Many Architects and Engineers have been carrying Professional Liability Limits of $1,000,000 each claim with a $2,000,000 annual aggregate for a number of years; but we are seeing an increasing demand for limits of $2,000,000, $3,000,000 or $5,000,000 (and even higher on larger projects). Seldom are the requests made near the policy inception / expiration date when we can shop for the most competitive terms for the increased limits. And a carrier that is competitive at one level of coverage is not necessarily as competitive at higher limits.
The increase can be implemented in one of several ways! The “practice” limit can be increased, meaning that it applies to all the projects undertaken by the firm; but this tends to be a more expensive approach since the higher rate is applied to the firm’s entire annual ratable fees. A less expensive approach may be for the limit to apply to a specific project or client (if multiple projects are being undertaken for one client) since the higher rate is only applied to those fees, which are presumably a small per cent of the firm’s overall fees. If the project represents a significant portion of the firm’s annual fees, the cost differential may be very small, in which case the “practice” increase does make more sense.
Premiums for increases in the “practice” limit will be pro-rated from the effective date of the increase to the policy expiration date, by all carriers. Premiums related to project / client-specific increases may be pro-rated by some carriers while other carriers may make a “flat” charge, meaning that the entire premium is earned without regard to the effective date of the increase i.e. a $5,000 premium charge with eleven (11) months remaining in the policy period would be the same even though only three (3) months remained. Where a “flat” charge is not pro-rated, an increase late in the policy term might be more economical if handled on a “practice” basis for the remainder of that policy term and changed to a project / client-specific increase at the subsequent renewal.
A major consideration to be negotiated is how long the A/E will be required to maintain the higher limit and how will he be compensated for it? Since premiums cannot be guaranteed beyond the expiration date of the current policy, estimates of future costs need to be carefully evaluated. Ideally, the contract should allow the decision to be made by the Owner on a year-to-year basis as renewal premiums are received. When the Owner is no longer interested in paying for the increased coverage, he can authorize the Design Professional to let coverage revert to its original level. In the long run this saves the owner money and the architect/engineer and their broker are not put in the position of guesstimating premiums.