Is This Insurance Necessary?

Professional Liability Insurance [Prof Liab Ins] is what I am referring to. I carried Professional Liability Insurance for 30 years, and didn't have a single claim. It really seemed like Prof Liab Ins was a waste of money. Then there was a project with leaky walls. There was a report by a fellow architect saying that our design was at fault because the walls leak and that is against the building code. The attorneys could understand that. They couldn't understand my rebuttal that waterproofing additive in excess of what was specified was preventing the masonry from bonding properly. Perhaps they did understand but the law isn't scientific; it is more like poker. You may not win with the best hand if you can be bluffed well enough. And the insurance companies are there to minimize the cost - not to determine whether you are innocent.

We had a mediation to see if a settlement could be worked out. We couldn't because the owner had decided that they wanted brick veneer added to the concrete block building. An elastomeric coating would have cost $25,000. The brick veneer cost $300,000.

For the next year each side maneuvered with motions on their way to a civil trial. After depositions and more motions, a second mediation to avoid the expense of the trial brought about a $160,000 settlement. My insurance company paid $95,000 and the General Contractor's insurance company paid the balance. My team's legal fees amounted to $120,000 to get to this point. The owner's legal expenses were probably twice that amount, since their attorneys are renowned for running up costs. And they had the justification that they were pursuing two defendants. My cost, the amount of my deductible, was $15,000 of those legal fees.

The math is pretty telling. These were the amounts paid or received by each party:

• $15,000 - Architect (my time spent on this was hundreds of hours)
• $200,000 - Architect's Insurance Company
• $140,000 - Owner spent to correct the problem $300,000 less $160,000 settlement.
• $240,000 - Owner paid to their attorney (perhaps insurance paid a portion).
• $65,000 - Contractor's part of the settlement.
• $75,000 - Contractor's legal fees (guesstimate).

The total expenditure by all parties was $735,000. Of which, attorneys received at least $435,000. And the problem could have been fixed for $25,000. This doesn't make any sense unless you remember that this is poker, not logic.

Without Professional Liability Insurance I might have paid around $200,000. This would have been disastrous. I probably have paid $200,000 for Prof Liab Ins premiums over 30 years, but that was easier to handle than the big hit.

So here is my opinion. Get Prof Liab Ins with the lowest coverage that will work for your situation. Many clients dictate the amount of coverage. $250,000 is probably the smallest amount you will find offered. $1,000,000 is the most you are likely to need unless you do very large projects. Once you have a policy you can usually increase the limits with very little hassle. The cost of the policy depends on the size and quantity of projects that you design per year, whether your consultants carry insurance, and number of employees among numerous other minor factors.

I used to keep my deductible as high as the insurance company would allow (not sure why they would limit this) to keep the premiums low. However, the experience I related above has changed my mind. I would get the lowest deductible offered. I would also see if a 'rider' is available that pays the cost of defense and your deductible is only applied to any settlement. The term I have seen is 'First Dollar Defense'.

To summarize: get Prof Liab Ins; get the smallest limits that work for you; minimize the deductible; add First Dollar Defense. Cross your fingers and hope you never need it.