There are many areas of a successful design practice that require a designer’s attention. Aside from client-oriented work, a variety of business topics—such as advertising, marketing, developing new leads, employee issues, and business accounting—consume much of a designer’s time. Unfortunately, one of the general topics that often does not receive adequate attention is insurance coverage.
Most designers understand that they need to have some insurance, but the question is what kind and how to procure it. To obtain coverage, designers can either contact an insurance company directly or hire an insurance broker. Regardless of how you secure coverage, it is critical that designers understand what types of coverage are necessary and what limitations may exist with the different types.
Why Be Insured?
Before we address the specific types of insurance that are pertinent to design practices, it is important to discuss the purpose of insurance and insurance companies’ reasons for wanting to retain you as a client. For most designers, insurance is a safety net. Designers pay their monthly premiums for the sense of security that it brings them. It protects you when a client sustains injuries inside your studio or when a designer makes a mistake. Instead of having to shoulder the financial burden of defending a claim, you turn it over to an insurance carrier who, after you pay your deductible, handles the rest of the claim, including monetary payments to the client.
But insurance companies have something different in mind. They are in the business of making money, not paying out claims, and they have a full array of adjusters and attorneys whose goal is to deny claims. These individuals are adept at finding hidden exclusions of coverage in your policy. So, essentially, insurance companies play the odds and insure designers based upon a calculated risk. They use mathematical formulas to determine how much money they will bring in from a particular insured client versus how much money they are estimating to pay out. When they believe that the risk of insuring an individual is too high (based on whether or not the individual has made previous claims in the past) they either refuse to provide coverage or they ask for extremely high premiums.
That being said, having insurance is a necessity; when chosen correctly, it can protect you. The key to not letting an insurance company get the better of you is to fully understand what it is that you need to insure and what type of policy will provide you with the desired coverage. For this, most designers rely on the expertise of a broker. But many brokers do not understand what lighting designers do and therefore fail to secure the proper type of insurance. So you need to have a basic understanding of what types of insurance to ask for and how to communicate what you do professionally to a broker.
For designers, there are two types of insurance which you should carry: commercial general liability (CGL) and professional liability, or errors and omissions (E&O), insurance. The most common of these two is the CGL policy, a standard insurance policy issued to businesses to protect them against liability claims for bodily injury and property damage arising out of premises, operations, products, completed operations, and advertising and personal injury liability. This is also referred to as comprehensive general liability insurance and general business insurance. It is noteworthy, in light of the damage caused by Hurricane Sandy, that most CGL insurance policies disclaim coverage for flood damage. If your business is located close to a significant body of water or in a known floodplain, you should also obtain separate flood insurance. Assuming that businesses which were lost along the coast had both a CGL policy and flood policy, they are able to seek reimbursement from their carriers. Those businesses that only had a CGL policy will most likely have no coverage for the hurricane damage.
A CGL policy is particularly important for any designer who has an office, studio, or warehouse. Scenarios that would be covered under a typical CGL policy include damage to office equipment as a result of fire, theft, or lightning strikes. So if your design studio was burgled and your office equipment was destroyed, you would be able to submit a claim.
Recently, a design firm that rents the first floor of a building in New York City was forced to submit a claim under its CGL policy for damage to its office caused by a ruptured water pipe located in an adjoining building. The firm’s office had equipment that included computers and copy machines, but also displayed various light fixtures and samples. The water that leaked into the firm’s space destroyed everything in the office. It took the insurance company more than three months to investigate the claim, salvage certain equipment and fixtures, and make the payout to the design firm.
In another example, a potential client tripped and fell over a raised floor tile in a designer’s office. Unfortunately, the client fractured her ankle and required two surgeries and extensive physical therapy. Although not hired by this client, the designer was able to submit the claim under her CGL policy and thus avoided having to pay the injured client. This designer had a $1,000 deductible. The claim ultimately settled for $150,000, which, minus the deductible, was paid out by the insurance company.
While a CGL policy does provide protection against property damage and personal injury, it does not cover mistakes or misrepresentations made by the designer. For example, if a designer is hired by a residential client to develop and install a lighting scheme in five rooms by a particular date, but only orders enough materials for four rooms, she will not be covered by her CGL policy. If the client sues, the designer would be required to hire her own attorney and would be responsible for any payments or settlement awarded to the client.
CGL policies also carry a number of exclusions—an exclusion being a statement contained within the policy that lists various issues, incidents, and claims that will not be covered. Often, these exclusions are confusing. A typical exclusion in a CGL policy is for “damage to your work.” In this circumstance, the exclusion will not afford coverage to instances when your product or design is damaged. For example, assume that you install luminaires in a ceiling that, unbeknownst to you, is structurally unsound. After the project is completed, the fixtures fall and are damaged. Should the client sue you, the exclusion in the CGL policy would prevent you from being covered.
As designers, the primary product that you are selling is your knowledge, opinion, and expertise. If a CGL policy won’t cover you for claims arising out of those “products,” what will? The answer is professional liability, or errors and omissions (E&O), insurance. E&O covers you and your company in the event that one of your clients sues you or otherwise holds you liable for a service that you provided or failed to provide that did not meet the expected or promised results. Most doctors, accountants, architects, and engineers have some form of E&O coverage. It covers you in situations where mistakes, unintentional misrepresentations, or omissions have occurred, whether in the work performed or in advice provided. Whether by commission or omission, there are many situations where a lighting designer would require professional liability insurance. An example of an error covered under an E&O policy would be when a designer provides incorrect layouts on design documents, which in turn delays a project. An example of an omission would be a designer failing to make sure that a particular type of lighting is specified correctly, for instance if recess-mounted light fixtures are properly shielded from ceiling insulation.
The bottom line is that all designers should carry an E&O policy. Recently, I was asked by a young lighting design professional which policy, CGL or E&O, I would recommend he obtain given he could only afford one. The answer, without question, is an E&O policy.
Ask For Help
While you can obtain CGL and E&O coverage directly through an insurance carrier, it’s recommended that you use a broker. Typically, a broker will be able to negotiate a fair premium and should be able to explain the limitations of your coverage. Separately, in the event that the policy secured by your broker is inadequate or fails to protect you against a particular claim, you may be able to sue the broker for professional negligence. Regardless of the size of your practice, having proper insurance is critical to your success. Many design firms, especially startup companies, put off getting insurance to save money on initial costs. Remember though, just one claim could put your practice out of business.