×
INTELLIGENT WORK FORUMS
FOR ENGINEERING PROFESSIONALS

Contact US

Log In

Come Join Us!

Are you an
Engineering professional?
Join Eng-Tips Forums!
  • Talk With Other Members
  • Be Notified Of Responses
    To Your Posts
  • Keyword Search
  • One-Click Access To Your
    Favorite Forums
  • Automated Signatures
    On Your Posts
  • Best Of All, It's Free!

*Eng-Tips's functionality depends on members receiving e-mail. By joining you are opting in to receive e-mail.

Posting Guidelines

Promoting, selling, recruiting, coursework and thesis posting is forbidden.

Students Click Here

Sole Proprietorship or LCC vs the E&O insurance
10

Sole Proprietorship or LCC vs the E&O insurance

Sole Proprietorship or LCC vs the E&O insurance

(OP)
I am planning to start a part time business in structural design in Northern California. Most probably small work for residential or minor commercial structures. Have about 35 years of experience in commercial, office, school, residential buildings. I have been trying to decide on the company structure, and liability insurance, and would appreciate any tips and help.

The sole proprietorship is the easiest to form. And I can select a name other than my last name for a DBA. Less paperwork starting and during the year, easier tax filing, less expenses etc. But there is this thorny issue of liability. If something were to go wrong, anyone can sue and come after my personal assets.

On the other hand, an LCC would shield from anyone coming after my personal assets (will it?) if I understand correctly. But the startup paperwork, startup fees, yearly paperwork, yearly fees etc are much larger. Taxes might be just a little more complicated than the above option. Plus, I was told that professional license holders can not start an LCC in CA and it has to be a PLCC. Even a PLCC is not allowed for structural engineers in CA. Which leaves only an S corp as the option from perspective of keeping my personal assets separate form the company. Lot more time and fees to set up & operate, more fees and paperwork yearly, double taxation etc.

Are SEs generally operating under sole proprietorship? Do they tackle the issue of lawsuits and someone coming after personal assets by getting an E&O insurance? And does that strategy actually take care of that particular issue and gives you peace of mind?

If yes, how much E&O coverage is enough? 250k? I do not anticipate having billing of more than 15-20k yearly, at leas in the beginning. Which companies are best for premiums and for handling of claims? I hear the names of Hiscox and Travelers.

Sorry for the long narrative. Any tips would be appreciated.

RE: Sole Proprietorship or LCC vs the E&O insurance

In today's world, when you get sued, the party suing you always tries to 'pierce the corporate veil' and go after personal assets. If it's a small company they will attempt to go after personal assets regardless of the entity structure.

In my opinion, you want to create as many barriers as possible in front of your personal assets and wealth. That means you want to set up an LLC, or a partnership if you have partners.

The business advisors and attorneys I have talked to all seem to stress that you have to set up a separate legal entity and then keep the business assets and personal assets separate. That's your best chance of keeping the personal assets safe.

If you loan money to the company, then you need to have a written loan document. Don't use the company checkbook to buy personal items. Do actual expense reports. etc. etc.

RE: Sole Proprietorship or LCC vs the E&O insurance

I roll the other way. I'm currently an LLC and wish that I were a sole proprietorship. Here's why:

1) I've heard that the layer of liability protection offered by incorporation can be quite ineffective at times.

2) If you get sued as a structural engineer and lose, the most likely reason will be that you did something wrong. It happens. As I understand it, this is the very scenario where your LLC liability protection is the weakest.

3) In many jurisdictions, I've found that sole proprietors have exemptions and relaxations regarding practice permits, COA's, quality control practices etc. Over the years, I've spent a great deal of time, energy, and money on these things that could have been avoided. When it's just you, you really do have to be cognizant of the amount of energy that goes into all of this bullshit administrative stuff that you employer normally take care of.

4) In my opinion, a sole practitioner's best defense IS their insurance policy. This is what lawyers will mostly want to come after because it's represents the best ROI on their invested time. They'll be reluctant to come after your shack in Sacramento and your 1989 Toyota Corolla for fear that a) they might lose and b) the assets will be more of a pain in the ass to deal with than the effort justifies. Yeah, I'm inclined not to leave $400K loitering around in my checking account rather than invested somewhere. But, then, you'd have to be some kind of special moron to do that anyhhow.

5) All of the annoying administrative hassles that you mentioned.

My insurer is AXA XL via a local broker. They're a mega-conglomerate but, at the same time, have been great with regards to service and flexibility on my ridiculously small, international policy. I carry $1M right now and will probably bump up to $2M. When somebody asks for your insurance certificate, even for high end residential, I find that they often want at least $2M. My insurer tells me that, at my ridiculously small scale, I have the cheapest insurance possible even if I did no work at all. And doubling or tripling my coverage basically doubles and triples my premium at my level. There are efficiencies of scale if, indeed, you have scale. KootK gots no scale.

