At The Whitehorn Financial Group, we sell a lot of insurance, but we're really in the business of giving advice. We focus on just one type of client: architects and engineers–the so-called design professionals.

The core of our market consists of design-professional firms ranging in size from 10 to 350 employees. For the most part, our clients are involved in traditional projects–i.e., preparing designs for buildings, roads and highways. We represent about 220 such clients in New York, New Jersey and eastern Pennsylvania. Collectively, they pay us about $6.5 million in premium. Architects and engineers professional liability insurance is the only P&C product we sell. Our retention rate for this product consistently remains in the 96% range. We also market various life insurance, retirement and financial services products, which account for about 30% of our overall revenue. (See sidebar.)

I'm the agency's sole producer. I have two other employees, both of whom are critical to the success of our business. One submits and markets applications for architects and engineers professional liability insurance, researches claim issues, helps answer the phone and fulfills requests for certificates of insurance–a major job. More important than anything else, she ensures that we address all service requests as quickly as possible–typically the same day they are received. Our other employee performs pretty much the same service in regard to our life insurance and financial services practice–and also helps out with the torrent of professional liability certificate requests.

The risks of contracts

Some of our clients are quite successful. They may have in-house counsel and pretty much everything else they need to handle their own risk management needs. But for most of our clients, we are their risk management department.

For design professionals, risk management starts with contracts, which articulate who is responsible for what. The majority of architects attempt to use standard contracts drafted by the American Institute of Architects (or, in the case of engineers, The Engineers Joint Contracts Document Committee documents). Anything in these contracts is covered by their professional liability insurance. (However, even with standardized contracts, there are times when it is prudent to modify the their language to further protect the professional from potential exposure.) The problem, of course, is that many project owners want to use their own contracts. Those of governmental agencies and some private sector clients can be troublesome. Quite often they want architects (or engineers) to certify that everything in their contracts will be covered by their insurance. That's rarely possible. A governmental agency's contract may go so far as to require a design professional to, in essence, guarantee a perfect design or be responsible for all claims arising out of a project. All architects and engineers professional liability policies, however, specifically exclude coverage for guarantees and warranties, and provide coverage only to the extent that claims arise from the professional's negligence.

We try to resolve such problems quickly and diplomatically. On one hand, we never want to dictate what a client should do; that's not our role. But on the other hand, we can't certify to the architect or the governmental agency that coverage exists where it doesn't. The professional and owner clearly must negotiate to resolve their differences.

There are times, especially when the project owner is a governmental agency, that we speak directly with the owner. Otherwise, our client easily can get the runaround. The owner's point person may be an employee who simply is told to reject any requests to alter the contract. In such instances, when we ultimately have spoken to someone with authority, we have been quite successful at persuading him or her to drop the worst language–guarantees, etc.–from the contract, or we receive authority to modify a governmental agency's certificate of insurance form. After all, from a project owner's point of view, it makes little sense to require architects and engineers to assume exposures that no insurance policy will cover. Such exposures are best treated in some other manner. Some governmental agencies, however, absolutely demand that design professionals agree to their non-amended contracts and use their certificate forms.

Design professionals are busy people. Therefore, we may not find out about a contract until the 11th hour, so we have to be prepared to respond at a moment's notice. At times, our review needs to provide a legal perspective. Consequently, we have an attorney on retainer to whom we, or our clients, can turn when necessary. The attorney also handles other matters for our clients, such as licensing issues for design professionals entering new states or building-code research. This person even counsels our clients regarding contract termination with project owners.

The risks of project implementation

Besides assisting with contract negotiations, we help our clients resolve problems that come up during project implementation. In a typical project, you have an owner who hires both an architect to draw up plans and a general contractor to turn them into reality. The general contractor often hires many subcontractors. As the various parties interact and carry out their responsibilities, things sometimes go wrong. When that happens, our responsibility is to help our client develop a strategy to address the owner's construction problem, while making certain that their problem does not turn into our problem.

For instance, one of our clients, an architect, recently designed a building whose basement subsequently developed a leak. As it turned out, the problem arose from the geotechnical engineer hired directly by the project owner. Fortunately, our client contractually had the right to rely upon the accuracy of owner-supplied information. That gave our client the ability to negotiate an appropriate outcome to the problem, rather than accept sole responsibility.

As the above example illustrates, our job is, first, to help our clients identify and understand their responsibilities and, second, help them respond effectively to concerns raised by other parties. More often than not, it's a matter of giving our clients the conviction to push back at parties that seek to transfer their problems to us.

We try to give our clients tools to help them negotiate their client relationships while minimizing their exposure. Condominiums, for example, are challenging projects for design professionals because of their adverse claim experience. If there is an incident, the design professional likely will face not just one lawsuit from the developer or condominium association, but more likely multiple lawsuits from individual unit owners. A big problem with many condominiums is that they are not properly maintained. So we advise clients who design condominiums to negotiate language into the project contract requiring the developer to establish a condominium association, mandate the use of an operation and maintenance manual, and limit the association's ability to assert a claim against a professional for the association's failure to adhere to the manual. Not that such a step will necessarily keep a design professional out of a claim; but if there is one, it will enable the firm to negotiate from a position of strength.

We also advise clients about the exposures posed by hiring subconsultants. Generally, it is in our clients' interest to have project owners hire all the subs directly. However, many project owners–including all governmental agencies–insist on contracting with a single design professional firm, which then will be responsible for procuring the services of all other necessary architects or engineers.

