Insurance Does Not Prevent Professional Liability - It Pays for the Defense and Any Judgment If It Arises
Architecture firms carry professional liability insurance (commonly called Errors and Omissions or E&O insurance) because their professional services create the possibility of claims - allegations that the architect's design, judgment, or documentation was deficient in a way that caused loss to the client or to third parties. Professional liability insurance pays the cost of defending against these claims and, if a claim results in a judgment or settlement, pays that judgment or settlement up to the policy limit. Without insurance, these costs fall on the firm's principals and partners personally. Understanding how professional liability insurance works, what it covers, and what it does not cover is a practice management knowledge area tested on the ARE PcM exam.
Professional Liability Insurance (E&O)
Professional liability insurance covers claims arising from the architect's errors, omissions, or negligent acts in the performance of professional services. Key characteristics: Claims-made policy: Most professional liability policies are "claims-made" rather than "occurrence" policies. A claims-made policy covers claims made during the policy period, regardless of when the alleged error occurred. This means: when an architect changes insurers, the prior acts coverage (retroactive date) in the new policy and the "tail" or extended reporting period of the old policy are important - gaps can leave claims uninsured. Policy limits: Typically expressed as a per-claim limit and an aggregate limit (e.g., $1M per claim / $2M aggregate). The aggregate limit is the maximum the insurer pays in total during the policy period. Deductible: The amount the firm pays before insurance responds; common deductibles for small firms are $10,000-$25,000 per claim.
General Liability Insurance (CGL)
Commercial General Liability (CGL) insurance covers bodily injury and property damage claims arising from the firm's premises or operations - not from professional services. CGL covers: a visitor injured in the firm's office; property damage caused by the firm's employees at a project site (not caused by professional errors - physical accidents). CGL does not cover professional liability claims. Owners typically require architects to carry both CGL and professional liability insurance.
Workers' Compensation
Workers' compensation insurance is required by state law for firms with employees. It covers employees injured on the job, providing medical benefits and wage replacement regardless of fault. The employer (the architecture firm) pays the workers' compensation premium; the rate is based on payroll and the firm's claim history (Experience Modification Rate - EMR).
Project-Specific Insurance
Some projects require project-specific professional liability insurance - a separate policy purchased for a single project, rather than the firm's annual blanket policy. This is common for large, high-risk projects (hospitals, airports, stadiums) where the project's liability exposure might exhaust the firm's annual aggregate limit, or where the owner wants a policy that remains in force for the project's full statute of limitations even after the firm's annual policy changes.
Key Exam Points
- E&O (professional liability): covers claims from professional errors, omissions, negligent acts; claims-made policy.
- Claims-made: covered claims must be made during the policy period; tail coverage for post-expiration claims.
- CGL: bodily injury and property damage from premises/operations; does NOT cover professional liability claims.
- Workers' compensation: mandatory for employees; covers job-related injury regardless of fault; EMR affects premium.
- Project-specific policy: separate policy for high-risk or high-value projects; remains in force through statute of limitations.
AREprep's PcM risk management and insurance content covers professional liability, general liability, and workers' compensation alongside contract risk allocation, indemnification provisions, and the architect's other risk management responsibilities - giving ARE PcM candidates the insurance and risk management knowledge they need to answer the PcM exam's practice management questions about professional liability protection.
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