Supplement professional liability insurance with owner-specific indemnity coverage
by Jeff Slivka
November 24, 2014

There is no set way to define the American economic recovery. One report seems to contradict another. Optimism is shared with pessimism. Gains seem to accompany setbacks on a daily basis. However, the good news is there has been a steady, if not stellar, rise in activities and profits among several business sectors over the past few years.

According to MarketLine, a publisher of business information, the global construction and engineering industry is expected to be worth over $3 trillion in 2015, while the American Institute of Architects’ (AIA) semi-annual Consensus Construction Forecast estimates that the nonresidential building industry in the U.S. will grow by another 8 percent in 2015 after posting about a 5 percent increase in 2014.

However, opportunity and risk cannot be disassociated from one another in today’s construction environment. This is especially true of the professional liability and design risks that regularly accompany even basic building projects. Subsequently, many owners have recognized the need for their design teams to evidence professional liability insurance, while in some instances even funding the purchase of a project-specific professional liability insurance program that insures the entire design team against design liability. If structured and endorsed properly, the owner will then be indemnified against the damages, claims and expenses incurred as a result of negligent acts, errors and omissions arising from the design team’s services.

On the upside this means ensuring that quality professional liability insurance is in place to protect the significant players on the project. However, should the owner need to file a claim as a result of design errors, the downside is that the issuing carrier will use this same policy to defend the design team against the owner’s claim. In the end, the defense costs alone could even result in the possible depletion of a significant portion of the limit of liability.

While purchasing project professional liability insurance for the design team may make sense in some instances, owners of large construction projects should be aware of the alternatives. This includes a careful review of the benefits provided by the Owner’s Professional Protective (OPP) when insuring against professional liability. Offered to owners of all types of construction projects who hold contracts with design professionals, the OPP provides first-party indemnity to the owner (insured) for damages incurred as a result of negligent acts, errors and/or omissions of the design professionals hired by the owner for the project. Under an additional coverage arrangement, defense expenses are also provided to protect the owner from actions brought directly against him due to design errors made by the professionals hired.

The OPP was specifically developed to supplement the designer’s professional liability limits available to the insured (owner) rather than replace it, which commonly occurs with typical project professional liability policies. In addition, since it is excess insurance, the cost to place such coverage is normally 30 to 50 percent less than a primary project professional liability policy for the design team. Another important feature is that the owner is the only named insured and sole beneficiary of the coverage so the likelihood of the limit of liability being depleted due to costs associated with defending the design team are dramatically reduced.

Another benefit is that most OPP carriers offer difference in conditions (DIC) coverage beyond the conditions of the underlying professional liability policy to extend coverage to the named insured in the event the underlying policy is deficient. This includes exclusions for mold and other pollutants resulting from design errors, habitational exclusions, construction management exclusions and the like that may exist in a design professional’s practice program.

One thing to keep in mind is OPP is not only for private owners or projects. Many public entities such as state DOTs, school development authorities and local, state and federal agencies have taken advantage of OPP coverage as well.

Given the ongoing demands and the evolution of the industry, OPP exists as a very viable alternative for protecting against risk in this highly litigious marketplace.

More OPP Facts and Features

Approximately eight insurers offer OPP coverage forms, with another four or five entertaining OPP on an excess basis and several more expected to enter the marketplace.

  • The typical capacity for this coverage within any of the primary markets is $20 million. Most primary carriers will also provide excess, so along with the excess market’s capacity, the total capacity is somewhere between $75 million and $100 million for an ordinary project. More complex projects may yield limits of between $25 million and $50 million.
  • Policy terms of up to 10 years (inclusive of the extended reporting period - ERP) can be offered. In some cases, longer ERPs may be negotiated.
  • Contractors Pollution Liability (CPL) an also be purchased in conjunction with OPP programs at a very competitive price when compared to purchasing CPL coverages independently. This would sit excess of the general contractors CPL coverage.
  • In the event the underlying design professional’s policy is intact (limits and coverage) at the time of claim payment, the self-insured retention (SIR) under the OPP policy does not apply. In other words, SIR is erodable by the covered design professional’s available limit.