RE: Sole Proprietorship or LCC vs the E&O insurance

Based on what I recall you are correct that Engineers cannot setup an LLC in California. We are setup as an LLC and file taxes as a pass through S-Corp. It wasn't that difficult to setup, however we aren't in California. We actually try our best not to do work in California because we have heard horror stories of how if you do even one little project in Cali they want to tax you on ALL work you do in ALL states and you have to fight it, so not worth the headache at the moment.

I agree with JoelTXCive - no matter which way you go, you want to setup barriers between personal assets and business assets, this is why most engineering firms actually rent rather than own property as well, no assets means nothing they can "take".

For insurance, there are normally minimums required, most commonly architects/contractors require a 1 million / 2 million policy as a minimum, and it goes up from there based on clients and project sizes. I believe the insurance company also assumes you will do a min of 250k a year as the base for their rate calculations. I suggest looking into this more as it will run you between 5 and 10k a year starting based on their base assumptions. (other carriers may have lower base assumptions)

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote:

On the other hand, an LCC would shield from anyone coming after my personal assets (will it?)

It beats nothing. The corporate veil is harder to penetrate than people think. The Operating Agreement of your organization should indemnify you for any actions you take as a agent of the LLC. Look for that when the lawyer draws it up.

Nothing will keep some ambulance chaser from trying to go after your personal assets.....but it is tough. To get outside of the corporate veil, it has to be criminal type negligence (not general incompetence). At least that is what most lawyers have told me.

EDIT: Something else....a lawyer strongly urged me once to never forget to use that COA stamp on drawings.


Quote:

If yes, how much E&O coverage is enough? 250k?

I'm not sure if 250k is worth getting. If anything happens, they will likely be after more than that. I've talked to some LLC owners who won't get E&O period because they think it just makes them a target. But it is whatever you are comfortable with.

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)
JoelTXCive and Aesur, sure it would be good to create more barriers to personal assets. The cons of LLC or S corp are significant too. Maybe those are worth it, in the end. I am curious what most small startup engineers do though. Whether they start as Sole P. and change later when things get going? Or whether most people start out as LLC or Corp?

I also hear that in some cases the lawyers can actually pierce through those corporate barriers too like KootK above seems to be implying. Is there some specific cases where those barriers can be pierced?

Aseur, if the 5-10k premium is based on 250k billing, that wont work for me since I am only anticipating 15-20k billing. Does ASCE provide a better option?

RE: Sole Proprietorship or LCC vs the E&O insurance

I'm going to try to summon member Ron for you. He's exceptional at this kind of stuff.

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)
KootK, can you share some observations where the corporate barrier did not help in going against personal assets? I have heard too, but have no observation.
And what is "COA's, quality control practices"?

It does seem logical that the lawyers will go after the insurance, or will go after someone with deep pockets. I wonder if one were to keep most personal assets under spouse name, will those be shielded from liability lawsuits.......

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote:

can you share some observations where the corporate barrier did not help in going against personal assets?

I talked to a guy who was responsible (his license was revoked as a result) for a collapse where several were injured and one was killed....and they didn't go after his assets.

Now I don't know if that was because they had juicier targets elsewhere (in terms of assets, they did)....or the corporate veil. But he came out ok.

RE: Sole Proprietorship or LCC vs the E&O insurance

2
A blurb by some lawyers on piercing the corporate veil: Link

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (Something else....a lawyer strongly urged me once to never forget to use that COA stamp on drawings.)


Sorry for not being knowledgeable. What is COA stamp?

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (A blurb by some lawyers on piercing the corporate veil)


From those examples, it seems a sole proprietor setting up a corporate, could get his/her veil breached by the court, if not extremely careful.

RE: Sole Proprietorship or LCC vs the E&O insurance

2
A good lawyer can pierce any corporate veil if it is truly a veil.

As for corporate entities, almost any of them provide some protection. A sole proprietor should have insurance protection as should the others. Anything other than a sole proprietor makes the other side work harder....and sometimes it's not worth the effort.

More important than any of then entities is how you structure your terms and conditions (as WARose alluded). Secondly, many states either allow or do not allow professionals in a corporate entity to be sued individually. (my state did not allow it for many years, now they do)

Make sure your indemnity clauses are tight. Have your client indemnify you for everything except your own negligence (you can't get out of that). More importantly, be careful in your practice. Remember that everything you produce will be scrutinized by both a lawyer and another engineer who might have a different opinion than yours. Keep that in mind.

I am attaching a booklet I wrote quite some time ago, but remains applicable. Further, if you have a copy of "Principles and Practices of Commercial Construction", 10th edition, read Chapter 1. It contains similar info.


