Savvy budgeting and careful consideration of any new expenses are must-haves for any business owner who wants to expand and grow her company. However, every business owner knows that there is a fine line between being too stingy with your money thus preventing necessary expenses that help the business expand; and being too free with your money and simply not having enough of it left for necessities.
A considerable expense should be met with criticism, of course, but also needs to be undertaken without fear when a situation calls for it. One of those expenses is your business insurance policies, and more specifically an engineer Professional Liability policy.
This is undoubtedly one of the most critical policies to have for anybody that provides professional advice, including engineering consultants. In fact, many engineering specialties work with sensitive and expensive materials (chemical or biotech engineers, for examples) or with massive projects that cost millions of dollars or affect many lives (such as structural or civil engineers).
The expense that a Professional Liability policy will cost you, will be worth it if the unthinkable happens and you are hit with a massive lawsuit asking to compensate your client for damages your actions caused.
But wait, let’s back up a little. Below, we’ve provided some basic information about what the Professional Liability policy covers and why you should have it (for more in-depth information, please refer to our previous articles on these topics). Our main topic of discussion, however, will be the question of the cost of such a policy.
How much does it cost? What factors affect the premium calculations? And of course, the question that every savvy business owner asks – how can I reduce the total cost of the policy?
What is Professional Liability Insurance?
A Professional Liability Insurance policy (also called an Errors and Omissions or an E&O policy) is designed to protect those firms that specialize in giving professional advice or providing a specialized service from the financial consequences of professional wrongdoing and thus a lawsuit. Any occupational exposure is expressly excluded under your standard Business Liability policy, creating a gap in coverage that needs to be filled. If your firm is sued due to a professional wrongdoing, the E&O policy will cover the cost to defend you in court as well as any awards, settlements, or judgments against you. Some policies even cover punitive damage (this is not a standard provision so please double check with your insurance agent).
Why you need Professional Liability Insurance?
Even if you are the best engineer this country has ever seen, you are still not immune to making mistakes. Whether due to negligence, miscommunication, or an error in calculations, many mistakes come with dire consequences.
A wrong calculation could cause a bridge to collapse, causing hundreds of thousands of dollars in damage (if you are lucky!). A failed inspection can cause the contractor to order wrong materials, causing a delay in construction and possibly having to tear down part of the project and rebuild. A miscommunication with a client regarding changes to the scope of work can lead to an upset client that feels he has been taken advantage of. These and many other situations can lead to a lawsuit.
The engineers Professional Liability policy will give you peace of mind that your business is protected in case of a lawsuit. In that case, you will not be facing the necessity to come up with hundreds of thousands of dollars to fight the lawsuit. You will have your insurance policy do that for you.
Factors that determine the cost
Our main topic of discussion in this article is the cost that you might expect to pay for your engineer E&O insurance policy. Unfortunately, it is impossible to predict your total premium without running all the numbers through the rating system, taking into account many additional non-quantifiable factors that will either reduce your premium or add on to it.
No two Professional Liability policies are the same, and no two premiums will be identical, simply because no two companies are identical. On average, an engineer’s professional liability policy starts at around $1,500 in annual premium; however, this number is not an accurate indication of what your premium might be. As a rule of thumb, any factor that increases the claim potential will result in a rate increase or in severe cases, even declination to provide coverage.
- Specialty – Just as some professions are inherently riskier than others from an insurance standpoint, so are the different engineering specialties. With over ten different specializations and sub-specialization, the degrees of risk vary accordingly. A hardware engineer will likely be considered a less risky specialty than a structural engineer.
- Company Size – Sales – The total sales that your company turns over in a year (or projected sales if you are new) is a major factor in determining your annual premium. Bigger sales mean that the company either undertakes larger projects or has more projects by volume. Both of these situations contribute to either a larger lawsuit or a higher risk of being sued. It’s also important to note that the carrier will also take into account the average size of your contract as it directly correlates with the size of the potential lawsuit.
- Company Size – Staff – Another factor also relates to the size of your company, but this time we are referring how many employees you have, specifically other consultants. A company with five consultants undertaking projects will be a much riskier insured than a one-person shop. Often these two factors go hand in hand as the more consultants you employ that larger your overall sales are.
- Claim History – This cost factor can definitely make or break your annual premium. In very severe cases where the claims have been too frequent or too severe, the insurance carrier might decline to quote coverage because it’s simply too risky. When you are submitting your application for a quote, the first thing the underwriter will ask for along with the basic information is your claim history.
If you have no claims on your record, great – nothing to worry about. However, if you do, it’s essential to prepare an explanation of what happened, what contributed to this lawsuit and what steps were undertaken to avoid a similar situation in the future. This last step is extremely important as that shows the underwriter what were the company’s takeaways from the situation. After all, if no steps were taken to avoid the same thing happening, it is likely to happen again.
How to reduce the cost?
There are a few ways to try and reduce your annual premium, however, please be aware that in doing so you will either sacrifice your coverage by adding exclusions or reducing your total coverage limit or increase your deductible thus increasing the amount you have to pay before the coverage kicks in.
Risk Management Program – An effective risk management program can help you convince your underwriter to consider your company as a lower risk and provide you with additional discounts. The RMP identifies risks and develops standardized procedures to address and mitigate those risks. It is an effective strategy in reducing the likelihood of a lawsuit as all employees are trained in the same way and know exactly how to respond to diffuse a tricky situation and catch possible mistakes.
The role of the Engineer’s Professional Liability insurance in protecting your business from the financial fallout of a lawsuit cannot be underestimated. While it is tempting to resist adding yet another expense to your balance sheet, the benefits such policy provides far outweigh the costs.
Even though we can not tell you how much exactly your policy is going to cost, we hope that the information that we provided regarding the factors that affect your annual premium and the ways that you can try and reduce your overall cost, will help you in knowing what to expect.