First of all, congratulations! Getting awarded a large project is both exciting and great for the bottom line; however, with larger projects come larger risks. More often than not, large projects come with a request for high limits on your firm’s professional liability policy. If your firm does not carry the requested limit, you will need to decide how best to satisfy the requirements of the contract. As always, the first thing you should do is contact your broker. Every contract and project is different, but we can help you understand the risk and choose the best solution.
When it comes to obtaining higher limits you have three main options: (1) increase your current professional liability limits across the board; (2) purchase a Project Specific Policy; or (3) have your carrier endorse the current professional liability policy to include a specific excess limit for the project/job/client. In some instances option 1 may be the best fit. If your firm is entering a new area of practice or taking on larger jobs more frequently, it might make sense to carry a higher limit. Typically though, your firm carries adequate limits for its work, and simply needs a higher limit for a one-time project. In this instance you will need to decide what the best solution is between a project specific policy and the specific excess limit endorsement. There are pros and cons to both, so let’s discuss which one is right for you.
Project Specific Policy
A project specific policy provides you a dedicated limit and deductible solely for the work done on said project. The policy is typically purchased at the beginning of the project and maintained through construction, plus an additional three to ten years after completion. You firm maintains its separate professional liability policy, and the new project policy sits on its own.
Some of the advantages of a project specific policy include: non-cancelable coverage, single source for payment or handling of any claims, and ability to insure or indemnify multiple parties.
No approach is without disadvantages, and some of the things to keep in mind are: higher costs, quality of the project policy coverage, and the issue of primary coverage.
When should you consider a project specific policy? While these types of policies can be used for projects of any size and type, they are best suited for projects with a large increase in risk. That risk can be due to the size of the project, the complexity, the length of schedule, or an unusual risk factor. In the industry, these policies are much more common on projects with construction values over $25 million.
Specific Excess Limit
Most insurers in the professional liability arena offer a specific excess limit by endorsement. It can be referred to as a Specific Project Excess Limit (SPX), a Specific Job Excess Limit (SJX), a Specific Additional Limit Endorsement (SALE), or even a Specific Client Excess Limit (SCX). Whatever it is called, the premise is the same. You are endorsing the firm’s current professional liability policy to provide a higher limit for a specific client, job, or project.
Some advantages to a specific excess limit are: the cost is cheaper compared to a project policy, you maintain continuity of carrier, and the ease of setting the endorsement up.
The disadvantages for this approach include: a need to renew the endorsement every year (even after the project is completed), the possible dilution of the original limit from a separate claim, or the possibility that adequate limits are not available.
You should consider the specific excess limit endorsement for a smaller project, typically with construction values around $10 million. Additional considerations include: work for a repeat client, the amount of time you will need a policy in place, and potential claims not associated with the specific project.
Your Broker can Help
The decision can be complex and often stressful if you aren’t sure what is best for the firm. The right broker can help you identify and manage this risk. After all, your firm secured a large project by doing what it does best, so let your broker do what they do best. If your firm was just awarded a large project and you aren’t sure what to do next, drop the architects and engineers team at Risk Strategies a note and we’ll be happy to help – aepro@risk-strategies.com.