Architects Insuring Architects: An Alliance for Protection

A professional insurer has three primary obligations:

• pay Damages when warranted, up to the limits of the policy;
• provide a Defence to the insured when a claim arises; and
• pay Supplementary Payments including Claims Expenses.
  
  A professional liability insurance policy “indemnifies” or pays on behalf of the insured professional, damages that the professional becomes liable to pay as a result of “an error, omission or negligent act in the provision
  of professional services for others”.
  
  Policy provisions will also include the insurer’s obligations for the provision of a defence to the insured related to a claim covered by the policy and the payment of claims expenses. The costs associated with provision of a defence and related claims expenses are a major aspect
  of the insurer’s role. However, how defence is provided and funded will vary between insurers, and can have a major impact on the funds available for payment as damages.
  
  For example, where defence costs are included in claim limits, the expenditures for lawyers and experts will reduce the funds eventually available for payment of damages. This will be an issue where the available claim limit is eroded by payment of defence costs leaving insufficient funds to pay the damages.

The Named Insured on a professional liability insurance policy will be the name of the Holder of a Certificate of Insurance of Practice. This may be an individual architect, a partnership or a corporation.

Individual architects who are current or former employees, partners, directors, officers or shareholders of an insured practice and individuals or personal corporations retained under a personal services agreement will be covered under the firm’s policy for actions taken within the scope of their duties for the Named Insured.

Also included as insured are heirs, executors, administrators and legal representatives of each insured in the event of death or bankruptcy. Refer to the definition of “Insureds” in a Pro-Demnity policy for the complete wording that applies.

Although often used interchangeably, the terms “coverage” and “limits” provided by an insurance policy are not the same.

“Coverage” refers to the circumstances or matters that are covered under the insurance policy, regardless of the “limits”. “Limits” refers to the amount of funds the insurer commits to making available in settlement of damages, where the policy provides “coverage”.

If the matter falls outside the “coverage” provided by the policy, the “limits” will not apply.
Most of the wording in an insurance policy relates to defining “coverage”…what is covered and very important, what is not covered.

Any professional liability insurance policy will include a lengthy list of Exclusions from coverage. For the most part these are consistent to various insurers; however, there will be differences in both the issues addressed and the wordings. Further, regardless of standard or sample wordings, insurers may add Endorsements to any policy to address specific considerations applying to the insured or a project.

Every professional liability insurance policy available to Canadian architects or other design professionals (engineers, interior designers, etc.) will be written on a Claims Made basis. Unlike most other insurance, it is the policy (coverage and limits) in place at the time a claim is made and reported that will apply, rather than the policy that might have been in place at the time the alleged error or negligent act occurred.

This is different from most insurance which is Occurrence based. In an occurrence based regime, it would be the policy in place at the time the error, omission or negligent act occurred that would respond…even if the claim arose after the policy had expired.

Learn more about Claims Made Insurance.

The applicable Policy Period for a firm’s insurance will be one year. At each annual renewal date, a new policy will be purchased by the architectural practice covering the next twelve-month Period of Insurance, sometimes referred to as the Policy Period. The commencement and end dates for the current Period of Insurance will be included on the Declarations Page or an Evidence of Insurance issued by Pro-Demnity.

It is important to recognize that it is the actual policy wordings that will apply in the event of a claim.

Policy wordings describing the coverage and other important features of the Pro-Demnity policies are provided to the Certificate of Practice policyholder upon renewal together with the latest Technical Requirements Schedule.

Pro-Demnity Insurance Company is owned by the Ontario Association of Architects (OAA). The OAA regulates the architectural profession in Ontario and oversees the issuance of Certificates of Architectural Practice, who, in turn, are required to be insured by Pro-Demnity.

The ownership relationship ensures Pro-Demnity has a clear mandate…to provide enhanced professional liability insurance to Ontario’s Certificates of Practice so that architects and the public interest are protected.

