Rethinking liability insurance
Does your firm need a new approach?
In the marketplace for professional liability (PL) insurance, how do you determine which program is right for your team? Ever engineering firm faces this question, as they seek to bring a high level of consistency and quality to making a decision that will affect their business year after year.
As the former financial controller of a building code consulting firm and having been tasked with purchasing its own PL coverage, I learned to focus on value first, followed by the insurer’s coverage options, experience, capabilities and, finally, cost. I found this approach largely insulated the firm from the uncertainty and volatility of the insurance marketplace.
In talking to my colleagues, however, I realize many engineering firms find the PL market increasingly challenging to navigate. With that in mind, the following are my thoughts on this subject.
Focusing on the value of PL insurance means considering the benefits your firm will derive both now and in the long run, even if you do not file a claim. For me, this involves thinking of insurance not as a business expense like renting office space, but as an investment.
Over a long period, I have learned there is a difference between the cost of insurance and the cost of risk. While you have relatively little control over the cost of insurance, you can influence your exposure to risk. So, I recommend looking for a carrier that can help you by supporting your firm’s risk management goals.
I liken this decision-making model to qualifications-based selection (QBS). Just as your clients may select your firm based on your experience, skill and knowledge, so too should you use the same criteria when choosing your professional liability insurer. Indeed, I believe the same criteria apply regardless of the size of the firm or the insurance carrier.
It is a given the insurer must be a financially stable, well-capitalized entity, with consistently high credit agency ratings. It is also critically important for the insurer to have both the desire and the ability to manage insurance cycles, so it can offer predictable coverage terms and ongoing support, regardless of your claims experience.
I wanted an insurer that was willing to work with my company to ensure our coverage was broad and flexible enough to meet our needs, offering the limits, deductibles and options we required. It was also crucial to us to work with a PL insurer that specialized in serving our profession, with a legacy of experience in the architecture and engineering (A/E) industry.
These days, you have to know where to look to find these companies. Your agent or broker should be able to help.
Some of the best A/E insurers have gone on to be acquired by new financial parent companies. While their programs have been around for years, run by specialists in A/E risk, I would want to know if their new parent companies are committed to such programs, investing in them and keeping on key personnel.
It only takes one claim
To me, great claims handling is a dealmaker. You only need to be involved in a single claim to understand how significant this is.
As mentioned, I wanted to work with claims specialists who understood our business and, hence, our types of disputes. I didn’t want to have to explain what we do in our profession to someone who also works on, say, life insurance claims.
How experienced is the insurers’ claims staff? Are they licensed attorneys? Do they specialize in A/E defence? Or are they simply general adjusters? Also, are they located in my time zone?
With these issues in mind, I looked for a claims department that would help us resolve our problems before they could become full-blown claims. I wanted them to step forward if a claim were justified, but not simply roll over and pay unnecessarily just to settle a case. I also looked for an insurer that would try to find ways to cover claims, rather than run away from them, and would help control our legal expenses, provide personalized service and communicate with us promptly and frequently.
A partner in education
We also found PL insurance carriers with true value offered first-rate training and risk management education programs.
Our firm really relied on and benefited from these programs, the significance of which cannot be overstated. I also expect an insurance company to provide a strong degree of service and advice to help us with our professional services agreements (PSAs).
The role of your broker
Our insurance broker never let us down. We expected them to recommend a program, rather than a price. So, they would run through a qualitative vetting process and show us how each carrier would support our risk management efforts, educate our staff and treat our time and deductible as if it was their own.
As design professionals, we have to stand by the recommendations we make to our clients. As licensed professionals, we do not shy away from this responsibility. I would always expect the same from our broker.
Value vs. cost
There is always someone who will offer you a PL insurance policy for less money, but just as we constantly explained to our own clients, the first cost is not always the lowest cost or the best value.
In the end, I would want an insurance company to be there for the long term, to work hard to reduce our losses and to be willing to go to bat for me and my profession. That is the carrier that offers the best value.
Mark Urwin is a chartered professional accountant (CPA) who recently retired from Vancouver-based LMDG Building Code Consultants.