type, “protective” policies are typically priced 40 to 60 percent lower than project professional liability policies with the same limits, retentions and policy terms. There should be no mystery surrounding the reduced cost as the protective is an excess coverage and contemplates the underlying design professional’s PLI will pay a portion of the loss.
Protective also provides the benefits of an owner or contractor controlled program that includes dedicated protection for the named insured—consistency in coverage, and reduced administrative costs on a project-specific basis for 10 or more years. Other advantages include the ability to offer, cover or supplement the following:
- IDifference in coverage, difference in limits (DIC/DIL) above the underlying professional liability policy in the event the underlying policy is deficient in coverage, or the underlying has been eroded from an unrelated claim
- Defense costs for third-party claims arising out of the design professional’s services
- Limits of liability secured up to $25 million with one single carrier. Higher limits may be obtained through use of multiple carriers
- Excess coverage for pollution claims, including mold and bacteria
- Rectification coverage, depending on the primary named insured (predominantly offered only the lead contractor). Rectification or mitigation coverage is another first party coverage for damages incurred by the named insured to remedy a design error or error in professional services. It differs from protective indemnity because it is a primary insurance subject to a self-insured retention, rather than sitting excess of the design professional’s PLI. It is typically purchased as part of the CPrL program similar to protective indemnity.
4. Project Specific Professional Liability Insurance
Project-specific professional liability (PSPL) policies often replace all the annual practice policies of the design and possible construction team, making it a true dedicated primary protection for projects. But as primary professional liability coverage, PSPL is the most expensive alternative for insuring projects. Although dedicated to the project, a third party can make a claim against this policy, possibly eroding limits intended to protect the project owner.
Properly structured PSPL policies often provide the broadest form of protection for design entities involved in construction projects. Although contractual arrangements and the services rendered can vary greatly, the lead design professional will often hold the contracts for the entire design team. In these instances, the policy structure is simple—all entities are named accordingly. However, life in the construction world is not always that simple. Sometimes owners will contract directly with the geotechnical engineering firm, structural engineering firm or even the fire protection engineering firm. Other times, the general contractor may contract with the MEP contractor, who happens to also provide design services. Nonetheless, the proper coverage of all services and events is dependent on a clear understanding of contractual arrangements across the various service fronts. Other benefits include:
- Joint defense for the design team, limits potential finger pointing.
- Dedicated project limits with extended reporting periods (ERPS) as long as 10 years. This is designed to preserve the design team’s professional liability insurance (which should sit excess of any project placement)
- Financial security for duration of project
- Primary protection for all design and/or construction entities
- Continuity of coverage throughout project and ERP
- Rectification coverage may be available for damages incurred by the named insured to correct or remedy a design errorDB or owner may be indemnified by policy for design team’s services
- Contractors Pollution Liability (including mold/bacteria) coverages, which can be included to provide coverage for pollution conditions arising out of construction work
- Coverage of third-party defense costs arising from design team errors
The key to selecting the proper professional liability alternative for a specific project entails matching program benefits with the entity or entities requiring protection. It’s very possible that no one form meets all the necessary goals, though. For example, proper protection for a mega project may require a combination of the above options, such as PSPL with a protective excess policy sitting above.
Plus, the process is often further convoluted by the fact that few carriers offer PSPL. There are more options for protective policies, but that list shrinks when considering rectification/mitigation coverage. In addition, coverage terms and conditions can vary greatly. So, it is imperative to establish a sound understanding of the contractual relationship between the named insured and the design professional well before the policy is enacted.
As a result, it may take a combination of alternatives and techniques to provide the proper amount and coverage type needed to protect the necessary parties from project problems. There is no cookie-cutter approach to construction risk management. Due diligence must be performed in every instance. If not, catastrophe should also be added to the list of alternatives.