Learn more about how this relationship came about in Our History

It is a fundamental obligation of a professional liability insurer to provide a defence for an architect faced with a claim, in accordance with the policy provisions. However, the extent of the defence will be determined by the insurer.

Pro-Demnity’s approach is to provide a vigorous defence to architects facing claims to avoid the misconception that the architects’ insurance program is an assured source of compensation for any problems or additional costs that arise on a project, or that an architect’s insurance is an alternate funding source where project budgets and contingencies are inadequate.

Damages are paid on behalf of architects when the facts establish that negligence of the architect contributed to the loss.

A professional liability insurer has the obligation to provide a defence to its insured as well as to provide funds to pay any damages. Defence costs are a very significant cost to an insurer, often exceeding damages actually assessed against an insured. If an architect is named in a lawsuit, it will be necessary to retain a lawyer to defend the architect even if the allegations against the
architect prove groundless and no damages result.

Since defence costs can run into hundreds of thousands of dollars…or even millions of dollars on a large claim…the impact of the treatment of defence costs can be an important factor. Few architects would have the financial resources to absorb the costs to defend themselves in a significant claim without the protection provided by professional liability insurance.

Pro-Demnity policies, (for any limits), provide defence costs IN ADDITION to the limits for damages. This means that the costs to defend an architect facing a claim do not erode the funds available for payment of any eventual damages assessed against the architect. The exception is claims instituted in a USA jurisdiction where defence costs will be included in the Claim Limits.

This is in contrast with many higher limits policies available from market insurers where defence costs will be INCLUDED in the claim limits. This has the costs to provide a defence for the insured reducing the funds available for eventual damages.

Where an architect purchases excess insurance from another insurer, there is a limit on the amount of defence costs Pro-Demnity will pay. Architects purchasing excess insurance need to arrange for payment of a share of the damages by the excess insurer.

For higher limit policies offered by market insurers it is common to see a claim limit that is also the
aggregate limit. The consequence of this is that one claim may exhaust the firm’s insurance for the balance of the Period of Insurance, leaving nothing available to protect the architect for subsequent claims on the project or on other projects.

In contrast, except for claims instituted in a USA jurisdiction, Pro-Demnity annual practice policies,
regardless of claim limits, will have as standard:

• a Claim Limit;

• a Project Limit for claims on one project in the Period of Insurance (annually) that is twice the
  Claim Limit; and

• an Aggregate Limit for all claims that arise against the firm in the Period of Insurance (annually) that is four times the Claim Limit.

The benefits of the multiple aggregates on the Pro-Demnity policies are that damages paid on one
claim will not eliminate coverage for other claims on the same project, and damages paid for claims on one project, no matter how large, will not eliminate insurance limits for claims that might arise on other projects in the Period of Insurance.

For the Aggregate Limit to be exhausted would require four claims to have generated damages at the full per Claim Limit on at least two projects, or for the full aggregate to be exhausted by an array of claims on multiple projects, all arising in the specific Period of Insurance.

For claims instituted in a USA jurisdiction, the Aggregate Limit will match the Claim Limit.

Under Pro-Demnity’s policies, the insured’s deductible will only apply to damages actually paid. This is in contrast to policies provided by some other insurers where the insured’s deductible will apply to defence costs or to any damages paid.

Further, Pro-Demnity incorporates a disappearing deductible that applies pro rata with damages actually paid up to $250,000. For instance if damages paid on behalf of the architect were $50,000 (20% of $250,000) only 20% of the deducible would apply. Where damages paid are $250,000 or higher, the full deductible will apply.

Where a client requires limits on its project that are higher than the Professional Liability Insurance (PLI) limits the architect currently maintains, an available and popular option is a Project Specific Spike-Up in limits applicable to a single specific project on the architect’s PLI.

For instance, where an architect carries limits of $250,000 per claim, $500,000 maximum for one project, $1,000,000 aggregate for all claims in the Period of Insurance, and a client requires limits of $1,000,000 per claim for its project, an option is a Project Specific Spike-Up for the project.