RE: Sole Proprietorship or LCC vs the E&O insurance

Quote:

Sorry for not being knowledgeable. What is COA stamp?

Certificate Of Authorization. Many states require that for a firm to operate in their state. It's the first thing you should get after starting a LLC.

https://www.harborcompliance.com/information/engin...

Quote:

From those examples, it seems a sole proprietor setting up a corporate, could get his/her veil breached by the court, if not extremely careful.

Caution is called for. Especially the part about commingling assets. I remember my lawyer specifically warning me about private purchases with the LLC account.

RE: Sole Proprietorship or LCC vs the E&O insurance

This is a good thread. This is outside of my expertise, but once you do start doing business, then your professional services agreement is also a super important document where you lay the groundwork for defending personal assets.

As Warose mentioned....Having your company indemnify you personally AND having the client indemnify you personally in the professional services agreement is an important thing to do.

I work for a large engineering firm, and I think our agreement says that in the end we are only liable for the fees we charge. So in theory, absent gross negligence, we can just refund our fee. (i have my doubts on that holding up in court, but that's what's in the agreement).

RE: Sole Proprietorship or LCC vs the E&O insurance

For me, it is more about the significant tax benefits of an S-Corp (in the US anyhow). I have no doubt my corporate status would have much effect on things legally.

RE: Sole Proprietorship or LCC vs the E&O insurance

Our terms and conditions require the client to indemnify me and anyone else working under our umbrella. Different states have different laws on indemnification and limitations of liability. We always try to limit our liability to the amount of our fee; however, we have given that up to our insurance limits on some jobs. We carry $1M in professional liability and $1M in Commercial General Liability. For both policies, we pay about $14k per year.

We also don't give up ownership of our documents. Many public projects require that, but we hold fast on that. You don't want your files opened up to just anyone and you don't want your work product re-used without your permission and getting paid for it.

RE: Sole Proprietorship or LCC vs the E&O insurance

Malpractice is a personal liability, not corporate, which no company can shield you from. If E&O your insurance is depleted, then your personal assets will be at risk.


Quote (https://www.nolo.com/legal-encyclopedia/limited-li....)

Personal Liability for Your Own Actions
There is one extremely significant exception to the limited liability provided by LLCs. This exception exists in all states. If you form an LLC, you will remain personally liable for any wrongdoing you commit during the course of your LLC business. For example, LLC owners can be held personally liable if they:

personally and directly injure someone during the course of business due to their negligence
fail to deposit taxes withheld from employees' wages
intentionally do something fraudulent, illegal, or reckless during the course of business that causes harm to the company or to someone else, or
treat the LLC as an extension of their personal affairs, rather than as a separate legal entity.
Thus, forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business. If both you and your LLC are found liable for an act you commit, then the LLC's assets and your personal assets could be taken by creditors to satisfy the judgment. This is why LLCs and their owners should always have liability insurance.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! https://www.youtube.com/watch?v=BKorP55Aqvg
FAQ731-376: Eng-Tips.com Forum Policies forum1529: Translation Assistance for Engineers Entire Forum list http://www.eng-tips.com/forumlist.cfm

RE: Sole Proprietorship or LCC vs the E&O insurance

I started my practice in early 2020 as a side job as well (Virginia, though, not California). I did it as a sole proprietor and got a $1M/$1M E&O Policy. My carrier is the same as KootK's, and I also got my policy from a local broker. I was anticipating annual revenues between 10K and 20K, so I wasn't too worried about the SP structure - most of it was assessments and evaluations with limited liability exposure. Not much design work. Well things took off and I started getting more and more design, so I changed gears. Quit my day job and restructured as a PLLC filing as an S-Corp. I get the protections of a PLLC and the tax benefits of an S-Corp (and some of a Sole Proprietor). I pay myself a salary and have my taxes withheld each month. My profits are then taxed as a pass through income with no payroll taxes. (For those who aren't aware, self employed taxes in the US to cover social security and medicare are 15.3%). So that's 15.3% of my profits that I get to keep. Still have to pay income taxes on it, but 15.3% is a nice chunk of savings. But at the same time, I can take advantage of the self employed health insurance rule (though some accounting and tax form gymnastics) by reimbursing myself each month for my health insurance premium. I have to have income tax withheld from that reimbursement, but at the end of the year I can deduct 100% of my health insurance premiums as an 'above the line' deduction (doesn't count toward my itemization or standard deduction).

