Claim Reduction is a regular series by the ASCE Committee on Claims Reduction and Management designed to help engineers learn from problems that others have encountered.
Part 1: Setting the foundation through policy provisions
For engineering companies, professional liability claims pose significant financial and operational challenges. Financially, claims come with immediate costs like defense expenses, deductibles, and potential settlement or judgment payments. However, the financial challenges do not end with immediate costs; claims frequently result in long-term consequences, such as increased insurance premiums. Operationally, these claims can distract ongoing projects, pull critical personnel away from other work, and even harm client relationships, making it harder to secure future contracts. These impacts underscore the importance of a proactive approach to managing claims and defense counsel to mitigate both immediate and lasting effects.
Insurers are essential in helping engineering companies manage claims, but their involvement must be carefully balanced to prevent overreach. The insurer's interests may not always align perfectly with the insured's interests. The policyholder must, therefore, ensure that the insurer's involvement does not overshadow the company's broader business objectives. Put simply, the insurance tail should not wag the business dog.
This two-part article tackles how engineering companies can better manage claims and, in particular, counsel retained to defend those claims. Part 1 focuses on getting the foundation right by negotiating key policy provisions. Because this article focuses on managing defense counsel, it is worth noting that there are a wide range of policy provisions that insureds should consider. Beyond the provisions discussed here, firms may consider, for example, terms that mitigate broader risks, like coverage for public relations expenses to manage reputational harm or terms that allow more favorable claims reporting or other provisions based on unique services offered by the policyholder.
Part 2 will look at managing claims after they arise, with practical strategies like supplemental guidelines for defense counsel retained by the insurer.
The importance of policy provisions
Managing defense counsel starts long before receipt of a demand letter. The insurance renewal process is where the policyholder establishes the foundation for effective claims management, and the provisions negotiated during this time can significantly impact the policyholder's ability to direct the defense effectively. Several provisions warrant particular attention:
Right to Select Counsel: Ensuring the policyholder retains the ability to select qualified defense counsel is important for companies looking to actively align defense strategies with their business objectives. For example, if a claim involves highly technical engineering principles, the policyholder may prefer counsel with specialized industry knowledge rather than relying solely on the insurer’s pre-approved panel. This ensures that the defense strategy is not only legally sound but also technically informed. This provision is especially important when technical expertise or industry-specific knowledge is required, as is often the case for claims encountered by engineering companies. However, because most panel counsel billing rates are significantly lower than non-panel counsel, insurers may seek to have the policyholder be responsible for the higher rates of non-panel counsel. This issue should be addressed proactively during renewal negotiations.
Pre-Claim Assistance: Preventing claims before they escalate is among the most effective strategies for minimizing risk and cost. Pre-claim support is a valuable tool, whether it involves obtaining legal assistance from an attorney admitted in the appropriate state or implementing early interventions to address and mitigate potential risks. Most insurers cap the amount they cover for this, so limitations on pre-claim assistance are topics to negotiate during renewal.
Credits Against Retention/Deductible: Many companies spend considerable resources managing claims, and some insurers are amenable to giving policyholders credit for that spending. Time spent by in-house counsel, technical staff, or engineers providing forensics services, for example, may be able to be credited against the policy deductible or retention. Insurers will often limit the credit – excluding, for example, profit margins or capping rates—so be prepared to discuss these limitations during renewal.
Early Mediation Incentives: Many professional liability policies include incentives for resolving claims through mediation, such as deductible reductions. Early mediation saves money and can protect a company’s reputation by avoiding prolonged disputes. Policyholders should ensure that their policy includes such provisions and that the incentive is maximized.
Policy Provisions to Reduce Defense Costs: Policies should include mechanisms encouraging early claim resolution, which helps preserve available policy limits for indemnity rather than defense costs. Early mediation incentives and pre-claim assistance, both mentioned above, are two of the most popular, but any tools designed to resolve disputes quickly can significantly impact the situation and should be added where available. The insurance market changes year to year so policyholders should work closely with their brokers to identify available features and negotiate their inclusion during renewal.
Right to Approve Experts and Similar Strategic Decisions: Securing the right to approve experts retained for your defense is critical for several reasons. First, engineers know their industry and, often, what expertise is needed for a particular issue far better than the insurer or defense counsel assigned. Similarly, policy provisions should ensure that the insured’s consent is required for all major strategic decisions, including settlement terms. Without this control, companies risk decisions that do not align with their business goals.
Addressing these provisions during policy negotiations better equips companies when a claim does arise.
Conclusion
Effective management of defense counsel begins with ensuring the company has the necessary tools. Securing adequate control of claims, creating the right incentive scheme, and ensuring as many early exits as possible are all important preemptive steps companies can take to better manage and, thereby, reduce the impact of claims. Part 2 will explore the steps companies can take to better manage counsel once a claim arises. Part 2 will address supplemental guidelines for defense counsel, collaborating with defense counsel, and dealing with insurer dynamics to make sure the company’s business objectives do not overshadow.
Zach Jones is a partner at Martin & Jones, representing clients in the design and construction industry across Tennessee, Kentucky, and Alabama, with a focus on contracts, risk management, and dispute resolution. He also serves as General Counsel to the Engineers Joint Contract Documents Committee.
The Committee on Claims Reduction Management will conduct a Workshop on Reducing Claims Against Engineers on Alternative Delivery Projects, May 1-2 at ASCE headquarters in Reston, Virginia. Learn more at ASCE’s Risk Management Hub.
Read more helpful insights from the committee’s Claim Reduction series on the Civil Engineering Source.
