by Kurt Cooknick, Assoc. AIA

Summary: The AIA California Council approached several professional liability insurance providers this past summer to initiate a dialogue addressing the disparity between premiums calculated during a time when the economy was strong versus a down economy and identify what architects could do to reduce premiums. The result is a list of steps to take to manage risk and keep premiums as low as possible.

The initial discussion between AIACC staff and representatives from RA&MCO Insurance Services, Travelers, Catlin Design Professional, and XL Insurance centered on the premium disparity issue. Professional liability insurance premiums are based on a three-year revenue average, and most firms had their best revenue years in 2006, 2007, and 2008. A consequence of these profitable years is a high premium for 2009, a time when many firms are struggling and can least afford it.

Interestingly, the insurers pointed out that this is a two-way street. Although design professionals do pay a comparatively high premium when moving from a robust to a sluggish economy, insurers have a similar, albeit inverse, experience. When the economy moves from sluggish to robust, design professionals are paying a premium based on those sluggish years, and, as commissions increase, so too does the insurers’ liability exposure—at the previous premium rate.

Insurers and insured alike have been affected by the downturn in the economy, and each must do what they can to maintain their respective positions in the marketplace until things pick up. While there is no silver bullet solution here, what AIACC and the insurers can offer are some information and guidance to assist architects when filling out insurance applications. Information is key to providing the underwriter a better understanding of the extent of a firm’s exposure so that the insurers are not providing too little or too much coverage.

Therefore, to help assure that you have the proper amount of coverage, exercise diligence when completing your insurance application. By presenting yourself to the underwriter in the best light, the information you provide can translate into savings on your insurance premium.

Consider including the following 10 items when completing your application for underwriting.

1. That you thoroughly document all conversations, transmittals, etc. on a project.
2. That you have proper senior personnel reviewing plans and specification before release.
3. That you do a thorough due-diligence on your clients, including their background, financing, and litigation history.
4. That you stick to your area of expertise. (or sub it out to properly insured sub-consultants).
5. Provide your underwriter a detailed project list.
6. Provide your underwriter detailed résumés.
7. That you use standard contract forms or state that when presented with a client's contract, you submit contract to legal counsel for review.
8. Provide your underwriter an accurate claims history.
9. If applicable, demonstrate that your firm has learned valuable lessons from its claims and has made adjustments based on such lessons learned.
10. That you make sure your sub-consultants carry professional liability insurance.

Finally, providing your carrier a cover letter addressing items insurers concern themselves with—but are not part of the standard professional liability application—also helps. Consider the following when completing your application:

1. Client selection/project selection
   • What the client selection process is
   • What factors you consider when taking on a project or client
2. Client retention and long-term relationships
   • What percent of fees are from repeat clients?
   • What is the firm’s philosophy on relationships?
   • Do you have long-term relationships that you foster and manage?
   • What are your relationships with the developers, owners, sub-consultants, prime sub-consultants with whom you choose to work? And how do you select them?
3. Contract review and negotiation
   • What is your contract review process?
   • How and by whom are your contracts reviewed and approved?
   • What process is in place to ensure that all contracts are signed before you begin work?
   • How vigorous is the firm in negotiating contracts?
4. Experience of staff
   • Does the firm have the requisite talent and experience to meet goals?
   • How does the experience of staff match up with the types of projects and clients with which you work?
5. Educating the client and your own people
   • How much time is spent on educating the client about the project and the factors that could change the scope, budget, or schedule?
   • How much time is spent on educating the project manager on the scope of service and client expectations?
6. Quality management
   • Does the firm have a project quality manual or a quality plan?
   • What are their standard project review procedures?
   • What are your standard quality-assurance procedures?
7. Lessons learned
   • Does the firm learn from both good and bad projects?
   • Do you have a formal review after project closeout?
   • How are lessons learned integrated into your daily practice and risk management approach?

Reprinted from the AIA California Council Web site.