In this example, the claim limit for the specific project under the architect’s PLI policy would be increased by a “spike-up” to total the required $1,000,000 per claim,

LIMITS: PLI + Spike-Up = Total for the Project
CLAIM
LIMIT: $250,000 + $750,000 = $1,000,000

For purposes of illustration, project maximums and aggregate limits are ignored. Contact Pro-Demnity for additional nformation and options.

Claim Limits applicable to all other work under the PLI policy will remain unchanged.

The additional premium for the “spike-up” is calculated with each annual renewal where the higher limits are required to be maintained, and will vary from year to year depending upon fees earned on the project in the previous year. There is no limit on the duration for maintaining the higher limits except for contractual obligations or where a claim has arisen on the project.

In most instances, the increased premium for one project has proven to be less costly than increasing the firm’s PLI limits. The added premium for the higher limits for the project can be identified at each renewal to facilitate allocation of the added insurance costs to the project or where the client is to reimburse the architect for the added costs.

A variant, a Client Specific Spike-Up feature can apply to projects where a particular client requires higher limits for its projects than the architect purchases for its practice.

Where an architect retains a pollution or hazardous materials consultant, it is recommended that the Pollution option be applied for and the Pollution Questionnaire completed in order that a premium for the increased pollution limits may be provided to the architect.

This will not assure that the architect will have coverage for all claims involving the specific services that are provided by the specialist. The policy wording will prevail in the event of a Claim.

For that reason, any architect considering retaining a designated substances, hazardous materials, pollution or environmental consultant should insist upon the specialist maintaining professional liability insurance coverage applicable to the subject of the investigation.

Further, architects should obtain assurance that the specialist’s policy does NOT include exclusions respecting asbestos, PCB’s or any of the designated substances, hazardous materials, pollutants or environmental hazardous that will be the subject of the specialist’s investigations and recommendations.

This Comparative Chart compares Pro-Demnity’s robust claim structure, against three other types that are available in the marketplace. Differences in Aggregates and Defence Costs can be critical to architects and the public. Pro-Demnity is structured to provide substantial coverage in the event of claims.

It is common for a claim against an architect to include one or more allegations that are not covered by the policy or are specifically excluded from coverage. In other situations, an architect may not have complied with the terms and conditions of its policy in reporting a claim or accepted responsibility for damages without the insurer’s consent, threatening its insurance coverage
for the claim.

In such circumstances, insurers have the right to deny coverage for the claim, leaving the architect without a defence by the insurer or funding for any damages that might be awarded. If the claim were denied, the architect would have to retain a lawyer at its own cost to defend the claim or to contest the insurer’s decision to deny coverage.

Ownership by the OAA and the clarity of its mission means that Pro-Demnity has rarely denied coverage. Instead, where circumstances are unclear whether coverage applies to a specific claim or allegation, a Reservation of Rights letter will be issued, which allows Pro-Demnity to continue investigating and defending the claim on behalf of the architect, while not prejudicing the insurer’s rights.

It is common for insurers to exclude specific types of claims that have proven particularly problematic or have generated large, uneconomic losses for the insurer. Historical examples would be claims related to asbestos, mould or water ingress.

Water ingress is an exclusion to Pro-Demnity’s Professional Liability Insurance Policy, however, Pro-Demnity takes an alternate approach, identifying measures that are to be taken for insurance coverage to apply, through the Technical Requirements Schedule, which forms part of the policy.

In several instances, such as with Ingress of Precipitation, Pro-Demnity policy provisions have filled a gap where adequate standards did not exist or building codes did not adequately address the systems giving rise to the problems and claims.

A unique feature of the Pro-Demnity program is the Retirement from Practice Program that is available to current and former OAA members once they retire or withdraw from practice and are no longer covered under an insurance policy issued to a current holder of a Certificate of Practice.

To qualify, the architect will have maintained Professional Liability Insurance with Pro-Demnity for two or more years, surrendered their Certificate of Practice, and be current respecting any financial obligations to Pro-Demnity.

