Ask the Expert: Architects and Engineers E&O Coverage Gaps

Insurance Market Source regularly taps into its network of experts for insight into key trends across the insurance landscape. Christopher Stephens, Senior Underwriter, Professional Liability Centre of Excellence, Burns & Wilcox Canada and Nicole Greene, Director of Brokerage, Professional and Executive Liability Center of Excellence, Burns & Wilcox, share their insight on Architects and Engineers Errors & Omissions (E&O) insurance.  

Q: Why is understanding a client’s contractual liability so important to avoiding gaps in coverage?

Nicole Greene (NG): Retail brokers and agents should always seek to deeply understand a client’s contractual liability. For architects and engineers, knowing whether the client is providing design work with or without construction responsibilities will aide brokers in understanding how to properly tailor a policy and ensure there are no gaps in coverage.

Additionally, understanding the extent of coverage a client’s subcontractor carries and securing copies of those policies is equally important. If they are not suitably covered, the client could be held liable for the errors or omissions of a subcontractor.

Brokers should also investigate additional endorsements that may be necessary when writing a policy, such as an Architects and Engineers E&O endorsement for condominium work. Architects who work on commercial and residential projects are most commonly placed on a Design insurance policy that excludes services for condominiums. Asking questions will help identify these additional needs as an exposure to the proper endorsement may be included.

Upon asking these crucial questions, brokers can obtain and provide copies of the corresponding contracts—allowing underwriters to customize the policy accordingly and avoid gaps in coverage.

Q: What are key coverage gap differences between an Architects and Engineers E&O policy versus a Construction General Liability policy?

NG: In an effort to reduce pricing many brokers with deep Construction General Liability policy experience will try to secure Project Design policies. Some believe if only one project is covered in lieu of all client projects, then the cost should be lower. This is a myth, and while it may work on GL policies, it does not work on Professional policies. Most Architect and Engineers E&O policies are written on a claims-made form rather than on an occurrence form, changing the premium cost.

Christopher Stephens (CS): The major difference between a policy governed by a claims-made form and one governed by an occurrence form is that the former covers claims that are made at the time that the policy is in effect. An occurrence form allows for claims to be covered as long as the occurrence took place within the active dates of the policy, regardless to when the claim is filed. Essentially, the time during which the claim is reported is the differentiator. To secure coverage for any potential claims from past work beyond the end of a policy date, brokers can recommend that clients purchase an Extended Reporting Period (ERP) policy.

NG: ERPs are often costly, and typically range anywhere from 75 percent of the expiring premium up to 225 percent. They are often accompanied by conditions as to when they can be purchased and how long the extended period can last – which is typically three to five years after the project concludes. An alternate approach could be to write all of the client’s design services on an annual practice and secure a designated projects limit via endorsements in order to meet the contract requirements. Taking this approach fulfills the contract, eliminates the need to purchase ERPs, and prevents any design coverage gaps the design client has. That is why it is important to get all the facts and project contracts first.

Q: What options does a design firm have if one claim results in defense costs that erode a substantial amount of the available limit on the policy?

CS: There are several different forms on which brokers and agents can write a policy based on client-specific needs. Some policies are cost inclusive forms, meaning that a client’s defense costs and other payouts are bundled under one limit. These are effective if defense efforts last lengthy periods of time. There are also cost in-addition forms that provide limits for defense separate from other potential payouts. Generally speaking, these forms are slightly more expensive, but may be important to a firm who works in more litigious areas of the world.  When brokers and agents have coverage discussions with clients, asking the right questions may uncover that the initial plan of coverage is not sufficient. An educated broker, partnered with the right underwriter, can assist their clients in navigating around potential coverage gaps.

Architect and Engineers E&O insurance has numerous intricacies and the right method for coverage can vary project by project. Approaching this coverage from a generalized perspective may leave clients underinsured, resulting in unexpected coverage gaps. Working together with a client, brokers can help them understand that – just like design work – no two projects are the same.