One thing to bear in mind on the protections from being sued...in the vast majority of places a Professional Engineer can be sued individually regardless of whether or not the company is sued. It doesn't always happen, and if the 'company' has insurance they'll often take that and settle, but we all carry some level of personal liability for the work we do as professionals. Talk with a lawyer to find out how this typically plays out in your state. A PC/PLLC/PLLP will often provide the added benefit of not being sued when your partner or another professional in your organization does something wrong. So your partner could get sued, and the company could get sued, but they can't sue you personally for the negligence of other professionals. An regular (non-professional) business structure doesn't afford the same protections to professionals. Again, check with a local attorney to make sure your state does things in a similar manner.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (WARose)

I'm not sure if 250k is worth getting. If anything happens, they will likely be after more than that. I've talked to some LLC owners who won't get E&O period because they think it just makes them a target.
Just listened to a CE presentation from an insurance brokerage where an engineer (true case story) took on a project from an architect, didn't do great and seems like he performed outside his expertise, and the building was damaged resulting in a 1M settlement. Funny thing is, he only carried 250K in insurance and just so happened to only pay 250K in the settlement. The architect's insurance paid the rest. Maybe the architect's insurance was more accessible than the engineer's personal assets, but I'll bet if the engineer carried a 1M policy it wouldn't have paid out only 250K.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote:

I've talked to some LLC owners who won't get E&O period because they think it just makes them a target.

That's crazy talk, I think. We met an ex-ER doctor that got sued for malpractice and lost, and the judgement was way above his insurance level and he lost his house. No insurance will definitely run the risk of losing one's house and savings.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! https://www.youtube.com/watch?v=BKorP55Aqvg
FAQ731-376: Eng-Tips.com Forum Policies forum1529: Translation Assistance for Engineers Entire Forum list http://www.eng-tips.com/forumlist.cfm

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote:



Malpractice is a personal liability, not corporate, which no company can shield you from. If E&O your insurance is depleted, then your personal assets will be at risk.

Malpractice is complicated legally. So is negligence. If someone does due diligence, and makes a honest mistake (maybe a error in judgement) I'm not sure it quite rises to the level of malpractice.

Quote:

That's crazy talk, I think. We met an ex-ER doctor that got sued for malpractice and lost, and the judgement was way above his insurance level and he lost his house. No insurance will definitely run the risk of losing one's house and savings.

It's up to the individual to weigh the risks. I myself have typically carried 2 million....but 250k? Not sure that is going to mean a whole helluva lot.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (WARose)

If someone does due diligence, and makes a honest mistake (maybe a error in judgement) I'm not sure it quite rises to the level of malpractice.


That is exactly why it is important to know your standard of care and practice to it or beyond it. Perfection is not a requirement of a standard of care. Reasoned judgment is required. Mistakes happen. Mistakes don't always equate to negligence. That's why professional liability insurance is often called errors and omissions (E&O) insurance.






RE: Sole Proprietorship or LCC vs the E&O insurance

This is Canada, but I've been looking into this stuff as well. The Association of Consulting Engineering Companies up here publishes form standard contracts.

The base level limit is $250,000 for a claim. If the engineer holds more insurance, it's clarified that only $250,000 is available to the project unless otherwise specified. They then limit liability to $250,000 (whether covered by insurance or not) plus rework by the engineer. Not repayment of fees, but redoing the work.

The commentary says that limitations that are read as reasonable are generally enforceable. However, the implication in the commentary is that a limitation to something like fees may not seem reasonable depending on the situation, but limiting liability to the insured amount makes it fairly likely that most claims will fall within the coverage available.

Rework instead of having the work done by someone else or returning fees means that you have control over fixing the situation, likely can do it at a lesser cost because you already know the situation, and put yourself in a situation where you can help repair the relationship.

Also, the language they use regarding stuff that may pass this limitation is less terrifying than I understood. They imply that the standard for breaking the limitation may be gross negligence rather than normal negligence.

The standard contract and commentary are available here if anyone wants to look. Once again, this is in a Canadian context. Insurance and Liability stuff is GC 14

https://www.acec.ca/Publications/acec_contracts.ht...

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (Our terms and conditions require the client to indemnify me and anyone else working under our umbrella. Different states have different laws on indemnification and limitations of liability. We always try to limit our liability to the amount of our fee; however, we have given that up to our insurance limits on some jobs. We carry $1M in professional liability and $1M in Commercial General Liability)


That's interesting. I guess I need to look up some contract language for my startup. I have not ventured in to how will I write a contract. While I may have to talk to a lawyer for drafting one, is there some resource where I can see how to write a contrate? And specially how is the language related to indemnify you...
I am not able to understand why would some client agree to indemnify you for just the fees he/she paid. If the potential loss for example form your errors and omissions was say $500,000, why would they agree to limit their lawsuit just to the fess they paid?

One more thing, I was only looking in to professional liability against the lawsuits. What is the commercial general liability and why is that needed in addition?

