Implications of changing limits of liability on my architecture/engineering firm’s professional liability policy. Changing your Professional Liability (Errors & Omissions) limits directly impacts your premiums, contractual eligibility, and out-of-pocket exposure. Increasing limits raises your premium but lets you bid on larger projects; decreasing limits lowers costs but increases your personal financial risk in a lawsuit.
- If You Increase Your Limits
- Expanded Contract Eligibility: Many commercial developers and public entities require specific, high limits (e.g., $2M or $5M per claim). Raising your limits allows you to bid on larger, more lucrative projects.
- Higher Premiums: One of the factors insurance carriers calculate risk based on your limits. A higher coverage cap generally results in increased annual practice premiums.
- Broader Risk Protection: If your firm has a design error or omission claim, you have more financial cushion to cover defense costs, settlements, or judgments before your personal or firm assets are touched.
- Alternative Options: If you only need higher limits for a single large project, you can ask your insurance agent for a Specific Job Excess (SJX) policy or a project-specific endorsement, rather than raising your entire firm-wide limit.
- If You Decrease Your Limits
- Lower Premiums: Your operational overhead will drop, freeing up cash flow.
- Contract Breaches: If you are actively working on projects, lowering your limits may violate the insurance requirements stipulated in your signed client contracts, putting you in breach of contract. Additionally review past contracts that may have a requirement to provide the higher limits for a specific period of time.
- Reduced Financial Protection: If a costly claim occurs, a lower policy cap means you are personally or corporately liable for any damages that exceed your limit.
- Retroactive Claims: Because professional liability is claims-made, you must maintain coverage limits that were active when an error allegedly occurred, not just the limits you carry today.
Key Considerations
- “Claims-Made” Trigger: Because most professional liability insurance for architects operates on a “claims-made” basis, changing carriers or lowering limits can affect past work. You must ensure continuous coverage and maintain “prior acts” coverage to protect against lawsuits from past projects.
- Statute of Repose: You may need to carry these limits for several years after a project is completed, often mirroring the state’s statute of repose (check with each State that your firm has projects).
Check the A/E Pronet resource page for additional information about limits of liability. https://aepronet.org/resources/.
If your firm has any questions about professional liability policy limits of liability please call, or email, your Professional Underwriter agent for assistance.