Trimming Down The Cost Of Professional Liability Insurance
Friday, January 8th, 2010Most environmental consulting and A/E firms are carefully evaluating their overhead items to reduce their costs. Professional Liability insurance premiums and the variable costs associated with deductible obligations (post loss) are usually two of the larger single line items after rent, payroll, and health insurance.
The costs associated with professional liability insurance are greatly influenced by how you and your firm are presented during the application process.
It is vital to realize that subtle clarifications or changes can significantly affect costs.
Below are some of the ways in which we help our clients better describe themselves to PL underwriters during the application process.
1. Clearly identify what you do with appropriate percentages. Seemingly simple, but it is important to be accurate:
Architects may think they would describe their work as completely architectural, but they often provide specifications classified as Interior Design services which yield significantly lower costs due to the lower-rated service type.
A civil or structural engineer involved in bridge design and inspection is classified under “Bridge Design” as one of the highest-rated service types. Perhaps, some of these services can be described as other service types such as “Highway Design” and there are instances of inspections that can be classified as “reports/opinions” (both alternate classifications are much lower-rated than Bridge Design).
2. Clearly identify your direct reimbursibles (DRs). Travel, per diem, reproduction costs, mileage charges, etc., are considered DRs (although sub-consultant pass-throughs are not). The industry standard is 3% to 6% for DRs (some engineers engaged in Department of Transportation work will have DRs higher than 10%). Clearly identifying those costs should reduce your ratable base (and, correspondingly, your premiums) by the same percentage. I have quite a few clients who will say that they do not track these costs because they don’t like to “nickel and dime” their clients. They charge a fixed fee, or their rate contemplates these costs. OK. Fine. However, you still can include a “best guess estimate” of what the DRs will be as a percentage of your gross. For example, a $30,000 premium that does not take into account DRs of 6% results in overpayments of $1,800 annually. This tip alone covers the cost of your The Zweig Letter subscription.
3. Make sure to identify your abandoned projects; most architect and engineering firms over the past year and a half have provided design services for projects that will never be completed. Loss of funding, changes in plans, sale of undeveloped property, and bankruptcy can all cause projects to be abandoned. There are insurance carriers out there that will require their clients to list abandoned projects and exclude coverage for claims related to them. I would warn against this because it is still possible for a law suit to occur even if the project does not go forward. Other insurance carriers will give you the opportunity to identify the revenue associated with your abandoned projects and remove them from your “ratable revenue” to yield lower costs.
Timothy Esler, CPCU, is a Principal with Fenner & Esler Insurance Agency, a boutique insurance brokerage and risk management organization representing architects and engineers countrywide. Tim’s complete original articles are published in The Zweig Letter.