Everything has its limits and insurance is no exception. Architects, engineers and other design professionals must navigate some particularly dangerous risks when it comes to choosing the limits of their professional liability insurance. Without adequate insurance limits, you risk being underinsured, which is a danger not only to yourself, but also to clients and projects.
Whether you are shopping for coverage, reviewing your policy documents or accessing your insurance, it’s important to know what your limits are and what that means for your business. This allows you to enter into relationships with clients and partners confident that you are managing your risk well.
Here’s what to know.
What an Insurance Limit Is and Why It Matters
All insurance policies come with limits and it’s important to know what they are. In general, an insurance policy limit refers to the maximum amount of money that an insurer will pay out as specified under the terms of an insurance policy.
Most insurance policies come with several different kinds of limits. The difference between these limits can be significant, so it’s important to understand each type.
Per-Claim vs. Aggregate Limits
Per-claim and aggregate limits are the first limits you’ll want to get to know.
- A per-claim limit, as the name suggests, refers to a limit that applies for a single covered loss event under the policy.
- An aggregate limit, common to most types of policies, sets the maximum amount payable for all claims during a policy period, which is usually a period of a year.
Per-claim and aggregate limits are typically paired together. For instance, you might see a policy that lists limits of $1,000,000/$2,500,000.
This means that the per-claim limit provides up to $1,000,000 of coverage per incident while the aggregate limit provides up to $2,500,000 of coverage for all claims for that year.
Becoming more knowledgeable about how insurance limits work is helpful when you’re reviewing your coverage options. At a glance, limits can tell you a summary of what kind of coverage you’ll have and how much you’re covered for.
What Happens If You Exceed Your Limits
Even when you know the limits of your insurance policy, there’s still a danger you could find yourself without adequate coverage for a claim. This can happen if you exceed your limit, which is easier to do than you’d think, in part because of how limits work.
Here are three examples:
1. Exceeding Your Per-Claim Limit
Imagine that a mistake in your work requires part of a parking garage to be demolished and rebuilt at a cost of $1,200,000. However, your policy has a per-claim limit of $1,000,000.
In this case, you would’ve exceeded your limit by $200,000 and could face a lawsuit for that amount that puts your business assets at risk and drags the client and additional stakeholders into litigation.
2. Exceeding Your Aggregate Limit
Or imagine that you have three claims in the same year from three different projects. For simplicity’s sake, let’s say each claim totaled $900,000 and your coverage limits are $1,000,000/$2,500,000.
Your insurance would’ve paid the first two claims with no problem, since both are under your $1,000,000 per-claim limit. However, you receive a phone call about the third claim. Your insurer tells you it will be able to cover the first $700,000 of the claim, but you will have no coverage for remaining $200,000 that has exceeded your aggregate limit for the year.
While all of your claims would’ve been within your policy’s per-claim limit, your aggregate limit would’ve been exhausted by the number of claims you experienced in the same policy period.
In this case, you would likely find yourself back in court, with the aggrieved party bringing a lawsuit against you and potentially your client and other stakeholders over the remaining $200,000 not covered by your insurance.
3. Exceeding Your Eroding Limit
Lastly, imagine that a difficult client brings a spurious lawsuit against you claiming a loss of $5,000,000. You have ample evidence that your work was impeccable and that no error was made, but with hypothetical limits of $1,000,000/$2,500,000, you have little option but to fight the claim in court.
After a long and difficult legal battle, you, your insurer and your attorneys agree to pay a settlement for $500,000 to end the matter. However, the legal costs of your defense total $600,000, meaning your total costs of $1,100,000 for the incident have exceeded your $1,000,000 per-claim limit by $100,000. While the settlement and defense costs separately would have fallen within your limits, together they exceeded it.
In this case, you may have to pay the difference out of your pocket, negotiate with your attorneys for lower fees, or face legal action from your attorneys as they try to collect their full fees.
Why Your Limits May Not Be High Enough
In professional liability matters, a legal defense, judgement and settlement all related to the same matter are considered to be part of a single claim. This can introduce added risk, in that the total cost of any claim matter may not be knowable in advance.
This danger is called an eroding limit, because the full limits of your policy are eroded by costs that can accumulate as you defend yourself legally against a claim.
Defending design professionals against claims is often costly, due to the cost of hiring experts, the lengthy discovery court process and the involvement of multiple parties to the lawsuit.
Legal costs routinely rise into the six figures when defending a design professional against a claim of professional negligence. Judgements and settlements are also high in the field, as remedying a mistake may mean demolishing and rebuilding a whole structure.
How to Determine Your Current Policy Limits
With the risk that low limits can introduce into your design business, it’s very important to know what your current limits are on your existing policy.
Here’s what to check on your insurance policy:
- Review the first page of your policy called the declarations page. This is a summary of your entire policy document.
- Locate your limits. Limits will be listed on the declarations page as a per-claim limit dollar amount followed by an aggregate limit dollar amount.
- Note the specific individual, corporate or group entities covered by the policy and any difference in the breadth of coverage or limits extended to each.
- Review your policy document. Check for key coverage, exclusions and definitions of terms.
- Read through the entire insurance agreement. The policy and its endorsements represent the broadest area of coverage.
- Check for exclusions. Exclusions to coverage represent situations under which coverage will not apply.
- Note any exceptions to the exclusions. Occasionally, there are exceptions to exclusions outlined in their own policy section.
- Review references to other sections as they appear within the document to gain a better understanding of the full extent of your coverage.
What to Do If Your Limits Are Too Low
Becoming knowledgeable about your insurance limits helps you make smarter risk management decisions. Limits give you a bird’s eye view of the insurance coverage you have and the risk you still shoulder.
If you discover that your insurance limits are too low, it’s best to take immediate action. Update your coverage to address the professional risks you face, or consider adding excess liability coverage that can be accessed if you exhaust your regular limits.
Adequate insurance protection is a must when you’re an architect, engineer or design professional. At Lockton Affinity, we understand the needs of design professionals like you. Our insurance experts can help you find coverage and limits tailored to your business needs.