RE: Sole Proprietorship or LCC vs the E&O insurance

E&O covers issues with your design. GL covers day to day stuff. Client comes over to your house to discuss a job and trips on your door sill? GL (your homeowner's may cover it, but if you haven't declared to your homeowner's carrier that you're running a business out of your house they may try to deny a duty to pay the claim). Visit a site and drop a tape or other tool on some poor sap's head from a 4th floor scaffold? GL. Some clients will also require certain car insurance limits, so I have an automotive liability policy tied to my GL as well that covers my business in case I hit somebody going to a job site or meeting.

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (restructured as a PLLC filing as an S-Corp. I get the protections of a PLLC and the tax benefits of an S-Corp (and some of a Sole Proprietor). I pay myself a salary and have my taxes withheld each month. My profits are then taxed as a pass through income with no payroll taxes.)


I guess I need to learn the tax things too. I was actually under the impression that an S corp means double taxation. The corp pays the taxes on its profits. When you take those profits out, you pay taxes again as personal income. Is that wrong?
Plus, when you pay yourself a salary, don't the corp have to withhold the payroll taxes already? Or you are talking about the profits over and beyond your salary which may be taken as dividends....?

RE: Sole Proprietorship or LCC vs the E&O insurance

C corps are double taxed. S corps are pass through, so they don't get taxed at the corporate level. You have to file a separate form (1120?) for the S corp, but no check gets sent with it. The K-1 is produced and sent to the shareholders of the S corp and the profits of the S corp are divided proportionally for tax purposes. If you take more than your portion (you own 40% but got 60% of the profits), the overage is taxed as a capital gain - but that wouldn't apply to you in this case.

By setting up as an S Corp I'm required to pay myself a salary. As just a sole-member LLC, I'd take owner draws periodically. There's a difference. The salary means I'm also an employee, and so the federal and state withholding requirements apply.

Note: I'm not a CPA and don't pretend to be one. Get tax advice from a licensed professional. Same for legal stuff and Insurance stuff. Bar registered attorneys and licensed insurance brokers are the best place fo that. Glad to offer the product of my experience, but take it for what it's worth: a layman's view.

When I'm talking profits, I'm talking profits. My salary is not profits, it's wages. That's what I would be getting paid if I were doing the same thing for somebody else. Profits are my reward for taking a risk and putting my personal capital at stake (either directly through overhead and paying mine and other employee wages in advance of receiving payment from clients, or through liability exposure and the risk of future claims on my or my company's assets).

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (phamENG)

When I'm talking profits, I'm talking profits. My salary is not profits, it's wages. That's what I would be getting paid if I were doing the same thing for somebody else. Profits are my reward for taking a risk and putting my personal capital at stake (either directly through overhead and paying mine and other employee wages in advance of receiving payment from clients, or through liability exposure and the risk of future claims on my or my company's assets).

I kinda just think of it all as how much money I make.
I pay myself 90k - the minimum amount my Acct. recommends without having the IRS get suspicious. The whole "wages versus distributions" thing is just a convenient loophole in the tax code.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote:

E&O covers issues with your design. GL covers day to day stuff. Client comes over to your house to discuss a job and trips on your door sill? GL (your homeowner's may cover it, but if you haven't declared to your homeowner's carrier that you're running a business out of your house they may try to deny a duty to pay the claim). Visit a site and drop a tape or other tool on some poor sap's head from a 4th floor scaffold? GL. Some clients will also require certain car insurance limits, so I have an automotive liability policy tied to my GL as well that covers my business in case I hit somebody going to a job site or meeting.

The thing we aren't talking about in this is non-failure issues with design and schedule blow ups. I've seen about 20 times the number of lawsuits associated with missed schedule dates than with any failure. I've never been sure what covers you there (as far as insurance goes).

RE: Sole Proprietorship or LCC vs the E&O insurance

XR - ultimately that's true, but I find it helpful to differentiate. Because if I'm making a 'normal' salary and then only pulling in 2% profit on my stake...then what's the point? I can make 3% bouncing it around in CDs at credit unions. I might as well be making a 'normal' salary working for somebody else, and let them take all the risk. Or maybe the added flexibility of not having to ask for time off is worth that risk. It's a helpful data point for me when answering the "WTF am I doing" question that comes up every now and then.

WARose - not sure. But I also have a line in my terms and conditions that there are no schedule guarantees.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (phamENG)

It's a helpful data point for me when answering the "WTF am I doing" question that comes up every now and then.

Makes sense. For me, I could never work for anyone ever again. That question does come up about my chosen career path, however.

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (The thing we aren't talking about in this is non-failure issues with design and schedule blow ups. I've seen about 20 times the number of lawsuits associated with missed schedule dates than with any failure. I've never been sure what covers you there (as far as insurance goes).)


