4 Important Questions About Professional Liability Insurance

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4 Important Questions About Professional Liability Insurance

Design firms face many risks to manage. Professional liability insurance (also called PLI or errors and omissions insurance) is a crucial means for a design firm to protect itself from actual or alleged negligent acts in the rendering of its professional services. Professional Liability Insurance coverage demands special attention due to its unique nature. Understanding the details of the policy will empower a firm with the precise knowledge of exactly is being paid for may even enhance its profitability. In addition, an understanding of professional liability insurance can assist in purchasing appropriate coverage in order to mitigate the impact of claims. Through the following four questions, a design firm will be able to better understand the importance and nuances of professional liability insurance or errors and omissions insurance.

1. What do professional liability insurance policies cover?

Generally, PLI policies cover actual or alleged negligence in the fulfillment of professional services. Failure to achieve a specific industry's standards of care will typically provoke claims of negligence. Thus architecture PLI and engineering PLI are two of the most common and effective forms of coverage. Some policies also cover disciplines like environmental and technical consulting. Specific policies and coverage can vary considerably. As a design professional, it's critical to know the extent of one's coverage. This is discussed in the definitions section of a policy under "Professional Services".

2. What is the "retroactive date" on a policy and why is it so important?

PLI policies will cover only professional services rendered after the retroactive policy date. A policy may provide "fully retroactive" coverage or it may be limited to a specific date. The retroactive date is usually the date that the firm first purchased professional liability insurance. The policy does not affect claims, incidents, or circumstances that are related to professional services performed prior to its retroactive date.

When perusing professional liability insurance proposals, it is crucial to note the retroactive date and ensure that it is not compromised. Remember that a lapse in coverage will typically result in loss of a retroactive date.

3. What does it mean for a professional liability insurance policy to be "claims made" basis?

"Claims made" refers to policies that provides coverage for claims made against the firm during a policy period. As always, this affects only claims from professional services performed after the "retroactive" policy date. Under a claims made policy, all coverage terminates when a policy cancels or is not renewed. Once a claims made policy lapses, it is as though it never existed. Therefore it is critical to avoid compromising retroactive coverage and to maintain continuous insurance coverage.

Any claims or potential claims should be reported to the insurance company that has a policy in force at the time you are made aware of the claim. It is also useful to know that most professional liability insurance policies do not automatically renew.

4. What are some common exclusions listed on a professional liability insurance policy?

It is very important to be aware of the exclusions listed in professional liability policies. Following are some exclusions that can be reason for a claim to be denied:

Prior knowledge: The insurance company will not cover claims that a member of the insured firm had knowledge of before the effective date of the policy.

Prior to the retroactive date: The insurance company will not cover claims that arise out of professional services performed prior to the retroactive date of the policy.

Delayed claim reporting: The insurance company will only cover claims that are reported within a reasonable period of time.

Claims against a firm not named on the policy: It's crucial to list all current and predecessor firms for which insurance coverage is desired. Most insurance policies will only cover claims made against a firm named on the policy.

Arising out of non-professional services: The policy will only cover negligence in the performance of professional services. Examples of claims of a non-professional nature are breach of contract, fraud, payment disputes, faulty workmanship, and intentional acts.

This exploration of the nature of PLI is not a determination of insurance coverage for specific situations. Consulting a reputable firm and gaining familiarity with the specifics of a contract is key to optimizing cost, coverage, and risk management.

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