There has never been a downside to reporting circumstances to your professional liability insurance carrier, but there can be a huge downside for failing to report them.
For many years, most professional liability insurance carriers have allowed architects and engineers to report circumstances; in fact, they typically offer pre-claim assistance on matters where they feel it will reduce the chances of a claim being made. Indeed, there has never been a downside to reporting circumstances, but there can be a huge downside for failing to report them.
As a practical matter, unless a claim is made and either reserves are posted or payments are made, reporting a circumstance will not affect the AEC firm’s loss ratio. Furthermore, an experienced claim consultant supplied or recommended by the insurer can often provide valuable insight on how the design firm might proceed to resolve the situation or minimize the potential for a claim.
Reporting circumstances now more critical for AEC firms. In recent years, developments in the AEC professional liability marketplace have made it more important than ever for design firms to report circumstances on a timely basis. Notably, there are many more carriers offering AEC professional liability coverage. Consequently, more design firms are changing their carrier than in the past. Certainly, some of these changes have been initiated by design firms as they shop to find the best coverage available at the best pricing.
In other situations, changes result from carriers reducing their overall book of business due to poor loss experience or one-off decisions to non-renew an existing client. Any time a design firm changes carriers it is extremely important to review their projects and report any with red flags to their current carrier before the policy expires.
In this context, red flags may include accidents on the jobsite that resulted in serious injury or death, projects that are behind schedule or have an excessive number of change orders or RFIs, or an actual design issue that has arisen – even if you believe it’s been resolved.
Court decision underscores exposure for AEC firms. This issue came to the forefront recently because of a decision in the United States District Court for the Middle District of Florida Tampa Division made September 22, 2023, in the case of RLI Insurance Company v. Outsidein Architecture, LLC. In that case the Court determined that RLI was entitled to a declaratory judgment that it has no duty to defend or indemnify the architect in the underlying lawsuit.
The background is that there was a fatal accident on a construction site in Puerto Rico on a project known as Rose Village on June 19, 2019. The employee was killed when the floor beneath his bobcat failed during demolition.
The architect’s insurer at the time of the incident was AIG, which subsequently opted to non-renew the policy. The architect then obtained coverage with RLI in March 2020. The firm was sued by the estate of the worker on July 15, 2020.
However, more than a year earlier, on June 21, 2019, the architect received a litigation hold letter in relation to the fatal accident. The letter from the attorney indicated that “I have been engaged as legal counsel by the Garcia family to seek redress in light of the negligence of one or more parties, Bird Group, LLC included, that may be liable for Mr. Garcia’s death on June 10, 2019. To that end we are advising you as a potential custodian of records pertaining to this potential matter.” (Subsequently, there was some dispute as to whether the letter had actually been received.)
Regardless, the fatal accident was not reported to AIG before the design firm received the non-renewal letter and had to change carriers. Ultimately, the accident was reported to AIG when the lawsuit was received. The architectural firm also cited the prior litigation hold letter it had received on the same project. However, AIG denied coverage indicating that there was no relationship between the two events. The architect then reported the suit to RLI, which originally agreed to defend it under a Reservation of Rights, but subsequently filed the declaratory judgment action on October 13, 2020.
RLI hired an expert witness in this case who was a practicing defense lawyer with 27 years of experience. He opined that OIA knew or could have reasonably expected that Garcia’s death could have given rise to a claim prior to the inception date of the policy or the application. The architect argued that the expert was “unqualified because he is an attorney, not an architect, and therefore cannot opine on what a reasonable architect in OIA’s shoes should have known.” The Court disagreed with this premise.
Additionally, RLI took the position that this matter was a related claim to the matter previously reported to AIG. However, the Court concluded the matter does not share a sufficient factual nexus with the underlying lawsuit to be considered a “related claim.”
In its decision, the Court granted RLI’s summary judgment because it agreed with RLI that the architect had made material misrepresentations on the policy application that voided the policy under the rescission doctrine.
Accordingly, the ruling was that RLI has no duty to defend or indemnify OIA in the underlying lawsuit and was entitled to summary judgment in its favor.
There were four questions in the architect’s insurance application completed for the RLI policy that were cited in the decision. Specifically, they were:
- Please provide the total number of claims and the total aggregate amount incurred for all claims over the last five (5) years…
- After inquiry, is the Applicant aware of any act, error, omission or circumstance which may possibly result in a claim being made against them but which has not yet been reported to a professional liability carrier?
- Has the Applicant ever reported a potential claim, circumstance to a professional liability carrier?
- After inquiry, is the applicant aware of any act, error or omission or circumstance which may result in a claim being made against them but which has not yet been reported to a professional liability carrier? (If yes, please attach a full statement.)
For design firms, there is rarely – if ever – a downside to reporting a circumstance to your professional liability insurance carrier. However, as this case indicates, there can be huge downside to not reporting them. This architectural firm is currently in a position where it has been sued, and there is no applicable coverage.
Although this decision may be appealed, the position the firm finds itself in is serious – and every attempt to avoid getting caught in a situation like this should be made by all design firms. In their risk management practices, AEC firms should make sure all circumstances are communicated to leadership as quickly as possible for review and timely reporting to the firm’s insurance broker and professional liability insurer.
Lauren Martin is a risk manager and claims specialist at Ames & Gough. She can be reached at email@example.com.