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Contract Clause Regarding Liability Insurance
7

Contract Clause Regarding Liability Insurance

Contract Clause Regarding Liability Insurance

(OP)
I sent a proposal to an architect today and he requested that I put the following clause in my contract:

The Consultant agrees to purchase and maintain a policy of insurance covering errors and omissions in the services performed by the Consultant in the amount of $1,000,000 per occurrence.  The Consultant further agrees to maintain this insurance in full force and effect throughout the period that the Consultant is performing any services on the Project and for an additional period not less than five years following substantial completion of the work.  The Consultant agrees to provide adequate written proof of insurance when requested by the Architect and on a yearly basis.  The Consultant agrees that the obligations set forth under this provision shall be specifically enforceable.

I was wondering if anyone knew if this a typical clause? Also, I am somewhat nervous about stating errors and omissions in the contract. It almost makes it sound like I have to be absolutely perfect.

Your help would be appreciated.

Val Courtney, PE
Optimal Engineering, Inc.

RE: Contract Clause Regarding Liability Insurance

Our firm has "errors and omissions" insurance and I think that most firms do.  The key here is that (in the U.S.) engineers are not judged according to a perfect set of plans and specs but rather a standard of care....what another engineer would reasonably have done in the same situation that you were in.

RE: Contract Clause Regarding Liability Insurance

(OP)
Would my liability insurance state something regarding errors and omissions? I am just wondering. I have a $1M/$1M aggregate coverage thru Marsh Affinity but I couldn't tell you if it is "errors and omissions". Is it a specific insurance.

Thanks

Val Courtney, PE
Optimal Engineering, Inc.

RE: Contract Clause Regarding Liability Insurance

Professional liability insurance for A/E firms is mostly comprised of errors and omissions.  There is really no other type of professional liability insurance (I'm not including workman's compensation, auto and misc. liability insurance and similar types that any professional organization would have).

What the architect is looking for is to ensure that you have coverage so that any problems in the design (the design by you) would direct any structural lawsuits your way.  Sometimes they may ask for a Waiver of Subrogation to put you first in line should a problem arise.

The errors and omissions insurance is very common and typical in our industry.  This is nothing special.  The five year period seems odd as I thought that the statute of limitations for our services was 7 years...but maybe they feel that statistically most problems would arise within 5.

RE: Contract Clause Regarding Liability Insurance

I thought a consultant would have Liability Insurance that covers clumsiness.  For example, while in customer plant, you knock over a ladder onto a worker and hurt him or destroy some property.  That is relatively inexpensive, and most companies with which you do business would require it as a minimum.

E&O Insurance is another animal, and not all clients request this (depends on the job).  It covers big design screwups.  Not only do you have to have it for some jobs (your situation), but sometimes it must be maintained (again, your situation).  Once you're in and hooked into this coverage, you're in for good.  If your client base requires this type of coverage, your business plan should have figured this expense into your billing rate.  I have a Professor friend who moonlights (mechanical design) to supplement his income, and he maintains this coverage to the tune of about US$5K per year.

Part of the service that your insurance agent performs is to fax a copy of the Proof Of Insurance to your clients on demand.

TygerDawg

RE: Contract Clause Regarding Liability Insurance

E&O is not so much "typical", but more "common". Depending on the work, especially design, it is often required.

The amount of $1 Million seems small. Most require a minimum of $2 - $3 Million. $1 Million doesn't go as far anymore.

The "clumsy" insurance is called "General Liability" here. It covers you when you spill coffee on someone's laptop, or drive through the side of the maintainence building. This is relatively cheap - $200 annual.

The E&O that I have heard, and been quoted, range from $15,000 to $40,000 per year, depending on total coverage, specifics, number of people, etc.

"Do not worry about your problems with mathematics, I assure you mine are far greater."   
Albert Einstein
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RE: Contract Clause Regarding Liability Insurance

Warning:  insurance companies will quote you a low number for the first year of E&O coverage, but each year thereafter the coverage will increase enormously.  The amount is based on your annual billings and the type of work that you do.  Ask your insurance company for a series of quotes for the next ten years of coverage based on your projected billings, and figure the amounts into your current billing rate.  IMO the E&O rates are a giant ripoff.

RE: Contract Clause Regarding Liability Insurance

Another point to consider is the type of policy. An aggergate policyll give you coverage for all your projects up to a limit. Project specific is just that,  It is a policy specific to a project. Most contracts will ask for coverage that can be met by aggergate coverage. Some are project specific, esp. when clauses are not standard language. Most policies are" claims made" ie. the claim must be made with in eriod. Thus a project specific will cost about as much as aggegate policy and must be renewed every year at the same or greater charge. Talk to your agent. If you do not have E&O talk to your attorney and other designers who you trust for recomendations.

RE: Contract Clause Regarding Liability Insurance

(OP)
I appreciate everyone's advice and have really learned a lot. I started my business approximately over a year ago and this is the first time I have run into this situation. I spoke with my insurance carrier and they said it was normal language for a contract. Again, thanks for all the great insight!!!

Val Courtney, PE
Optimal Engineering, Inc.

RE: Contract Clause Regarding Liability Insurance

2
Your insurance company will tell you not to agree to maintain the professional liability insurance for a number of years.  Neither you nor the insurance company can guarantee that the insurance will be available to you or will be affordable.  Talk to your agent.

Also, I believe that most professional liability is based on an aggregate limit.  Therefore, if you have more than one claim, the coverage is split among the claims, first come, first serve.  You usually don't have a million for each.  You have a million each with a maximum million aggregate.  Talk to your agent.

DPIC's Contract Guide says, "Professional liability policies have aggregate limits.  The policy limit you purchase is the total amount your insurer will pay for both defense costs and indemnity, regardless of the number of claims made during the policy period."  Also, "Because of these features and because the insurance market for this coverage is somewhat volatile - in both price and availability - it would be unwise to agree to a contract requirement to maintain specific levels of professional liability coverage for any extended time.  You might not be able to comply in the future.  Instead, you could soften a client's absolute requirements for professional liability insurance with a clause similar to this: The consultant agrees to attempt to maintain professional liability coverage for the period of design and construction of the project, and for a period of ____ (__) years following substantial completion, if such coverage is reasonably available at commercially affordable premiums.  For the purpose of this Agreement, "reasonably available" and "commercially affordable" shall mean that more than half the consultants practicing the same professional discipline in the state where the project is located are able to obtain such coverage."

Talk to your agent.

RE: Contract Clause Regarding Liability Insurance

Nice post PEinc!

RE: Contract Clause Regarding Liability Insurance

Thank you, JAE.  What DPIC says seems to be different from what courtnvm says his carrier told him.  He better ask again.

Even if courtnvm agrees to "attempt to maintain" the insurance, he better figure on the price going up about 20% each year!  If he can maintain the coverage, it could be much more expensive than what he pays today.  Been there, done that!

RE: Contract Clause Regarding Liability Insurance

(OP)
Thank you everyone for your insight. I apologize for replying so late but I have been under the gun for a while. Just started my own company and just trying to get caught up. I apprecaite all the comments from all of you.

Val Courtney, PE
Optimal Engineering, Inc.

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