Contractor's Professional Liability and the CGL
March 2007
Yes, there is a level of professional liability
coverage that can be secured under the commercial general liability (CGL) policy
using Insurance Services Office, Inc. (ISO), endorsements or the equivalents.
Unfortunately, and even though its 2007, many insurance professionals offering
insurance and risk management services to contractors are still not sure about
the differences between the various alternatives available to their clients
for professional liability under the CGL policy.
by Jeff
Slivka
New
Day Underwriting Managers
There are vast differences between the CGL and a common contractors professional
liability (CPrL) policy, such as:
- The CGL is an occurrence-based policy while the CPrL is always claims-made.
- The CGL policy provides no limit for payment of defense costs while
the CPrL limits total payment, including defense, to the limit of liability
purchased.
- The CGL usually carries a lower deductible, if any at all, and many
CPrL programs typically apply a $25,000 per-claim deductible or higher.
- The CGL responds to bodily injury and property damages, while the CPrL
responds to a broader form of damages.
With that said, it is important to understand how these differences influence
organizations to purchase CPrL in addition to the CGL. One of the prominent benefits is the difference in covered damages.
The CPrL provides broad coverage for damages—defined differently by each insurer
but generally defined as a monetary judgment, award, or settlement of compensatory
damages and where allowable by law, punitive damages; whereas the CGL is much
more restrictive. The CGL provides coverage only if bodily injury or property
damage occurs. Keeping it simple, economic damages, such as acceleration costs,
delay damages, cost for remedial design, reconstruction, and the like arising
out of professional services performed by or on behalf of the named insured
would not be a covered loss under the CGL but would be covered under the CPrL.
One of the deciding factors of whether or not the CGL will respond to professional
liability is the insurer. Not all insurers offer the standard ISO endorsements
discussed below. Nonetheless, the issue should be raised with each CGL insurer
to determine their willingness to offer such coverage. Under the CGL policy,
ISO offers three specific endorsements to insurers that address professional
liability for contractors.
- CG 22 43—Professional Liability Exclusion Endorsement (loosely interpreted)
- CG 22 79—Construction Means and Methods Endorsement (loosely interpreted)
- CG 22 80—Design Build Endorsement (loosely interpreted)
Each come with certain advantages, yet have limitations. However, if a claim
for professional liability is covered under the CGL, at minimum, defense costs
are unlimited. Each is explored and discussed below, and those of us offering
insurance services to contractors should have at least an intermediate understanding
of each endorsement.
CGL Endorsement 22 43
ISO endorsement CG 2243 is pretty straightforward. It is an exclusion for
professional services performed by or on behalf of the named insured. If this
exclusion is attached to the CGL, and the contractor is providing any of the
professional services defined in the exclusion, it would be prudent to have
this exclusion removed and replaced with either CG 22 79 or CG 22 80, and explore
the need for CPrL coverage.
CGL Endorsement 22 79
ISO endorsement CG 22 79 was developed to correct the deficiencies of CG
22 43 with respect to construction means, methods, sequences, and techniques
of the contractor. Simply put, construction means and methods are those processes
or techniques that contractors use during the course of construction to construct
a building or structure. Endorsement CG 22 79 excludes coverage for professional
services defined within the endorsement as:
- preparing, approving, or failing to prepare or approve, maps, shop drawings,
opinions, reports, surveys, field orders, change orders, or drawings and
specifications; supervisory or inspection activities performed as part of
any related architectural or engineering activities.
However, it does provide some level of coverage for the construction means
and methods with an exception to the definition of professional services:
- Professional services do not include services within the construction
means, methods, techniques, sequences and procedures employed by you in
connection with your operations in your capacity as a construction contractor.
No doubt, this affirmatively broadens coverage for a contractor, but there
is a limiting factor associated with it. The operative phrase in the above exception
is “employed by you in connection with your operations.” While the intent of
this endorsement is to provide coverage for services within the construction
means, methods, etc., it is apparent that if professional services related to
construction means/methods were performed on behalf of the contractor, coverage may not exist.
For example, claims arising out of the design of false work on a bridge project
performed by a licensed professional engineer subcontracted with the general
contractor may not be covered under this endorsement had the general contractor
(GC) had this endorsement on the policy.
Another example would be shoring/trenching on a parking structure project.
Had a subcontractor performed the design for the shoring/sheeting on the project,
the GC would have no coverage as the work was not performed by the named insured.
In essence, this endorsement provides virtually no coverage for those GCs that
perform no work. However, in the event the subcontractor has the CG 22 79 attached
to its CGL policy and provides additional insured status to the GC, the GC may
have some level of protection regardless.
Although there is some element of coverage for professional liability, this
endorsement still falls short of adequately addressing professional liability
associated with various professional services performed by many construction
firms such as construction management, pre-construction consulting services
and design-build services.
CGL Endorsement 22 80
ISO CG 22 80 was created to address professional liability exposure for contractors
while performing design-build services or for any professional services performed
on their behalf. It provides coverage for professional services, as defined
in the endorsement, performed on the named insured’s behalf. It explicitly excludes
coverage for professional services performed by the named insured.
Although the endorsement does provide enhanced coverage, it does have its
limitations:
- It only provides coverage for bodily injury and property damage—the
basis for the CGL coverage form. This is extremely important to remember:
it does not provide coverage for economic damages as discussed earlier.
- It does not provide coverage for professional services performed by
the named insured which may be construction management, pre-construction
consulting services, value engineering, scheduling, inspection services,
subcontractor management, etc.
In summary, as long as the CGL insurer is willing to offer CG 22 79, CG 22
80, or both (depending on the professional services provided by the construction
firm), it would be a prudent first step in attempting to address a contractor’s
professional liability. Even if it only allows for payment of defense costs,
it is a huge advantage, since all CPrL programs cap the limit of liability at
the aggregate limit of the program purchased.
Don’t fool yourself however. There are many limitations to the endorsements,
primarily due to the fact that the CGL only covers bodily injury and property
damage. To fully insure a contractor’s professional liability exposure, CPrL
coverage should be investigated.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.