Measures To Cut Professional Liability Insurance Costs

Written By: Tim Esler on December 25, 2009 63 Comments

The majority of architect, engineer, and environmental consulting firms are looking closely at their overhead with the intent of cutting costs. After rent, payroll, and health insurance, professional liability insurance premiums as well as the variable costs included with deductible obligations (post loss) are the larger single line items.

The costs associated with professional liability insurance are greatly influenced by how you and your firm are presented during the application process.

However, you should realize that this process is a “beauty pageant,” where subtle changes or clarifications can have material impacts on costs- and, of course, any savings is pure profit.

A few points we use to help our clients better describe themselves to underwriters during the professional liability application process are listed below:

1. Make a clear outline of how you handle appropriate percentages. Although this may appear a simple task, but clarifying various elements of your service might reward you with substantial savings:

An architect might describe his work as 100% architectural. However, architects often make specifications that are classified as Interior Design services (which yields much lower costs as it is a lower rated service type). Client advocacy services, owners’ representatives, and public advocacy services are all provided by architects, but do not necessarily involve the service of architectural design.

Engineer- Let’s say that you are a civil/structural engineer engaged in bridge design/inspection. “Bridge Design” is viewed as a high-rated service type (in fact one of the highest). Are you really doing ALL bridge design? Or, are you engaged in the design of the approaches as well? Can some of those services be described as “highway design?” What about inspections? Certainly those are considered “reports/opinions.” (highway design and reports/opinions receive a much lower rate factor than does bridge design.)

2. It’s important to clearly illustrate your direct reimbursibles. Reproduction costs, travel, per diem, etc. are all direct reimbursibles (DRs). 3% – 6% is the industry standard for DRs, and engineers working with the Department of Transportation can have higher than 10%. Identifying these costs will reduce your ratable base and corresponding premiums. Many of my clients do not track these costs because they don’t want to seem cheap to their clients, which is OK, however, you can still give an estimate of what percentage of your gross these DRs make up.

3. Identify any abandoned projects. There are a plethora of reasons for abandoned projects including loss of developer funding, changes in plans, sale of the undeveloped property, and bankruptcy among others. Beware of carriers that require you to “list” abandoned projects and exclude coverage for related claims. Although unlikely, it is always possible to get sued even if the project never goes forward. Instead, opt for an insurance carrier that allows for you to identify any associated revenue and remove it 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.

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