That's good to know. I didn't realize there are more suits from schedule issues. If it is any help though, when I was talking to the insurance agent re quotes, he did mention the suits related to schedule issues are also covered, same as E&O.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (HD10)

That's interesting. I guess I need to look up some contract language for my startup. I have not ventured in to how will I write a contract. While I may have to talk to a lawyer for drafting one, is there some resource where I can see how to write a contrate? And specially how is the language related to indemnify you...
AIA has some example contracts that may be a good starting point. AIA SampleAdditionally, many insurance providers will provide you with certain language they want in your contracts.

Quote (HD10)

I am not able to understand why would some client agree to indemnify you for just the fees he/she paid. If the potential loss for example form your errors and omissions was say $500,000, why would they agree to limit their lawsuit just to the fess they paid?
I'm sure a good lawyer can tear this apart easily, I believe in many cases it's written in such a way to try to deter lawsuits as it may not be worth the cost of the fight.

RE: Sole Proprietorship or LCC vs the E&O insurance

Ron...yeah...until the IRS audits you and adjusts the "reasonable salary" number to $90k and you owe back taxes on $85k for every year you've been in business...

Thanks for posting the contract guide...I'll have to read through it when I have time...

RE: Sole Proprietorship or LCC vs the E&O insurance

Oh I didn't see the question about why a client would limit your liability. It's a question between balancing fees vs liability. You can carry all sorts of insurance if people want to pay for it. If they don't want crazy fees, there has to be some understanding of what the liability you're taking on is. It's not reasonable to take on 500 million dollars in liability just because you were designing a pipe support at a refinery that you're getting paid a thousand bucks for. But there's the chance that the pipe support could fail, start a fire, and burn down the entire place.

Nobody's going to pay the fees necessary to carry the one off liability for something like that.

If you're responsible for a large project, then you'd negotiate a project specific insurance coverage that's reasonable.

RE: Sole Proprietorship or LCC vs the E&O insurance

I don't remember who it was, but one of the older guys in here once admitted he worked his whole career as a sole proprietor w/o insurance.

RE: Sole Proprietorship or LCC vs the E&O insurance

I went for 15 years without it as a Sole Proprietor...

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (I went for 15 years without it as a Sole Proprietor...)

How did you protect yourself from potential liability for 15 years? How did you get peace of mind?

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (HD10)

How did you protect yourself from potential liability for 15 years? How did you get peace of mind?
I honestly did not worry about it.
I did talk to an Attorney early on. Right or wrong he stated that as long as all my assets were jointly owned with my wife, they could not be touched.

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)
Thanks very much for everyone who chimed in. A lot of good information and tips. It looks like at my small level, Sole Proprietorship should be good enough. While it seems some people have been successful without carrying any insurance, I would sleep better at night carrying E&O, at least to the level of my potential projects.
Trying to limit the liability to the fees I receive, is an interesting concept. And I understand also, how to pitch that to clients.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (HD10)

Aseur, if the 5-10k premium is based on 250k billing, that wont work for me since I am only anticipating 15-20k billing. Does ASCE provide a better option?

Was this issue ever addressed in the thread? I'm exploring the idea of a part-time practice myself, and I also would not anticipate more than $20,000 annual billing for the first few years. Looking at prior threads, it sounds like my plans would be dead in the water if I tried to carry E&O insurance without having like $100,000 in revenue, or at least a plan to get there quickly. I'm starting to suspect I'd be better served just using good contracts, doing good work, and avoiding risky projects/clients. And having a good lawyer.

Quote (XR250)

I did talk to an Attorney early on. Right or wrong he stated that as long as all my assets were jointly owned with my wife, they could not be touched.

And stuff like this. I don't know all of the details, but there is a lot of protection to be had in asset classification.

On a separate note, I've been reading up on LLC formation, and the literature definitely stresses avoiding chinks in the corporate veil, but I have a nagging suspicion that the typical small business owner probably keeps horrible records, uses their business assets for personal use all the time, etc. and that a lot of the typical advice reflects that. Malpractice liability is the main thing I'm worried about.

RE: Sole Proprietorship or LCC vs the E&O insurance

CARunderscore - I launched my practice part time and my E&O policy was $1900/year. Not cheap, but I considered it worthwhile. And it helped me build my business. Several solo competitors of mine don't carry it, and I remember the timid question from potential clients about it...and the relief in their voice when I told them I had it. I know it's won me more than a few projects.

RE: Sole Proprietorship or LCC vs the E&O insurance

phanENG, I appreciate the input. Do you mind me asking for reference: What industry(ies), and what was your average annual billing for the first 3 years?

RE: Sole Proprietorship or LCC vs the E&O insurance

I locked in that rate for 3 years with an expected billing rate of between $10k-20k. Mostly residential and commercial. $1M/$1M. I bought it through a broker - it's an AXA XL policy.

