Contracting with Consultants: Part 5, Insurance
Insurance often confounds design professionals, but besides the consultants’ portfolio of project experience, it may be the most important consideration when selecting consultants. Because the architect is retaining the consultant, the architect is vicariously liable for the consultant’s performance to the owner. Put simply, if the consultant performs negligently, the architect is responsible to the owner. In that circumstance, it is vitally important that the consultant have adequate insurance to cover the architect’s liability to the owner.
The architect may have a contractual obligation to ensure that its consultants maintain coverage required under the prime agreement, but the architect also should consider what types and limits of coverage should be required of the consultant in addition to or beyond the requirements under the prime agreement.
Professional liability insurance is the primary type of insurance that design professionals need. It covers the negligent performance of professional design services (i.e., a breach of the standard of care) and provides money to compensate the design professional for damages to the extent caused by their negligence. Because design professionals are service providers, they typically do not have assets sufficient to pay money damages. Design professionals usually rent their office space and lease the furniture and computers. They also normally pay out their profits annually to their partners or employees in the form of bonuses, so they are not sitting around on a lot of money to fund defense of claims and damages from lawsuits. That makes having an available “wallet” of insurance very important in order to pay for the high cost of project related disputes.
Professional liability insurance is written on a “per claim” and annual aggregate limit basis. That means that a dollar limit applies to each claim and the policy is capped at an annual aggregate limit that replenishes each policy year, subject to renewal. For example, a $1,000,000 per claim and $2,000,000 aggregate limit means that the insured has $1,000,000 in available limits per claim and up to $2,000,000 available in limits that policy year. If the insured files two claims in the policy year, each $1,000,000 limit applies. However, if the insured files a third claim in the same policy year, the coverage remains capped at $2,000,000 for all three claims. The aggregate limit is subject to erosion of limits. So if the first of three claims erode the policy by $1,000,000, and the second claim erodes the policy by $500,000, the third claim will have only $500,000 available for the claim.
Note that such coverage is not specific to the project. It covers the design firm for all its professional services for the policy year. When the design professional provides an insurance certificate showing coverage, it is not for that project; rather it is evidencing the insurance that the consultant has in place to insure the firm for all its services company-wide. In other words, claims from other projects in which the consultant is involved could erode their insurance policy so that less or no coverage is available for your project. Additionally, timely reporting of claims is of utmost importance because this policy type covers only claims that are reported to the insurer within the policy period.
Professional liability insurance is also subject to either a deductible or a self-insured retention. You can think of both similarly in that there is some amount of money that must be paid or spent before insurance coverage is available. For example, if a consultant has a $50,000 self-insured retention, they will have to pay for the first $50,000 in defense costs and/or damages before their insurer begins covering the claim.
Commercial general liability (CGL) insurance is another policy type regularly required of architects and their consultants. CGL covers damages to property and bodily injury caused by the consultant. This type of policy is written on a per occurrence basis with a general aggregate. Unlike professional liability insurance requiring timely reporting of claims within the policy period, an occurrence policy like CGL has lifetime coverage for the incidents that occur during a policy period, regardless of when the claim is reported. The architect should be named as an additional insured and so should the owner, if required by contract. Umbrella or excess liability insurance provides additional limits if the underlying CGL or automobile liability policy is exhausted. It may be desirable (or required by the owner-architect agreement) to require the consultant to maintain an umbrella or excess liability policy.
Consultants should also maintain automobile liability, workers’ compensation, and property insurance. A certificate of insurance should be obtained to evidence coverage meeting the requirements of the contract. It should include the name of the architect as the certificate holder and list the additional insureds by name.
AIA has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors. The AIA’s Risk Management Program posts new materials and resources periodically.
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