AIA Louisiana How Do I Get Out of This Business? October 6, 2011 Shreveport, La.

What is Professional Liability Insurance?

How does it work? Claims-made and reported Retroactive Date claims made against you and reported to the insurance company during the policy term, and any extended reporting period subject to a retroactive date on your policy.

CLAIMS MADE POLICY Firm Established Firm Purchases Insurance Policy Expires NO COVERAGE COVERAGE Date Allegedly Faulty Service Rendered Date Claim is Made and Reported to Carrier NO Coverage Claim was made for an act performed prior to the Retroactive Date in the policy.

CLAIMS MADE POLICY Firm Established Firm Purchases Insurance Policy Expires NO COVERAGE COVERAGE Date Allegedly Faulty Service Rendered Date Claim is Made and Reported to Carrier NO Coverage Claims made policies must be in effect when claim is made to afford coverage.

CLAIMS MADE POLICY Firm Established Firm Purchases Insurance Policy Expires NO COVERAGE COVERAGE Date Allegedly Faulty Service Rendered Date Claim is Made and Reported to Carrier Coverage Coverage would apply, subject to limits and deductible for Policy Year 3.

Professional Liability Key Policy Language & Conditions

Professional Liability : Insuring Agreement A.COVERAGE A – Professional Liability The Company agrees to pay on behalf of the INSURED all sums in excess of the Deductible, subject to the Policy Limits of Liability, that the INSURED becomes legally obligated to pay as DAMAGES and/or CLAIM EXPENSES as a result of any CLAIM(S) first made against the INSURED during a POLICY YEAR and first reported to the Company, in writing, during that POLICY YEAR or within sixty (60) days after the end of that POLICY YEAR, provided that: 1. The CLAIM(S) arises out of a WRONGFUL ACT; 2. Such WRONGFUL ACT was committed or alleged to have been committed on or after the Retroactive Date(s) stated in Item 6 of the Declarations; and 3. Prior to the Anniversary Date stated in Item 7 of the Declarations, none of the INSURED’s directors, officers, principals, partners or insurance managers knew or should have known that such WRONGFUL ACT might give rise to a CLAIM(S).

Claim C. CLAIM means a demand received by the INSURED for money or services and that alleges one or more of the following: 1.A WRONGFUL ACT arising from the performance of PROFESSIONAL SERVICES; 2.POLLUTION CONDITIONS arising from the performance of CONTRACTING SERVICES; or 3. A NETWORK SECURITY COMPROMISE. A demand can take the form of, but is not limited to, lawsuits, petitions, arbitration demands, mediation requests or other alternative dispute resolution requests served on the INSURED.

Claims : Company Notification A. In the event of a CLAIM(S), prompt written notice shall be given by or for the INSURED to the Company and shall contain: particulars sufficient to identify the INSURED; reasonably obtainable information with respect to the time, place and circumstances thereof; and the names and addresses of available witnesses. B. If a CLAIM(S) is made against the INSURED, the INSURED shall promptly forward to the Company every demand, notice, summons, order or other process received by the INSURED or the INSURED’s representative. This requirement continues throughout the life of the CLAIM(S).

Claims: Early Reporting C. If the INSURED becomes aware of a CIRCUMSTANCE(S) to which this Policy may apply and provides written notice to the Company during the POLICY PERIOD containing details of: 1. The alleged WRONGFUL ACT(S), POLLUTION CONDITIONS or NETWORK SECURITY COMPROMISE(S); 2. The specific nature and extent of the injury or damage that has been sustained; and 3. How the INSURED first became aware of such CIRCUMSTANCE(S), then any CLAIM(S) that may subsequently be made against the INSURED arising out of such reported CIRCUMSTANCE(S) shall be deemed to have been made on the date first written notice of the CIRCUMSTANCE(S) was received by the Company. This right conferred upon the INSURED in this Paragraph shall terminate at the end of the POLICY PERIOD and shall not exist during the Automatic Extended Reporting Period or Optional Extended Reporting Period.

Claims: Early Reporting Loss Prevention Assistance B. LOSS PREVENTION ASSISTANCE If the INSURED reports a CIRCUMSTANCE during a POLICY YEAR in accordance with Section IX, NOTICE, Paragraph C, any costs or expenses the Company incurs as a result of investigating or monitoring such CIRCUMSTANCE will be paid for by the Company until such time a CLAIM(S) arising out of the reported CIRCUMSTANCE is made against the INSURED. The decision to incur any costs or expenses to monitor or investigate a CIRCUMSTANCE shall be at the sole discretion of the Company. CIRCUMSTANCE means an event or occurrence from which the INSURED reasonably expects that a CLAIM(S) could be made.

Now…. How Do I Get Out of This Business? First, the big picture…

A Poll Two Questions: – How old are you? – Have you started a succession plan? (yes/no)

Background of Drivers in the Design Sector Today

Number of US & Canadian A/E Firms Total number of design firms continues to decline 33.9% loss since 2001

2003 The National View – Architects

2011 The National View – Architects

Basic Microeconomics Should Favor $ Services DemandSupply increasing

Profile of the A/E Industry Mature, fragmented and cyclical (Lost Generation article?) Limited barriers to entry/significant barriers to exit Needs-driven by factors outside the industry Economies of scale difficult to achieve Vast majority are closely-held businesses (only 28 publicly-traded companies)

How Do I Get Out of This Business? -The Rest of the story

A/E Firm Perpetuation Alternatives: 1. Sell it? (Then someone has to buy it!) - Internal - External 2. Merge and fade away. 3. Shut it down (We recommend you wind it down.)

