Engineering Firm Contracts and Licenses After a Sale

An engineering or surveying firm's contracts commonly ask for professional liability, general liability, auto and workers' compensation, and some add additional insured status and a duty to defend. Those contracts are the revenue you bought, so the insurance promises inside them are part of the deal. Its licenses belong to individuals, and in some states to the firm as well, so a sale can change what the firm may lawfully offer. Bonds are not a licensing condition in the Texas and Florida engineering firm laws or in New York's certificate of authorization law for engineering and land surveying firms, though other states may differ and a client can ask for a bond on a construction or design-build job. This guide is for the buyer who inherited the client contracts, the license list and the office lease, and needs to know which insurance promises are baked in and what to confirm with deal counsel.

The short answer

Client contracts commonly ask for professional liability, general liability, auto and workers' compensation, and sometimes additional insured status, a waiver of subrogation and primary wording. Read each clause against the actual policy.
A duty to defend and broad indemnity clauses deserve a careful read, because some states, such as Texas and California, limit them for design professionals.
Licenses attach to people, and some states, including Texas and Florida for engineering firms and New York for engineering and land surveying firms, also register or certify the firm. If the licensed person leaves, the firm may not be able to offer the service until another qualifies it.
Bonds are not a licensing condition in the Texas and Florida engineering firm laws or New York's certificate of authorization law, though other states may differ and a client can ask for a bond on a specific project. A bond is not insurance for the principal.
After a sale, policies, certificates and some contracts need reissuing or consent, and deal counsel decides which.

What insurance do clients ask an engineering or surveying firm to carry?

Clients are public agencies, developers, builders, property owners, utilities, lenders and title companies. Each has its own contract form, and the largest customer type decides which clauses dominate. The table describes common patterns, not the terms of any particular contract. Limits vary widely, so read the number in each contract instead of assuming one.

Common contract insurance asks and what to check
Ask	What it means	What to check
Professional liability	Coverage for errors in the firm's work	Limit, retroactive date and whether the policy stays in force after completion
General liability	Coverage for premises and non-professional operations	Whether the professional services exclusion is on the policy
Auto and workers' compensation	Coverage for crews and vehicles on the client's site	Certificates that match the policy period
Additional insured status	The client is added to the firm's liability policy	Whether the professional policy can be endorsed this way, which varies
Waiver of subrogation, primary and noncontributory wording	The insurer gives up its right to recover from the client, and the firm's policy pays first without seeking sharing from the client's	Whether each policy allows it
Limitation of liability	A cap on what the firm owes the client, if the contract has one	Whether inherited contracts include one, and whether your state's law and your policy respect it; ask deal counsel
Indemnity and duty to defend	The firm promises to cover or defend the client for certain claims	State limits and what the policy actually pays

A certificate of insurance is not the policy, and the page on why a certificate is not coverage explains the gap. The guide to checking customer contracts against your policies shows the method.

What is a duty to defend clause, and why do design firms push back on it?

A duty to defend makes the firm pay for the client's legal defense, often as soon as a claim is made, whether or not the firm turns out to be at fault. Design firms push back because the clause can reach claims caused by the client's own negligence. Some states limit it by statute, and only in those states.

Three rules that shape a design firm's duty to defend and responsibility for errors
Where	What it says	Limit of the rule
Texas	A design professional's promise to indemnify or hold harmless an owner for the owner's own negligence is void, and so is a promise to defend a party against claims based on the owner's own negligence or breach of contract. An owner can still require additional insured status "to the extent the policy allows."	Texas only, outside single family and multifamily residences, with exceptions
California	A design professional's defense or indemnity obligation is unenforceable except to the extent the claim arises from the professional's own negligence, recklessness or willful misconduct, and defense cost is capped at the firm's percentage of fault.	California only, for contracts entered into on or after January 1, 2018
Federal architect and engineer contracts	Where a contract includes the standard Federal Acquisition Regulation clause, it makes the firm responsible for the professional quality and coordination of its designs and obliges it to correct errors at no extra charge. It does not address defense or indemnity of the client.	A federal contract clause, not a state rule, and only where the contract includes it

These rules have exceptions and do not carry over to other states. Ask deal counsel what yours says.

A hypothetical example. A city's standard consultant contract asks an engineering firm to defend the city against every claim connected to the project. After closing, the buyer reads the contract and finds the clause alongside a promise to carry $2,000,000 in professional liability. The firm's lawyer notes that, in the hypothetical state, the statute limits the defense duty to the engineer's share of fault. The buyer asks the broker whether the professional policy pays defense costs inside or outside the limit and whether it responds to liability the firm assumed only by contract. The policy wording, not the contract, decides what is covered, so the buyer finds any mismatch before a claim does.

Whose license is it, and what happens if the licensed person leaves?

