Owners and Contractors Liability Insurance Policy Definition - PDF - PDF by yak12997


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                                                  Industry Update
      MSP Construction Update 09/2004: “Contractors Professional Liability Insurance”                                           September 2004

          Contractors Professional
            Liability Insurance
                                                      Jeffrey W. Cavignac, CPCU, RPLU, CWCA

    No one questions the fact that design-build con-                                    sionals are for economic damages. If a claim were
tractors have a significant professional liability ex-                                  made for economic damages, there would be no
posure. They are directly responsible to the owner                                      coverage under a commercial general liability pol-
for the design of a project, and whether they do this                                   icy, even if there were no professional liabil-
in house or sub it out, they remain responsible.                                        ity exclusion.
    Over the years, however, the line of distinction                                        Since nearly all, if not all, insurance companies
between “means and methods of construction” and                                         providing coverage for construction contractors will
“professional services” has blurred. In addition,                                       specifically exclude liability arising out of the pro-
even when general contractors are not working un-                                       fessional services typically performed by architects
der a design build project delivery method, they                                        and engineers, this creates the need for a contractors
may actually sub out design to certain subcontrac-                                      professional liability policy.
tors (mechanical, electrical, etc.) Furthermore, stan-                                      “But I sub out the design,” you might say, “and
dard construction contracts have changed how they                                       my design professional carries professional liability
allocate design responsibilities and risk. As a result                                  insurance and has agreed to indemnify me for any
many “ordinary” contractors may have a profes-                                          liability arising out of his negligent acts, errors or
sional liability exposure.                                                              emissions. Why do I need professional liability?”
    To understand why you need professional li-                                                                                  (Continued on page 2)
ability insurance, you really need to understand
what your commercial general liability policy does
not cover. The basic commercial general liability
policy, published by the insurance services office                                                         Published by
(CG0001) does not contain a professional liability
exclusion, although most insurance companies do                                               Cavignac &Associates
add an exclusion by endorsement.                                                                 I N S U R A N C E    B R O K E R S

                                                                                                          License No. OA99520
    Even if a professional liability exclusion is not
added, a commercial general liability insurance pol-                                             1230 Columbia Street, Suite 850
                                                                                                   San Diego, CA 92101-3547
icy responds only to liability arising out of either
                                                                                                ! Phone         619-234-6848
bodily injury or tangible property damage; eco-
nomic damages are not covered. Unfortunately,                                                   ! Fax           619-234-8601
more than 50% of the claims against design profes-                                              ! Web Site      www.cavignac.com
(Continued from page 1)                                  they actually provide. Whichever approach is taken,
                                                         it is critical that the definition of professional ser-
Here are a few of the numerous reasons:                  vices encompass all the services that the contractor
                                                         might provide.
1.   Hold harmless provisions         can    be   de-
     clared unenforceable.                               Claims-Made Form

2.   The design firm may be out of business and/or           As previously mentioned, most if not all profes-
     may have dropped its professional liability in-     sional liability policies for contractors are written
     surance when the claim is made. (Professional       on a claims-made basis. This means that in order
     liability insurance policies are written on a       for coverage to apply, the policy must be in force
     claims-made basis, and coverage must be in          when the claim is made. In other words, if you de-
     force at the time a claim is made to trig-          cide to carry contactors professional liability insur-
     ger coverage.)                                      ance, it should be a long-term decision.
                                                             Recognize as well that every policy has a retro-
3.   The design professional’s insurance policy only
                                                         active date. The retroactive date is usually the in-
     extends to contractual assumptions of liability     ception date of the first professional liability policy.
     that the design professional would have had in      Any claims arising out of work done prior to the
     the absence of a contract. In laymen’s terms,       retroactive date are specifically excluded.
     this means the design professional can only in-
     demnify you for his/her negligent acts errors or    What Constitutes a Claim?
     emissions, and cannot assume your concurrent            A claim is generally defined as “a demand for
     tort liability.                                     money or services.” In other words, if someone
4.   The design professional’s policy limits may be      claims that you did something wrong and demands
     inadequate or may have been exhausted by            that you either pay them money or perform addi-
     other claims.                                       tional services, this would be considered a claim.
                                                             There may also be circumstances, which you
    In addition, some contractors have direct pro-       are aware of which might give rise to a claim, but
fessional liability exposures. They may have in-         has not been the subject of a demand. A well-
house design professionals, or they may provide          written contractors professional liability policy will
construction management advisory type services           allow you to report this under the policy, and the
that are consultative in nature (as opposed to con-      insurer will recognize it as a claim if there is a sub-
struction related).                                      sequent demand made for money or services.
    To address a contractor’s direct professional li-
                                                         Extended Reporting Periods
ability exposure, the insurance industry developed
contractors professional liability policies. This cov-       Sometimes, when the decision is made to dis-
erage is offered by several different insurance com-     continue a professional liability policy, you will
panies, and typically provides direct and contingent     have the option of purchasing an Extended Report-
liability coverage. Any contractor that has either a     ing Period (ERP) endorsement. This extends the
direct or indirect exposure should evaluate this type    period of time within which a claim can be made
of policy.                                               for services arising prior to the date that the en-
                                                         dorsement was purchased (this is commonly done
What Does Contractors Professional
                                                         at retirement).
Liability (CPL) Insurance Cover?                             Recognize that extended reporting period en-
    To be brief, a CPL policy provides coverage for      dorsements tend to be expensive due to what is
claims alleging an act, error or omission arising out    known as “adverse selection.” Those who think
of the performance of professional services. The         they need it tend to buy it, and hence the claims ex-
key here is defining “professional services,” and        perience for this is not good.
this can be done in two ways. One is to include a
                                                                                                (Continued on page 3)
standard list of covered activities in the policy, and
the second is to tailor the definition for each in-
sured contractor, based on the types of services
(Continued from page 2)