When our clients encounter such a project owner, we advise them to reply, “We understand you want a turnkey solution, but there are additional risks and costs associated with that.” As long as our clients recognize the issues up front, they can respond to them appropriately. Our job is to make sure they understand and anticipate those issues before a problem arises, not after. Architectural firms generally are aware of the issues raised by subconsultants. Others–e.g., landscape architects–may not be. Given the growing trend for landscape firms to lead projects, it is our responsibility to advise our clients of its implications. For starters, their own professional liability insurance premiums will increase to reflect their potential vicarious liability for the subconsultants. Even traditional building architects are not always aware of what they can get themselves into by working as lead design professionals. In fact, some subconsultants–e.g., geotechnical engineers and structural engineers–have exposures that have led to significant claims against leads firm, just because of the additional responsibility they have to owners as the prime consultants.

Analyzing coverage

Naturally, we arrange customized coverage for clients–a process that actually starts while they are still prospects. During my initial meeting with them, I ask to see their current policies and often find errors or coverage gaps in them. For instance, you'd be surprised how often a predecessor name of the insured is left off the policy. Typically, that happens because the firm has changed its name since its coverage initially was written, but the change was not picked up (or was lost) at some point in time. Or it may be that the firm has added a second “doing business as” name that's not listed on the policy. It is critically important to periodically revisit this issue. Sometimes we receive correspondence from a client on which a new business name appears. We immediately contact the client to find out about the name and subsequently amend coverage accordingly.

When examining prospects' policies, I also look at retroactive dates. Perhaps a design professional firm that's been around for 15 years did business without professional liability insurance during its first three years of existence. Usually a professional liability policy's retroactive date is the date that coverage was first purchased. But in a case like this, an insurer may be willing to reset the retroactive date to the date on which the firm started to do business–often at no additional cost.

Sometimes I find exclusions in policies that create serious coverage gaps. For instance, I encountered a design professional that derived 30% of its business from bridge inspections. Its current professional liability policy had a pollution exclusion. Lead-based paint is on every bridge–and the paint is considered a pollutant. Work on a bridge easily can lead to a release of lead-based paint into the air. Should a nearby resident allege he or she was injured as a result of being exposed to it, the inspector likely would be dragged into the case–and have no coverage because of the pollution exclusion.

Another problematic exclusion in some policies bars bodily-injury claims arising out of construction inspection. Any design-professional firm that offers construction inspection or construction management services needs to confirm that coverage exists–or find another carrier.

In addition to the current policy, I like to see a prospect's prior-year application. By examining it, I can tell, literally within a few minutes, whether I can help the prospect. For instance, I recently called on a large design professional firm that was having trouble obtaining coverage because of prior claims. I quickly saw that they were making things even more difficult by describing themselves on the applications as, in part, a roofing consultant. As it turned out, they derived only 3% of their business from roof work, so I advised them to leave that out of their description. The firm's work as a roofing consultant would be disclosed elsewhere, in the section of the app that asks architects and engineers for a detailed breakdown of the sources of their fees. But underwriters are human, and they can be swayed by initial impressions they get from reading a design professional's description of its operations. Why not make that impression as favorable as possible?

To give you another example, civil engineers shouldn't describe themselves as “building envelope consultants,” if that is a small part of their business. Such engineers help identify the source of water leaks and design ways to eliminate them. That kind of work makes underwriters nervous. While many civil engineers do some such consulting, they certainly shouldn't emphasize it in their descriptions.

Design professionals that have adverse claim experience need to be even more sensitive when describing each claim. Because of the nature of construction projects, architects and engineers sometimes get dragged into claims even if they really did nothing wrong. When underwriters look at loss runs, they usually only see numbers, but don't necessarily understand the dynamics of a claim or what lessons were learned from it. Consequently, we describe the details of all large losses in a narrative. For example, a design professional may sue a client (sometimes more than once) to collect fees owed on a large project. The project owner may respond by suing the design professional for malpractice, triggering coverage. So one thing an underwriter may ask is, “What did this firm learn from this experience?” In the narrative, we might explain that the client has learned to never let its receivables get out of hand, to negotiate the right to terminate a contract when a client doesn't pay (while waiving the right to assert a delay claim), and to evaluate the potential litigiousness of project owners prior to accepting a project.

State of the market

We prefer to work with markets that have demonstrated a commitment to design professionals, rather than those that either are new to the business or that appear to be undercapitalized. Among those we use are CNA/Victor O. Schinnerer, Lexington, Zurich, Ace and RA&MCO.
Like the market for liability insurance in general, the market for architects and engineers professional liability insurance is softening. New carriers are entering the field, and premiums are headed down. Consequently, it is important for our clients to understand what they are buying and what the potential coverage implications are. While we always stress value over price, we do so even more now.

For instance, we explain to clients the importance of selecting or sticking with a carrier that has shown a willingness to step forward in the event of a borderline claim. If the odds that a claim will be covered appear remote, some insurers simply deny coverage, or disclaim everything one could possibly think of. Others, however, may at least provide a defense under a reservation of rights letter until it becomes clear whether or not a claim is moving in the direction of coverage. Our preference would be for a carrier to spend $50,000 to $100,000 in legal bills, as opposed to our clients having to defend themselves for 100 cents on the dollar.

As I hope this article has made clear, the key to our success in the architects and engineers market is helping our clients manage their relationships. We don't give them generic information, but rather provide the sort of advice that makes a real difference to their profitability, while giving them the ability to practice with a sense of conviction. Anyone can sell insurance to design professionals, but the agents and brokers who also can offer them in-depth advice are the ones who will earn their respect–and keep their business.