I've since gone full time and my billing is substantially more than that. I'm not looking forward to my rate adjustment next spring...

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)
It's amazing to have such great discussion above. But not remember the basic question!
The question is, how long does the liability stays with an SE for the design he has done, the report she has written etc.? Statute of Limiyations, anybody?
And if you terminate the insurance along the way, retire or whatever, do the insurance companies still cover any lawsuits arising form the work done when that insurance was active?

RE: Sole Proprietorship or LCC vs the E&O insurance

I know a guy who went out on his own and carried no insurance. He figured not being insured would decrease the likelihood that he would be sued. No point in going after someone with shallow pockets.

RE: Sole Proprietorship or LCC vs the E&O insurance

Quote (HD10)

how long does the liability stays with an SE for the design he has done, the report she has written etc.?

As long as you pay for it.

Quote (HD10)

Statute of Limiyations[sic], anybody?

Depends on where you are. Some states its 5, some 10, I think federal work is actually unlimited for design errors (which is kind of terrifying) but I could be mistaken - I haven't done any federal work since branching out on my own.

Quote (HD10)

And if you terminate the insurance along the way, retire or whatever, do the insurance companies still cover any lawsuits arising form the work done when that insurance was active?

No. You either sell your business and its liabilities (good luck) or you purchase tail coverage. You're no longer expanding your liability exposure, so it costs less and if I remember correctly the cost declines over time (the longer your buildings stand, the less likely a future problem will be blamed on a design flaw). And if all of your work falls under a 5 year statute of limitations, you could drop it after 5 years - though you'd probably want to discuss that with a lawyer/insurance broker to make sure you're in a safe position.

RE: Sole Proprietorship or LCC vs the E&O insurance

JLNJ - that's fine...until you find out your client's sister a lawyer who doesn't mind filing the paperwork for him. It costs almost nothing to name somebody in a lawsuit (though litigating it can get expensive), and even if you aren't at fault it'll cost you a few thousand to get your name taken off or negotiate a settlement. I think it's BA on here who has a story of a $500 letter that said, effectively, its safe but may crack and it cost him about $10k (that's having the suit dismissed, not settling or an adverse ruling).

I had an issue come up recently - not a design issue, but a construction issue - and the contractor got sued. I immediately contacted my insurance company and warned them that something may be coming. They thanked me, put me in touch with one of their lawyers and we discussed the issue, and then she assigned me a local attorney to review everything and stand ready in case they filed suit against me. Cost me exactly $0 (if you ignore the premium I pay) and there's no claim against my insurance. It's like a pre-claim slush fund they use to defuse situations before they reach claim/lawsuit level.

RE: Sole Proprietorship or LCC vs the E&O insurance

I've only been threatened to be sued once - and it was by a customer who was a law professor. My current policy is to not have lawyers as customers, because, as Pham pointed out, it costs nothing for them to sue you.

I literally tell them that it is too easy for you to sue me so I'll pass.

RE: Sole Proprietorship or LCC vs the E&O insurance

BAretired was sued by a local authority iirc. But the premise of not having insurance is only partly that it discourages law suits. The other, necessary part is that you don't care about the outcome if you are sued. Otherwise you're just holding a weak bluff.

I have been curious in this discussion on engineer's contracts. We have our own terms, of course, but they're hardly relevant. Few of our clients are naive enough to use our terms. I'm wondering whether that's the nature of our work (larger private clients and government) vs what's being discussed here, or just how it is in North America?

(We also won't get far with just 1 million insurance.)

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (I literally tell them that it is too easy for you to sue me so I'll pass.)

Have you actually said that to them? What if they sue you for discrimination then....... :)

RE: Sole Proprietorship or LCC vs the E&O insurance

HD10, I haven't followed the "gay wedding cake" stories for a while, but I don't think lawyers could be considered a protected class under any existing anti-discrimination law.

----
just call me Lo.

RE: Sole Proprietorship or LCC vs the E&O insurance

Perhaps this should be a separate thread, but how does this apply to the licensed engineer who works for a company but is no way an owner or a partner of the company. If said company has it's insurances in place, how does the individual engineer working for the company protect themselves? Is there contract law that states no individual hired by the company can be financially responsible?

RE: Sole Proprietorship or LCC vs the E&O insurance

StrEng007 - only if you have such a contract in place with your employer.

This was a sticking point I had with my last employer. I brought up this concern to which they said "you have nothing to worry about." I said "If I have nothing to worry about, then I'm sure you wouldn't mind having your attorney draft an indemnity commitment or, at the very least, right it into the Employee Handbook as a general protection for all employees." They wouldn't do it. So I refused to seal anything.

