MythBusters: Professional Liability Insurance Edition

Premiering on the Discovery Channel in 2003, the MythBusters TV series used the scientific method to test the veracity of urban myths, rumors, and legends. Each experiment resulted in a verdict of “busted” (impossible), “plausible” (possible but not proven), or “confirmed” (proven true).

Busting professional liability insurance myths may not have the entertainment value of determining whether, say, a penny falling from a skyscraper can kill a pedestrian below (apparently not, due to terminal velocity and air resistance). But engineers who negotiate professional services agreements need to know the truth about some prevailing myths regarding professional liability insurance coverage.

Myth: Engineers’ professional liability insurance covers an upfront defense for the engineer’s client.

Verdict: Totally busted.

Typically, this misconception about engineers’ professional liability insurance first emerges during negotiation of an owner-drafted indemnification clause that includes a phrase like “Engineer will indemnify, hold harmless, and defend Owner against damages …” The engineer rejects this language, asserting that professional liability insurance will not cover a defense for the owner. The owner disagrees (or claims that the lack of coverage is the engineer’s problem; we’ll address this myth in the last section of this article).

Before we explore the merits of this classic debate, let’s assess what is at stake for the engineer if they sign a contract obligating them to defend the owner. The exact contours of the engineer’s defense obligations will depend both on the language of the clause and the law of the applicable jurisdiction, but could include a duty to pay the owner’s defense costs upfront – at the time the claim is made – prior to any determination of the engineer’s negligence. Clearly, this could be an expensive proposition.

We can rarely make overarching statements about what engineers’ professional liability insurance does or does not cover, because there is no standard policy form. Every carrier has its own unique form or forms, and the policies are further customized through endorsements. When it comes to understanding what any given professional liability insurance policy covers, the correct answer is “RTFP,” which stands for “Read the Freaking Policy.”

Despite the infinite variety of professional liability policy forms, this is one time that it is possible to generalize with confidence. Professional liability insurance, although it provides a defense to the insured firm and engineers, will not provide an upfront defense to other parties such as the project owner.

There are PL policy forms that provide some coverage for reimbursement of the client’s cost of defense. This is not, however, an upfront duty to defend, and the insurer’s duty to reimburse the client is by no means total or automatic. It will typically be limited to the percentage of the insured’s fault, and will often be conditioned on a determination of the insured’s liability by a court (sometimes arbitrator, also) of competent jurisdiction. The overwhelming majority of claims are resolved by settlement, rather than a verdict by court or arbitrators, and presumably they would not qualify for this coverage.

Myth: Engineers can buy an insurance product that covers a defense for their clients.  

Verdict: Plausible, but there’s more to the story.

As with many myths, this one has a kernel of truth. Every now and again, an insurer launches a product that purports to offer coverage for the engineer’s contractually assumed obligation to defend the client against claims. Invariably, these policies impose sublimits, coinsurance, and other conditions that make full coverage for the client’s defense highly unlikely.

Even if an intrepid insurer someday offered robust coverage for a contractually assumed defense obligation, coverage would still be uncertain. Professional liability insurance products have a “claims made and reported” coverage trigger, meaning that the policy that will apply to a claim – if any – is the one in force when the claim is first made against the insured and reported to the insurer. Both events must occur during the same policy period.

If an engineering firm were to purchase the defense coverage product, it is not unreasonable to assume they would want to maximize the value of their investment (and any competitive advantage it might afford) by routinely agreeing to defend their clients against claims. But what would happen if the insured could not renew or replace the coverage at the end of the policy term, either because the premium skyrocketed, or the insurer ceased to offer the coverage altogether?

The answer is that any claims for defense that arose after the cessation of coverage and any applicable reporting periods would have no coverage for the defense obligation. If the engineering firm had gone all-in on signing contracts with defense obligations, this could turn out to be an enormous unfunded liability.

Myth: If contract language isn’t covered by insurance, that’s the engineer’s problem.

Verdict: Plausible, but there’s more to the story.  

To the extent the engineer’s professional liability insurance does not cover their liability, they will have to satisfy it using their own funds. Depending on the magnitude of the loss, this could indeed be a problem for the engineer.

But it might well be the client’s problem, too. Unlike their construction contractor counterparts, who retain substantial capital reserves so they can operate and maintain bonding capacity, engineering firms typically distribute a large share of their profits and purchase professional liability insurance to cover damages caused by their negligence. If that coverage is nonexistent, there is no guarantee that the engineering firm will have funds sufficient to pay the claim. Even if coverage is simply disputed, resolution of this issue has real potential to delay and complicate settlement of the underlying claim.

Engineering firms buy professional liability insurance to provide financial security for their clients. It is in their clients’ interest to have that coverage standing ready to make them whole when negligence happens.

The material in this article is provided for informational purposes only and is not to be regarded as a substitute for technical, legal, or other professional advice.  Individuals seeking such advice are encouraged to consult with an appropriate professional consultant or attorney. ACEC and its officers, directors, agents, volunteers, and employees are not responsible for, and expressly disclaim, liability for any and all losses, damages, claims, and causes of action of any sort, whether direct, indirect or consequential, arising out of or resulting from any use, reference to, or reliance on information contained in this article.