Measures To Cut Professional Liability Insurance Costs

Most 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.

Professional Liability insurance costs are largely influenced by the way in which you or your firm is presented during the Professional Liability application process.

It’s important to understand that this process is a sort of beauty pageant, and small changes can have substantial influence on costs.

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:

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. Clearly identify your abandoned projects. Over the past year-and-a-half, it would be difficult to find an A/E firm that did not provide design services on a project that will never be built. Projects have been abandoned due to, among other things, loss of funding by developers, changes in plans or projects, the sale of undeveloped property, and bankruptcy filings. Some carriers will make you “list” abandoned projects and then exclude coverage for claims arising from them. Be careful of this. I would not advocate ever placing such a list on a policy for one of my clients. It may be unlikely, but it’s still possible for you to be sued even if the project does not go forward. Other carriers, however, allow you to identify the revenue associated with abandoned projects and remove that revenue from your “ratable revenue,” yielding 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.