Things to consider: Regardless of which way you go, there are common issues that need to be addressed: A. Who will retain the exposure from the prior-acts of the related entities? B. How will the deductible be handled? C. What if there is a loss in excess of policy limits? D. Impact on rates and availability of coverage E. How will project that are transferred mid-term be handled?

Things to consider: Regardless of which way you go, there are common issues that need to be addressed: A. Who will retain the exposure from the prior-acts of the related entities?

Options to deal with Prior-acts Purchase Extended Reporting Endorsement Purchase Run-off (Tail) policy Get someone else’s policy to cover it Go bare

ERP (Extended Reporting Period) Vs Run-off (Tail) policy

ERP – Most, but not all, policies provide guaranteed ERP options of (1-5 years) – Pricing is usually: 1 year = 100% of expiring premium 2 years = 150% of expiring premium 3 years = % of expiring premium 5 years = % of expiring premium – ERP has to be requested within 60 days of policy expiration – Current policy limits and deductible applies – Policy limits are not reinstated upon purchase of ERP – ERPs cannot be renewed

ERP (Extended Reporting Period) Vs Run-off (Tail) policy Run-off (Tail policies) – Tail policy has to be requested prior to policy expiration – Tail policies are not guaranteed Requires underwriting approval and pricing – Pricing is determined at the time of request – Usually there is some flexibility regarding limits and deductibles – Renewal of Tail policy may be an option with underwriting approval

Big Planning Issue: – The Premium for both the ERP and the Tail policy are fully earned and 100% due at the time of purchase. – Remember that the terms of the policy in place at the time you need the ERP or Tail policy will apply. They do change!

Sample Policy wording

EXTENDED REPORTING PERIOD A. In the event of non-renewal or cancellation of this insurance for any reason by the INSURED, or if the Company should cancel this Policy or terminate it by refusing to renew, for reasons other than the INSURED’s non-payment of Premium and/or Deductible amount and/or non-compliance with the terms and conditions of this Policy, the INSURED: 1. Shall be entitled to a sixty (60) day Automatic Extended Reporting Period at no additional premium. This extension shall apply to any CLAIM(S) first made against the INSURED during the POLICY PERIOD and reported to the Company, in writing, during the sixty (60) days immediately following the effective date of cancellation or non-renewal. 2. May purchase an Optional Extended Reporting Period of up to three (3) years or as otherwise required by the regulatory guidelines governing this type of insurance. The minimum premium for this Optional Extended Reporting Period will be 100% of the expiring annual premium for a one (1) year period, 150% of the expiring annual premium for a two (2) year period, and 185% of the expiring annual premium for a three (3) year period.

EXTENDED REPORTING PERIOD The first NAMED INSURED must request the purchase of the Optional Extended Reporting Period in writing to the Company within sixty (60) days following the termination of this Policy and pay the premium to the Company promptly when due. If purchased, this extension shall apply to any CLAIM(S ) first made against the INSURED and reported to the Company, in writing, during the Optional Extended Reporting Period. If, however, this Policy is immediately succeeded by similar claims-made insurance coverage for which the retroactive date is the same as or earlier than the Retroactive Date shown in Item 6 of the Declarations, the INSURED shall have no right to an Optional Extended Reporting Period. The Optional Extended Reporting Period shall be non-cancelable. Accordingly, at the commencement of the Optional Extended Reporting Period, the entire premium shall be considered fully earned. Note: When premiums are fully earned, there usually is not option to finance through insurance premium finance companies. Might still get your local bank to finance it for you.

EXTENDED REPORTING PERIOD B. The limit of liability applicable to the Automatic Extended Reporting Period and Optional Extended Reporting Period will be the limit of liability remaining under the terminated policy, or as otherwise required by the regulatory guidelines governing this type of insurance. C. The Automatic Extended Reporting Period and Optional Extended Reporting Period will not apply to: 1. Any pending CLAIM(S) or proceedings; 2. Any paid CLAIM(S); or 3. Any CLAIM(S) that is covered under any subsequent insurance purchased by the INSURED, or that would otherwise be covered under any subsequent insurance purchased by the INSURED but for a reduction or exhaustion of the limits of liability that would otherwise be applicable to such CLAIM(S).

Back to the Alternatives Selling the practice. – Internal or External – Asset only or Assets and Liabilities

Things to consider: A. How will the prior-acts be handled? Shutting it down or Assets only – Selling entity remains responsible for prior-acts. Assets and Liabilities – Acquiring firm usually adds exposure of Selling firm’s prior- acts to their policy, but may still wish to have prior entity purchase ERP or Tail.

Things to consider: B. How will the deductible be handled? – Shutting it down or Assets only purchase: Insured is responsible – Purchase/merger - Assets & Liabilities Negotiated by parties. Must be in Buy/Sell agreement. Ultimately the purchaser is on the hook.

Things to consider: C.Limits - What if there is a loss in excess of policy limits? – Shutting it down or Asset only Owner/Seller is responsible – Internal/External- Assets & Liabilities Negotiated by parties. Must be in Buy/Sell agreement. Ultimately the purchaser is on the hook.

Things to consider: D. Impact on future rates and availability. – Shutting it down or Asset only Not applicable – Price of ERP and initial Tail policy term is guaranteed – Internal/External- Assets & Liabilities Claim history and future claims of acquired entity will impact the rates and availability of coverage.

Things to consider: E. Projects in progress – Shutting it down or Asset only Shutting down- Usually not applicable – ERP available, but not coverage for continued services – Tail policy not available if there are any continued activities Asset only- Will client allow transfer of contracts? Client will likely require continued coverage. – Internal/External- Assets & Liabilities Usually no issue. Manage clients/contracts

Q & A Thank You for your time and the opportunity to be of service.