Understanding professional liability exposure

Construction business owners undoubtedly have restless nights over business risks associated with operations, not to mention other concerns. But what these individuals often overlook are the uninsured or underinsured risks, such as professional and vicarious liabilities.

It’s important to evaluate your professional exposure, the insurability of such exposure and any potential contractual problems of risk transfer or A&E contractual limitation of liability. Additionally, you should weigh these elements against project profitability and the impact on a design loss resulting in a project delay or, worse yet, a rectification of the work.

Objections to taking the time to evaluate professional liability and protective mitigation strategies are plentiful: “It’s too costly,” “We do not have the exposure,” “We are contractually protected,” “Our A&E firm is responsible and insured,” and the list goes on. The fact, however, is that construction firms may be exposed to such risk in many ways. Examples include simple cases such as the tipping of a tower crane designed by the firm or something as extreme as the discovery of sinking bridge piers on a $400 million toll road project. If you are a mechanical contractor or if there are mechanical elements in one of your projects’ larger packages, claim possibilities are even more prevalent.

Changes in the insurance environment
The professional protective insurance environment for contractors has changed vastly with the influx of new insurance capital and heightened competition in the insurance industry. Three years ago, only one insurance agency offered construction firms this type of coverage. To date, nearly half a dozen insurers have entered the professional protective marketplace, expanding coverage options while creating a competitive environment with affordable premiums.

Most owners understand professional liability, but contractors professional liability is far more comprehensive, as it includes protective environmental coverage. Such coverage extensions protect against liabilities related to design errors that result in environmental loss or claims. These types of liabilities are important, but they often remain uninsured against.

Additionally, your subcontractors will lack relevant coverage on occasion, and regardless of contractual indemnity provisions contained in your contract, you remain responsible to the project owner to complete the project on time. In these cases, protective environmental insurance can offer “first-party” coverage for mitigation of loss and rectification.

It is important to note that professional practice liability policies for designers are claims-made, and as long as the design professional has maintained continuous coverage, the policy covers all professional exposures from the design firm’s inception. Consider the design professional that has been in business for decades and maintains $2 million of professional liability. That $2 million of professional liability extends to all of the design professional’s projects—current and historical. Thus, all owners need to determine whether the limit is sufficient for their size and the complexity of their projects. It is for this reason that contractors protective professional indemnity was developed as an additional risk transfer solution.

A Holistic Approach
Contractors protective coverage should be contemplated as part of a holistic approach to a construction owner’s risk profile. Contractors protective pollution indemnity provides protection to the construction owner for designer errors in excess of the A&E’s professional policy and for instances in which the designer’s policy limits have been exhausted by other claims. This protection extends to the construction company for all design team errors.

The protective portion of the policy can also offer “difference in conditions” (DIC) coverage that extends to the constructor if the underlying professional liability policy is deficient. A few examples of areas covered by DIC include mold, means and methods, construction management and contractual liability exclusions that may exist in the underlying design professional’s practice program.

One of the newer extensions of coverage is “mitigation of loss,” or “rectification,” coverage. This is an excellent extension to protect the project budget and mitigate delay due to design error discovered during the course of construction. It affords first-party coverage to the constructor to mitigate and rectify a design defect or error. However, the limit is often sub-limited within the policy and subject to a self-insured retention as well as coinsurance.

Mitigation of loss is typically contemplated by larger construction firms that feel comfortable retaining a portion of self-insured risk. This coverage does not exceed the design professional’s policy; rather, it is taken into account on a first-stage basis for the mitigation extension. Additionally, the policies offered are indemnity-based; the insured pays first and upon proof of loss is reimbursed by the insurance company.

Through the use of BIM, the design-on-the-go approach to construction has expedited scheduling and reduced project costs. These fast-track project delivery methods demand increased interaction between the owner, the design team and the general contractor. The result: more professional liability exposures.

That’s why it’s more important than ever to consider strategies to manage professional and pollution risk.