In general, the Engineer of Record assumes at least some personal liability for everything they design. If a problem rises to the level of criminal negligence, manslaughter, etc. then the Engineer of Record can be held criminally liable. The same liability extends to civil suits. It is true that many attorneys will view an individual with limited personal assets and no insurance to be a dead end and not worth the time/expense, but that's not a sure thing. If they are already suing the company, it will cost about 5 seconds of a paralegal's time to add your name to the filing. So an individual may very well get caught in the 'shotgun approach' if they are suing multiple parties already.

Some states have laws restricting this, though, so it does depend on where you are and what jurisdiction the contract(s) fall under.

Best bet is to sit down with your own attorney experienced in this kind of law and discuss the risks to which you are exposed. This will help inform your salary negotiations, indemnity from your employer, etc.

RE: Sole Proprietorship or LCC vs the E&O insurance

(OP)

Quote (HD10, I haven't followed the "gay wedding cake" stories for a while, but I don't think lawyers could be considered a protected class under any existing anti-discrimination law.)

I have not looked in to the specifics of discrimination issues with professional consulting and am not sure whether "profession" is a protected class or not. When I was renting my property to a tenant, that definitely was a consideration. Lawyers are more inclined to sue the landlord.......and it does happen more in their case. But legally, I could not, not rent the property to them just because of their profession. At least I could not say that.

RE: Sole Proprietorship or LCC vs the E&O insurance

I'd be interested in seeing a poll here on what others have actually seen. It seems to me that most of this talk is too risk averse, but maybe i'm too delusional. Each of us probably has a pretty limited data set of observed claims but combined we should be able to get some better idea.

I am curious how many times others have seen a) any claim that resulted in any level of disruption/loss, b) a claim that effectively ended up a company, and c) a claim that pierced the company and got to an individual. I'd leave out the few famous cases that we've all heard of.

My data points:
- Never had a claim since starting my own business
- Have a couple of peers that have been briefly named in incidents that did not actually involve structure which there were able to get out of fairly quickly, with the insurance footing the bill for the minor legal work involved.
- Previously worked for a big company that had many claims, including one that resulted in what was at the time the largest settlement for a bldg/construction incident (no longer the record holder). Interestingly that claim had essentially zero impact on day to day operations, never mind impacting any individuals involved. This was a large company (numerous office in/out of the US) and it seemed that some level of claims was a constant part of doing business, but I never saw it disrupt anything nor any fear that it would touch an individual.
- I'm familiar with some involved in the mega settlement from surfside, no one personally touched that I know of
- I occasionally do expert review work, in my limited exposure there I've never seen an individual touched. Very recently I worked on a 12M overall claim where the struct eng had a 2M policy. They are getting his policy minus his legal expenses on that one. I asked the attorney I was working for about personal exposure (since it got me thinking). He told me that in 25 years of doing only construction litigation he's never actually seen anyone go after an individual (but that it could happen). I also worked on one where the engineer had designed numerous mid level hotels for a major chain and was extremely negligent and they got his policy but no other repurcussions.

Based on my observations the risks seem very low to be personally touched in a meaningful way.

RE: Sole Proprietorship or LCC vs the E&O insurance

I have been in business since 1997 and have probably worked on over 10,000 projects (no joke).
I have been threatened to be sued once and paid out less than $1000 out of my own pocket on another occasion. That's it!

Red Flag This Post

Please let us know here why this post is inappropriate. Reasons such as off-topic, duplicates, flames, illegal, vulgar, or students posting their homework.

Red Flag Submitted

Thank you for helping keep Eng-Tips Forums free from inappropriate posts.
The Eng-Tips staff will check this out and take appropriate action.

Reply To This Thread

Posting in the Eng-Tips forums is a member-only feature.

Click Here to join Eng-Tips and talk with other members! Already a Member? Login


Resources

Low-Volume Rapid Injection Molding With 3D Printed Molds
Learn methods and guidelines for using stereolithography (SLA) 3D printed molds in the injection molding process to lower costs and lead time. Discover how this hybrid manufacturing process enables on-demand mold fabrication to quickly produce small batches of thermoplastic parts. Download Now
Design for Additive Manufacturing (DfAM)
Examine how the principles of DfAM upend many of the long-standing rules around manufacturability - allowing engineers and designers to place a part’s function at the center of their design considerations. Download Now
Taking Control of Engineering Documents
This ebook covers tips for creating and managing workflows, security best practices and protection of intellectual property, Cloud vs. on-premise software solutions, CAD file management, compliance, and more. Download Now

Close Box

Join Eng-Tips® Today!

Join your peers on the Internet's largest technical engineering professional community.
It's easy to join and it's free.

Here's Why Members Love Eng-Tips Forums:

Register now while it's still free!

Already a member? Close this window and log in.

Join Us             Close