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RE: E&O Coverage

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With regard to the E&O questions posed by Dennis Wish, three areas of reply: 

ANOTHER  PERSPECTIVE  ON  DESIRABILITY

I believe that E&O coverage, beside providing all those known good things,
also constitutes an attractive nuisance to the detriment of the covered
small-practice design professional. That is, it offers a tempting, bountiful
crop of money growing on a tree that anyone connected to the project can try
to harvest for themself, on scant merit or none.

The way an E&O policy hurts the covered person is first, that it invites
claims, and second, that it costs him his deductible at the pleasure of the
insurance company, which has all the rest of the policy at risk and will
settle on the best terms they can to limit their potential loss. Your
deductible is the first to go into the kitty.

My predecessor as president of Central section of SEAOC had exactly this
experience. He had designed rebar for a residential swimming pool. A teenage
girl at a party unwisely dove into the shallow end and thereafter traveled
by wheelchair. As usual, everyone was sued. My friend's carrier immediately
settled for the policy limits and sighed in relief. Was the rebar designer
in any respect at fault? It doesn't matter. There would be a tragic victim
on one side of the courtroom and a pot of insurance corporation money that
"doesn't belong to anybody" on the other side. The jury knows where that
money will do the most good, and they can award more than the policy limits. 

In 1985 I attended a hearing on this topic, as it relates to architects and
engineers, at the State Senate Judiciary Committee, Sen. Lockyer (now Pres.
pro tem) presiding. Abundant testimony made clear that the cost of
successfully defending a claim often exceeds what a settlement costs. In
other words, it is cheaper to lose out of court than to win in court. A man
speaking for Boyle Engineering said that "you have lost your money the
instant they file their claim." This fact is well known, and marginal or
meritless claims are made and settled according to the cost of coping with
them. Posturing and intimidation rule.

I was asked to testify as to my reasons for being an intentionally uninsured
structural engineer, and I spoke last. After describing my small, mostly
residential practice and the care and skill I apply to my work, I stated my
belief that, unless one deserved to lose a large judgment, the claims
climate made insurance a doubtful value even if affordable. I said that "It
appears to me that engineers with insurance get sued for the same reason
Willie Sutton gave for robbing banks: 'Because it's where the money is.'"
The other testifiers  laughed; the senators didn't. I finished by stating
that, to me the "empty pocket" defense seemed preferable.  Sen. Lockyer
replied dryly, "Thank you for your candor."

Later I wrote of all this in an article in the SEAOCC Newsletter.

Nothing has happened since 1985 to change my outlook, but several things
have occured to strengthen it.  

WHAT  NOW?

Returning to the situation Dennis posed, it would seem that the cost of
coverage should be borne by the projects "requiring" it. If enduring
coverage for named projects can be obtained, that should satisfy the client.
But that client's possible agenda is worrisome. Dennis writes of "two
projects that I am to give a bid on." Without overreacting to the B-word,
does this procedure mean that a low fee that encourages claims-causing
shortcuts is expected, with purported harm to that client made good by
insurance coverage paid by other, non-bid clients who are paying first class
for Dennis's usual, carefully done engineering (or paid out of the
engineer's pocket without pass-through to any client?) 

For what insurance coverage would cost, how much peer review could be
obtained in an effort to head off any E's and O's before they get built?
(When I am asked about earthquake insurance on older houses, I suggest
spending the money instead on seismic strengthening so that bad damage
doesn't occur, and to call it a single-premium self-insurance policy.) What
would this client require to comfortably accept Dennis's services without
them being wrapped in coverage that tempts abuse?  

Deciding on coverage for one's own benefit involves more than rational
estimates, and more than conformity to habits of peers. Ultimately it turns
on matters of emotional comfort: security vs. uncertainty in the face of
risk. That makes it a very personal decision.    

UNINSURABLE  NEW  RISKS

There is a very rapidly growing risk to engineers, on residential projects
in particular, that E&O coverage appears useless for. The source is the
consumer protection bureaucracy in California, including the Board of
Registration, but hardly limited to them. Their sympathies are with the
layperson consumer in the same way the jury favors the girl in the
wheelchair, and these kinds of disciplinary accusations are being pursued
with singleminded fervor. (See the postings on "BORPELS and residential room
additions" beginning Sep 9, 1997.)

Engineers are now subject to paying all of the Board's investigative costs,
all of the fees the Board's prosecuting deputy attorneys general run up, and
all of the restitution the Board orders (under greatly liberalized law
changes originating with the distinguished California Law Revision
Commission that took effect last July) not to mention their own legal fees
in defense. No kidding about watching out for innocuous-looking legislation
that only targets bad guys, you think.

Unlike in tort litigation, where the plaintiff won't spend more to get you
than they can expect to get, the license-lifters will keep at you until you
can't go on, at no disadvantage to themselves. And settlement money to a
complaining consumer only maybe will appease them. Because all this comes
under "administrative disciplinary action" rather than civil liability, E&O
coverage as far as I know doesn't kick in to help. To their credit, CELSOC
contested the restitution authority explosion, but didn't prevail. We now
live in the get-even era of "three strikes", or in residential structural
work, it seems, three box nails and you're out. 

__________
Sorry for so much at once, but one reason is to stimulate feedback. I've
been entrusted this next year with the chair of Central section of SEAOC's
Professional Practice Committee, and we're looking for new issues now that
the SEAOC Recommended Practice Guidelines document nears completion. I think
the unpretentious end of our work might be due for attention. This listserve
makes good outreach. Thanks.

Charles O. Greenlaw, S.E.   Sacramento CA