Coverage goes to the individual architect, and is provided under Policy No. 2. Limits are $250,000 per claim, $500,000 aggregate in the annual Period of Insurance or Policy Period.

At the present time, no further premium is charged. In the event damages are paid, the maximum deductible is $1,000.00 each claim.

Coverage under the Retirement Program is designed to apply for the life of the individual and six years after death for estate resolution purposes. This coverage is a special added benefit to Ontario architects, made possible through the mandatory program.

Learn more about the Retirement from Practice Program.

The Pro-Demnity policies, including standard Endorsements applicable to all policies, are provided directly to the Certificate of Practice Policyholder as the contract for professional liability insurance is between the Insurer and the Insured. The Technical Requirements Schedule, which forms part of the contract of insurance is available on our website for download by architects, project and design teams to help support the architectural firm in managing practice risks.

The Architects Act requires that ALL Ontario architects offering services to the public maintain professional liability insurance, so that the public interest is protected.

The Ontario Association of Architects oversees and administers the Architects Act, assuring that the mandatory insurance is maintained by every Ontario architect offering professional services to the public.

A client is not directly insured by the architect’s professional liability insurance policy.

The architect’s professional liability insurance is available to pay damages to a client or other party
should it be established that the architect was negligent, and the damages claimed resulted from the negligence.

However, the architect is entitled to a defence of the claim and such determinations respecting the architect’s negligence and the amount of damages suffered are subject to due process in accordance with applicable law and procedures.

Some clients seek to be added as a Named Insured on an architect’s professional liability policy.
The architect’s professional liability insurance provides coverage respecting damages arising from errors, omissions or negligent acts “in the provision of professional services to others”. A client is not providing the professional services that are the subject of the insurance. Instead, a client is the “others” who receive the services.

A client is also the entity most likely to pursue damages covered by the architect’s professional liability policy and would therefore have a conflict if it were one of those insured. Accordingly, it is not appropriate to add a client as an insured under an architect’s professional liability insurance policy.

This is different from other types of insurance such as Comprehensive General Liability (CGL) where it may be appropriate and possible to have a client added as an insured on an architect’s CGL policy. An architect should consult its insurance broker if such a request arises.

Renewal of existing annual practice limits is automatic at each renewal date unless the architect fails to complete a renewal application, acts to change its limits or surrenders its Certificate of Practice prior to the renewal date.

Failure to complete the required renewal application needed to assess renewal premium will trigger a notice of pending cancellation of the architect’s Certificate of Practice and Licence.

A client may seek assurance that an architect will maintain its professional liability insurance.
The Architects Act and Regulation require every architect offering professional services to the public to maintain mandatory professional liability insurance with Pro-Demnity Insurance Company, and the OAA enforces the requirement by interlocking the architect’s Certificate
of Practice and Licence with the architect’s insurance.

Neither the architect nor Pro-Demnity can cancel the architect’s insurance except for the architect’s failure to pay any premium, deductible, taxes or levy when due. In such an event, the OAA will be notified and will cancel the architect’s Licence and withdraw the architect’s Certificate of Practice, meaning the architect can no longer provide architectural services to any clients.

The Evidence of Insurance provided by Pro-Demnity Insurance Company includes advice that the policy is non-cancellable by the insurer except for the specific failures noted.

At no point may the architect’s professional liability insurance drop below the mandatory limits prescribed by the Architects Act and Regulation.

When an architect retires from practice and is no longer covered by a current annual practice policy maintained by a Holder of a Certificate of Practice, the Retirement from Practice Program is available subject to the eligibility requirements being met. The Retirement from Practice Program ensures availability of coverage to the retired architect for claims that arise related to his / her
professional services prior to retirement.