What Isn’t Covered
Under a CPL Policy?
    Contractors professional liability policies are all
                                                                   CPL Exclusions
manuscripted policy forms created by the insurance
companies providing the coverage. Before selecting
                                                               #   Express warranties or guarantees
a specific policy, the coverage form should be re-
viewed by your insurance broker (assuming he is a              #   Assistance provided with respect to pro-
specialist in this area and is capable of providing                ject financing
such an analysis for you).                                     #   Obligation to obtain insurance or bonds
    Like most open peril or “all risk” types of insur-         #   Product manufactured or supplied by
ance policies, everything is generally covered ex-                 the insured
cept what is specifically excluded. Some common                #   Auto, aircraft, watercraft or mobile equipment
exclusions are listed in the side bar that accompa-
nies this article. Some exclusions are more critical           #   Employers liability
than others, and these should be specifi-                      #   Workers compensation claims
cally addressed.                                               #   Employment-related practices
Express Warrantees Are Guarantees                              #   Nuclear energy liability
    The law does not require design professionals              #   Insured versus insured claims
to be perfect. It merely requires them to perform to           #   Claims brought by a related entity
a standard of care, typically defined as “that degree          #   Claims based on events the insured knew
of care and skill ordinarily exercised by members                  about prior to policy inception
of the same profession currently practicing under
                                                               #   Claims that have been reported under
similar circumstances.”
                                                                   prior policies
    Most design professionals avoid agreeing to ex-
press warrantees or guarantees. Contractors, how-              #   Failure to perform professional services
ever, commonly provide express performance war-                    on time
rantees to project owners that exceed a design pro-            #   Failure to complete a project on time
fessional’s “standard of care,” and this becomes               #   Bankruptcy or insolvency of the named entity
a problem.                                                     #   Pollution
    If the contractor agrees to warrant not only its
                                                               #   Specification, use, or removal of materials
construction services but also its design services, it
                                                                   containing asbestos
has agreed to a standard of care that is not covered
by its professional liability policy. Candidly, this is        #   Losses to which project-specific insur-
one of the most significant benefits to an owner of                ance applies
the design-build delivery process. It transfers this           #   Return or reduction of professional fees
gap (alternatively known as the “liability gap” or             #   Punitive damages
the “Spearin Gap”) from the owner to the contrac-              #   Personal injury
tor. With this in mind, the contractor needs to
avoid, if at all possible, guaranteeing or warranting          #   Cost estimates exceeded
the design aspects of the work.                                #   Fiduciary liability/securities violations
Contractual Liability                                          #   War (and other hostile acts)
                                                               #   Deliberate noncompliance with a statute
   Contractors have become accustomed to agree-
                                                                   or regulation
ing to sign intermediate form indemnification
agreements. Such an agreement requires the con-                #   Bodily injury or property damage resulting
                                                                   from means and methods of construction $
                                       (Continued on page 4)
(Continued from page 3)                                  what the underwriter perceives the risk exposure
                                                         to be.
tractor to hold harmless and indemnify the owner             Because the nature of professional services dif-
not only from the contractors negligence but also        fers so greatly between contractors, one is hard
the concurrent or joint negligence of the owner.         pressed to provide a ballpark figure of cost. Typi-
This is legal in most states and is usually covered      cally, however, it is a fraction of what the commer-
by the contractors general liability policy. This is     cial general liability policy costs.
because the general liability policy typically pro-
vides broad form contractual liability, which allows     Conclusion
the contractor to assume the tort liability of a             If you feel you may have a contractors profes-
third party.                                             sional liability exposure, it is recommended that
    Unfortunately, professional liability polices        you discuss your exposure with an knowledgeable
provide narrow contractual coverage. It only ex-         broker and also submit an application to obtain
tends to such liability that would have attached by      quotations. This will not only require you to evalu-
law in the absence of such agreement because of a        ate your firm’s exposure, but it will give you the
negligent act, error or omission of the design pro-      input of a third party expert (the underwriter) as
fessional. Because of this, it is imperative that you    well as an idea of what it would cost to transfer this
carefully review the indemnity agreements you are        risk to an underwriter. Even if the decision is made
asked to sign to make certain that you are not as-       not to purchase contractors professional liability in-
suming uninsurable obligations from a de-                surance, you will be aware of your exposures so
sign standpoint.                                         that you can actively manage them. $
Pollution Liability
                                                         Disclaimer: This article is written from an insurance perspec-
    Most commercial general liability policies spe-      tive and is meant to be used for informational purposes only.
cifically exclude pollution, and usually mold as         It is not the intent of this article to provide legal advice, or
well. Most contractors professional liability poli-      advice for any specific fact, situation or circumstance. Con-
                                                         tact legal counsel for specific advice.
cies are written without a pollution exclusion. Note,
however, that this does not close the gap created by
the exclusion in the general liability policy. It
merely extends pollution coverage to damages aris-         Cavignac & Associates
ing out of professional services.                             I   N   S   U   R   A   N   C   E   B   R   O   K   E   R   S

    In order to correctly close the gap in the general
liability policy, you would need to buy a separate
contractors pollution liability policy. (These are oc-            Visit our Web site!
casionally written in conjunction with a contractors
professional policy.)
Means and Methods of Construction

    For obvious reasons, the professional liability
policy usually contains a “means and methods of
construction” exclusion. The purpose of this is to
avoid overlap with the commercial general liabil-
ity policy.
What Does It Cost?
    In order to determine the premium for a con-
tractors professional liability policy, a rather ex-
haustive application is required. In addition to the
application itself, a number of other supplements
are usually requested. The premium is based on

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