchased.

So now, the time comes to address the question: Should You Purchase the Loss Damage Waiver from the Car Rental Company or Rely on Your Personal Insurance or Credit Card Car-Rental Insurance Coverage?

Unfortunately, there is no simple answer to this question. Purchasing the Loss Damage Waiver is expensive, but there is the potential for substantial financial loss if the Waiver is not purchased. Each individual must determine whether or not to purchase the Loss Damage Waiver or not. The probability of a serious car-rental damage claim is small, but that is true for all insurance decisions. 99.9% of the time nothing happens.

It is like Clint Eastwood in the movie Dirty Harry. After a violent gun battle, the thug is sprawled out on the floor, his gun just out of his grasp. He begins to reach for the gun. Harry has lost track of how many bullets he has left in his 44 Magnum revolver. Harry points his weapon at the thug and says “I don’t know how many shots I have left in this gun, but this is a 44 Magnum and it will blow your whole head off. Do you feel lucky today, punk?”

How about you? How lucky do you feel about not purchasing the Collision Damage Waiver?

You now know what your personal and business auto insurance doesn’t cover and what your credit card car rental coverage doesn’t cover. Do you think it is worthwhile to purchase the Loss Damage Waiver or not? An informed decision is the best outcome you can achieve in this situation.

9. Car-Rental Contracts and their “Prohibited Use” Clauses

The provisions of all car rental contracts include specified actions or activities that are prohibited. If the renter engages in the prohibited conduct, the contract becomes void. This nullifies the Loss Damage Waiver and can nullify your personal or business insurance coverage for use of the rental car. Personal and business automobile insurance policies require the insured person to have the permission of the vehicle’s owner to use a vehicle not owned by the insured person. When a car rental contract becomes void, the renter may no longer have the permission of the car rental company to use the vehicle.

Examples of prohibited use of the rental car can include:

1. Driving the rental car while intoxicated, using illegal drugs or using a controlled substance.

2. Driving the rental car on unpaved surfaces or roads, for example driving on dirt or gravel roads.

3. Allowing a non-approved driver to operate the rental car, for example, valet parking the car at a restaurant.

4. Failure to use seatbelts when required by local laws.

5. Using the rental car to push or tow anything.

6. Engaging in willful, wanton or reckless misconduct, for example, excessive speed or reckless driving.

7. Using the vehicle for any illegal purpose, using the vehicle in a race or a speed contest.

While most of the above examples of prohibited use are common to all car rental contracts, there can be individual quirks. It would be wise to check the contract to see exactly what actions/activities are prohibited in the specific car rental contract you are signing.

Randy C. DeLopst, CPCU is a senior consultant at Risk Resources, Inc. in Madison, WI and former Vice President. He helps companies and government agencies in the evaluation of their property and casualty insurance, procurement of their property and casualty insurance and design of their risk management program. 608-203-6357.


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