Public entity work has been in the economic forefront due to the passage of the American Recovery and Reinvestment Act of 2009.
This economic recovery package provides $787 billion in stimulus spending and tax cuts. Much of those funds will be allocated toward the upgrading and improvement of infrastructure such as roads and bridges. Even though economic cycles are impossible to predict with any degree of certainty, we all look forward to an inevitable economic upturn. In the interim, it's clear that public sector work will be one of the drivers of our nation's recovery. Being able to anticipate some of the possible insurance coverage issues that are seen most typically with public sector work is important. Following is insight into four areas of coverage concern when working in the public sector and how they align with your Commercial General Liability (CGL) coverage.
Unique Coverage Requests
Contracts entered into with public entities should always be in writing so any risk transfer expectations are fully understood. Public entity projects often require separate limits or policies and unique additional insured forms. They also frequently insist that non-standard certificates of insurance be issued. It's critically important that you don't rely on verbal agreements.
While most insurance carriers will work with these requests, that is not always the case. It's important that you discuss any anticipated public sector work with your broker to assure that your carrier can quickly respond to any non-negotiable requirements of the public entity.
Collaborative or Virtual Design and Construction
Many public entity buildings are being done via collaborative or virtual design, more commonly known as Building Information Modeling (BIM). This process promotes the development and use of computer software to simulate the construction and operation of a facility. The process is currently being used on many major public sector construction projects and is projected to be more commonly used in the years ahead. In addition, trends toward public-private partnerships or integrated delivery models will further merge the distinctions between design and construction on some projects in the future.
There are many benefits to processes like BIM. Done properly, it leads to fewer errors, more efficiency and fewer change orders. It also provides non-technical participants on a project the ability to better understand the link between their work and the final product. It is seen as a more effective way to identify problems within the traditional contracting means and methods of the construction process.
On the other hand, as with any new technology, there are potential pitfalls. Risk allocation, protocols for sharing digital information and possible liabilities are all areas that need to be and are being addressed.
There are important coverage considerations. You need to be aware that many policies contain exclusions for professional liability coverage. Professional services are typically defined as preparing, approving or failing to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings and specifications. They also extend to supervisory, inspection, architectural or engineering activities.
The Insurance Services Offices (ISO) offers standardized forms that are available to the insurance industry, and the ISO's portfolio includes various exclusions. These are the typical ISO exclusions a contractor might find on their policy for professional liability exposures under a standard CGL coverage form:
- CG 2243 excludes coverage for liability arising out of the rendering or failure to render any professional services by you or any engineer, architect or surveyor who is either employed by you or performing work on your behalf in that capacity. This is the most restrictive of the standard exclusions.
There are two alternative ISO exclusions that contain exceptions to the above exclusion:
- CG 2279 includes an exception to the exclusionary language. It says that professional services do not include services within construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as a construction contractor (and thus are not excluded). Contracting operations should request this form as an alternative to the CG 2243.
- There is a final standard exclusion that contains a different exception to the exclusion. CG 2280 for Design-Build contractors allows an exception for construction work performed by you or on your behalf. In other words, the exclusion will apply to professional services done outside your own construction operations but not to your own construction work. However, it's important to remember that the professional liability exception under both exclusions is limited to the bodily injury or property damage covered under the CGL. And the CGL does not contain many of the coverage provisions found under a Professional Liability (PL) policy. You should be aware that not all carriers will provide this exception alternative, recommending instead a separate PL policy.
The most important message is that while technology is making public sector work more efficient, it may be increasing potential liabilities for design errors. What has been traditionally considered means and methods may be changing. Contractors who are uncertain about the extent of their professional services should consider a separate professional liability policy. Companies provide many professional coverage products for a wide range of contracting operations. These are exposures you should be sure to address with your broker or underwriter.
More and more projects are requiring "green" technology and materials. This is particularly the case on public sector projects and raises coverage challenges similar to those presented by virtual design. Many of these jobs will require Leadership in Energy and Environmental Design (LEED) certification. The impact of LEED certification is seen in the areas of sustainable design, conservation, indoor air quality and water/energy efficiencies.
Potential loss exposures with green technology, such as failing to meet promised performance standards or other economic losses are not covered under the CGL policy.
Communication among all parties about the design and construction process should take place during all phases of the project. Since insurance, even professional insurance, might not cover all the risk presented by green technology, contractors relying on a standard CGL must make sure their obligation does not extend beyond bodily injury or property damage for construction means and methods.
Owner or Contractor Controlled Insurance Programs
Also referred to as wrap-ups, the use of this alternative to a traditional insurance approach has increased in recent years for public sector work. Wrap-ups are designed to provide a single source of coverage to multiple interests brought together for a single project. The insurance program covers the project owner, project manager, contractors and subcontractors. There are many benefits and limitations to this approach but contractors should recognize that work performed under an insured by a wrap-up program is often excluded under their own insurance program. Typically, the reason for the exclusion is to simply avoid duplicating coverage and making an unnecessary charge for coverage that is already in place.
That may not be a problem since the wrap-up programs are usually fairly comprehensive in terms of coverage and often extend completed operations coverage for your work through any statute of repose. However, that might not always be the case and a coverage gap could be created.
For most public-sector wrap-ups, some insurance carriers will include excess coverage for exposures not covered by the wrap-up, provided they are not excluded under your own policy. The most important example is the exposure for your work that might only be covered by the wrap-up for a limited time frame, such as three to five years.
It's important to discuss past, current and future wrap-ups, including those done in the public sector, with your underwriter or broker.
We all look forward to brighter economic times in the future as we emerge from the recent recession. Hopefully, the stimulus package will eventually be seen as a one of the turning points of our recovery through the creation of opportunity in the public sector. In the meantime, for those contractors who are taking on public sector work for the first time, these four areas offer some insight to the unique coverage challenges you will encounter. Partnering with insurance professionals who understand this element of risk can help you avoid potential pitfalls.
Construction Business Owner, September 2009
One or more of the CNA companies provide the products and/or services described. The information is intended to present a general overview for illustrative purposes only. It is not intended to constitute a binding contract. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice. Any examples in this article are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. This material is not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy. CNA is a registered trademark of CNA Financial Corporation. Copyright © 2009 CNA. All rights reserved.