A client may seek to receive prior notification of cancellation or changes in the architect’s insurance from the insurer. Pro-Demnity declines to do this for a number of reasons:

• The insurance is non-cancellable by the insurer except for non-payment of any premium,
  deductible, taxes or levy;

• The policies and standard endorsements are the same for all architects, and cannot be amended;

• All architects are treated in an equal manner. No favour or arrangement can be given to one
  architect that is not available to all architects;

• Pro-Demnity has no relationship or obligations to any client, or any other entity than the insured practice, and is unwilling to establish any duty to a client.

Since Pro-Demnity provides Professional Liability Insurance, there is no realistic expectation that Pro-Demnity would be able to identify and notify all of an architect’s clients (past and present) even if it was possible to accommodate clients in this way.

An architect who has not paid its premium, deductible, taxes or levy will receive notice of pending cancellation of its insurance from Pro-Demnity and pending cancellation of its Licence and Certificate of Practice from the OAA. The timelines that apply are determined by the OAA through by-law and cannot be impacted by a client, architect or Pro-Demnity.

Where a client insists on such information, there is no reason why an architect could not agree to inform the client of any notifications received about the looming loss of its insurance and Certificate of Practice. However, there is no action that a client can take to replace the
mandatory insurance from another source. Once advised by the architect the client might opt to advance funds to the architect for the purpose of meeting the outstanding financial obligations to Pro-Demnity. However, such arrangements would be strictly between the architect and its client(s).

Ontario architects are provided with advance notification of pending changes to the Pro-Demnity policies that might restrict coverage, and there is no reason why an architect could not agree to pass such notification onto any client who required it.

Changes in the standard policy wordings that restrict coverage will only come into effect after a notice period, at the time of the architect’s next Professional Liability Insurance renewal. Amendments to standard policy wording that broadens coverage will immediately apply to all existing policies. Changes specific to an individual architect’s policy such as changes in limits, change in deductible, a Project Specific Spike-Up in limits or change in name of the practice will come into effect immediately upon issue of the appropriate endorsement.

Architects determine what claim limits they wish to maintain, based on their own assessment of the needs of their practices, including business and personal considerations. Mandatory minimum limits are established by the Architects Act and Regulation. However, many architects
opt to maintain higher limits above the mandatory requirements based on their own conclusions about the needs of their practice, the size and complexity of projects being undertaken, the inherent risks and ability to manage them in practice among other considerations.

Some clients choose to establish their own insurance limit requirements as a condition of retaining an architect.

Often these limits are higher than architects interested in the client’s project have selected, and there can be concern that the claim limits required by a client appear out of proportion to what is reasonable and realistic considering the fees involved or the size and construction value of the project.

Unfortunately, there is little information available to guide a client or an architect. The issue of what is a “reasonable” limit for any particular project and circumstance will always be open to consideration and discussion. It must also be recognized that some risks that may be covered by a professional liability insurance policy such as claims related to personal injury or economic loss will be unrelated to fees or the size or construction value of a project.

Where project costs including fees are a significant concern, it may appear counter productive for a client to require higher insurance claim limits than the architect already maintains, recognizing that there will be higher premiums to be absorbed by the project budget.

The perceived benefit to a client of requiring a higher claim limit will be to reduce the possibility that insurance proceeds available for damages will be insufficient. As discussed elsewhere, there are other factors that a client should consider that will impact the amounts actually available for damages.

Features of the Ontario architects’ insurance program such as:

• Defence costs in addition to limits for Damages;
• Aggregate limit for one project twice the Claim Limit ; and
• Aggregate limit for all claims four times the Claim Limit;

mean that one maximum limit claim cannot exhaust the available limits for the project and claims on one project will not impact available limits for other projects. If considered by the client, such features of an architect’s insurance might help offset the perceived value and need for higher limits.

Higher claim limits come at a price. Higher premiums must be recovered from the client indirectly through higher fees or directly from the client as a project cost. An offsetting drawback of unrealistically high limits from a client’s perspective is that funds spent on insurance premiums will not be available for other expenditures on the project, including those where the client might benefit from the investment over the life span of the project.