Licensing is by individual and by state. Surveyors need a license in all 50 states and the District of Columbia to offer services to the public, and engineers who serve the public directly usually need a professional engineer license. Some states, including Texas and Florida for engineering firms and New York for engineering and land surveying firms, also register, qualify or certify the business entity. Three states show three different ways a sale can matter:

Three state examples of firm-level rules
State	What the statute says	What it means for a buyer
Texas	A business entity must register with the engineering board, and each engineering service must be done by an engineer or supervised by a regular full-time employee engineer	Confirm registration and who supervises
Florida	A business must be qualified by a licensed engineer, and if the sole qualifying agent leaves it generally may not practice engineering until another qualifies it, with a temporary agent allowed for up to 60 days to finish incomplete contracts	Know who the qualifying person is and plan for their departure
New York	An entity needs a certificate of authorization from the state education department, and ownership of a design firm structured as a professional service corporation is restricted	A buyer who is not a licensed professional may be limited in ownership, so ask deal counsel

Plans and reports must also carry the licensed professional's seal and signature in many states (New York and Florida are two examples), which ties each deliverable to a person.

The Small Business Administration (SBA) rules for 7(a) loans say businesses offering licensed services are eligible if their ownership structure meets the state's requirements, and the lender documents it. Their definition of a key employee may reach the person who holds the license needed to run the business, so ask your lender and deal counsel whether a consulting seller can qualify the firm. See licenses, permits and registrations when buying a business and buying a business in a licensed trade, and ask deal counsel about your state.

Do engineers and surveyors need bonds?

Not as a condition of the Texas and Florida engineering firm statutes or New York's certificate of authorization law for engineering and land surveying, none of which mention a license bond. The Texas and Florida rules for surveying firms were not reviewed, and other states may differ, so check your state's practice act for each service you sell. Bid, performance and payment bonds come up mainly on construction or design-build contracts, and a public agency may require a bond for particular work.

A bond is not insurance for the firm. It is a three-party arrangement in which a surety stands behind the firm's obligation to a client or agency, and if the surety pays a claim it has the right to recover from the principal and often the owners personally. A seller's personal indemnity to its surety generally survives a sale. See do surety and license bonds transfer, the surety bonds page and the surety bond vs liability insurance comparison.

What transfers or has to be reissued when I buy the firm?

Plans and surveys the seller's licensed staff sealed before closing stay tied to those individuals and to the old project files (the defense file when old work is questioned), so confirm you keep access to both. Deal structure decides most of the rest. In a stock or membership interest purchase the contracting entity does not change, so a plain anti-assignment clause is usually not triggered, but a change of control clause can be. In an asset purchase, contracts with an anti-assignment clause generally need the other party's consent. Standard commercial policies say the insured's rights and duties may not be transferred without the insurer's written consent, so in an asset deal the seller's policies do not simply move to a new company.

Certificates. Reissue certificates that name the old entity or old policies, and check which ones clients hold. See certificates the seller issued.
Public agency standing. Many public clients select firms by qualifications, so a change of ownership or key licensed staff can affect prequalification or past-performance records. Agencies differ, so ask each one before closing.
Federal and other registrations. The remote pilot in command of any drone flight for the firm needs a remote pilot certificate with a small unmanned aircraft rating, and others may fly only under that person's direct supervision. A U.S. Department of Transportation (USDOT) number may be needed for a vehicle that meets the federal definition (10,001 pounds or more used in interstate commerce to carry property).
The lease. Commercial office leases commonly ask for general liability, additional insured status for the landlord and certificates. See lease insurance requirements for new owners.

The after you buy guide and the coverage gaps guide for these firms cover the policy side of the same checks.

Keep reading

Frequently asked questions

Can my client be added as an additional insured on my professional liability policy?

Sometimes. It depends on the carrier and the form, and the answer is often different from the general liability policy. Ask your broker before you sign a contract that requires it.

Can a client make me defend them against any claim?

Only if the contract says so and your state allows it. Some states, such as Texas and California, limit a design professional's duty to defend and indemnify. Do not assume your state is the same, and ask deal counsel.

Do I need a bond to practice engineering or surveying?

The Texas and Florida engineering firm statutes and New York's certificate of authorization law do not mention a license bond. The Texas and Florida rules for surveying firms were not reviewed, other states may differ, and a client may require a bond on a particular project. Check your state's practice act and each contract.

What happens if the only licensed engineer leaves?

In some states, such as Florida, the firm may not be able to offer engineering services until another licensed person qualifies it. Plan for retention, and ask deal counsel what your state requires.

Do the seller's client contracts transfer to me?

In a stock or membership interest purchase the contracting entity stays the same, though change of control clauses can still apply. In an asset purchase, contracts with anti-assignment clauses generally need the client's consent.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

What You Inherit With an Engineering Firm: Contracts, Licenses, Bonds