ASCE Risk Management Resources

Know Your Limits — The Consequences of Being Underinsured

Posted on 6/9/2016 by ASCE Insurance in Claims Liability Coverage

Most professionals, including engineers, understand that claims are one of the inevitable costs of doing business. Engineers buy professional liability insurance to ensure that the cost of defense, settlement, and/or liability associated with a claim will not fall predominately on their shoulders.

However, engineers are often underinsured, meaning their policy limits are low enough that they risk personal exposure despite having purchased professional liability insurance. Most professional liability insurance policies, including those underwritten for the ASCE program, have eroding limits. This means that claim expenses (including defense costs) are included in, and thus erode, the policy limits. In other words, the amount paid to defend a claim is included in and subtracted from the policy limits, leaving only whatever amount remains after defense costs and expenses to cover any settlement or judgment.

It can be very expensive to defend an engineer in litigation because the cost of discovery is increased by multiple parties, including several design professionals and contractors. Additionally, experts are usually hired to defend the engineer’s work, which also increases the cost of litigation. It is not unusual for the cost of defending an engineer in litigation to reach six figures.

Policy limits of $100,000 to $250,000 can easily be exhausted by simply defending the litigation, leaving almost nothing to pay any settlement or judgment. Moreover, if there is actual liability on the part of the engineer, settlements and judgments can be quite high, as remedying engineering errors may require the demolition and rebuilding of a structure.

If the engineer's professional liability insurance policy is exhausted, and he has not purchased any excess insurance, the engineer himself will be responsible for any shortfall. Therefore, it is important that the engineer purchase the appropriate amount of insurance. Engineers should contact their insurance agents to discuss the necessary policy limits to adequately protect themselves and to avoid personal exposure.

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