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Why Is Professional Liability Insurance Important For Engineering Consulting Companies?

On Jul 2, 2018

Professional liability insurance, A.K.A. errors and omissions (E&O) insurance, is an insurance coverage that protects your company against claims brought by a customer who alleges they suffered financial loss due to the professional design (software or hardware) services you provided. This type of coverage protects you from unintentional mistakes (errors or omissions).

Technology-based companies who perform software or hardware design services should carry this type of insurance as more traditional general liability insurance coverage may not cover situations in which the process of invention and related development services are included in the engagement.   

Limiting your professional liability related costs has primarily two focuses, premium management and claims mitigation/avoidance.

  • Premium Management – This is an occasion where, in my experience, bundling insurance coverages has not been to my advantage. Carriers who offer general liability insurance often do not offer professional liability insurance or if they do, it is not as price competitive as carriers who specialize in it. Shopping carriers who offer such specific coverage, even though it takes more time and energy in the long run can save you significant dollars.
    Determining your appropriate coverage level based on risk assumed is another way to manage your premiums. Look to industry standards and common practices of peer groups to set your coverage level. Often the customer’s requested level of coverage is cost prohibitive and excessive for the common practice in your industry. Read the customer’s Statement of Work’s requests carefully and negotiate the coverage level with your customer.
  • Claims Mitigation/Avoidance – In the event you find yourself in a situation where a potential claim may be brought against you, there are a few practices that can aid you in successful defense should the occasion arise. First, clearly define design approval or buy off responsibilities and get the customer’s approvals in writing. Second, manage your client’s Statement of Work’s expectations, diplomatically reminding the customer of the agreed to and shared responsibilities. Lastly, ensure you execute in accordance with industry standards or best practices if available. If documented industry standards and best practices are not available, be able to show your approach was consistent and reasonable with past successful company practices for similar engagements.

In summary, where design services are offered (software or hardware), professional liability insurance is a valuable protection that should be included in your portfolio of insurance coverages. Careful evaluation of the type of coverage, your sensitivity to assumed risk and the defense of your good business practices are important in helping you control the costs of this important protection.

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