Owners Protective Professional Indemnity Insurance
March 2008
Even though the professional liability marketplace
has expanded somewhat over the past few years, and in 2008 we will definitely
see rate decreases, most of this news resides with practice or corporate programs.
When it comes to insuring professional liability on a project-specific basis,
construction project owners still have few alternatives.
by Jeff
Slivka and Tony Polini
New Day
Underwriting Managers
The first—and most recognized—alternative is a project professional liability
program that insures the design team, and may
include the contracting firms that are performing certain professional services.
Only two insurers are willing to offer project professional liability coverage
even if they are not providing the firm's corporate or practice insurance program.
They are Lexington Insurance Company and Zurich Construction, via Steadfast
Insurance Company. (Note: other insurers
may offer project coverage but only if they are insuring their practice program.)
Each insurer's program has its benefits and drawbacks, and careful consideration
must be given to identifying the primary beneficiary of coverage: architects,
engineers, construction firms, owners, or all of the above. Many times, this
can be a difficult task, if not impossible. Couple this with the high cost for
project professional liability programs, and we see many project owners passing
on project coverage and opting to rely merely on the design professionals' practice
insurance. On sizeable projects, this may not be a prudent move.
The other option or insurance product that is gaining more and more attention
with owners of construction projects is the owners' protective professional
indemnity or OPPI policy. Offered to owners ("owner's protective") of construction
projects who hold contracts with design professionals, the OPPI provides first-party
indemnity to the owner (insured) for damage they incur as a result of negligence
of the design professionals. It does not extend coverage to the design team
so the possibility of defense cost eroding the limit of liability, which is
usually a concern with a project professional liability program, is drastically
reduced, if not eliminated. The OPPI is in the name of the owner and sits excess
of the design professional's professional liability insurance and essentially
supplements coverage and capacity that the design firms bring to the project
via their practice programs. No design professionals are named to the policy.
At first, the major attraction to the OPPI is usually cost. Theoretically
speaking, the premiums are usually 30 to 40 percent lower than a typical project
professional liability placement. However, for owners of large construction
projects that want to ensure they are protected properly from professional liability
of the design team, there are numerous benefits, as outlined here.
- All the benefits of having an owner-controlled program exist, such as
primary protection for the named insured (owner), consistency in coverage,
and reduced cost to administrate the program.
- The policy supplements the design professional's professional liability
program, providing direct benefits to the named insured, and allows the
design professional to apply its own practice program. This eliminates potential
coverage problems, such as separately insured project exclusions, that may
arise when a project professional liability program replaces the design
professional's practice program.
- The policy offers difference-in-conditions (DIC) coverage above the
underlying professional liability policy, extending coverage to the named
insured in the event the underlying policy is deficient in coverage. Some
good examples include mold exclusions, habitational exclusions, construction
management exclusions, or contractual liability exclusions that may exist
in a design professional's practice program.
- Defense costs for third-party claims arising out of the design professional's
services are provided to the named insured under a specific coverage part.
- Contractor's pollution coverage can be included providing the named
insured with excess coverage for pollution claims—including mold over the
contractor's pollution liability coverage.
- Coverage can be provided for the liability of the owner's professional
services in the event the owner has an engineering/construction entity on
staff.
- The policy can be offered on a project-specific basis for the construction
term plus up to 10 years on the extended reporting period (ERP) or annually
for all construction ("blanket" coverage) of the named insured.
- 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 "protective" policy does not apply. In other words, the SIR is
"erodable" by recovered design professional's available limit.
- It can be an effective alternative for those owners requiring design
builders and general contractors to secure professional liability from their
design professionals.
- Limits of liability can be secured up to $25 million with one single
insurer. Higher limits may be obtained through use of multiple insurers.
Markets
There are only a few insurers offering "protective" policies: Lexington Insurance
Company, Zurich Construction/Steadfast Insurance Company, and Arch Insurance
Group have been offering the product for some time. However, in 2007 Beazley
USA began offering OPPI as well.
All insurers have capacity up to $10 million however; Zurich is the only
one with $50 million in capacity. Zurich is probably the insurer with the most
experience in OPPI having offered the product for over 10 years. Coverage terms
and conditions can vary, so it is imperative that a sound understanding of the
contractual relationship between the named insured and the design professional
exists prior to pursuing the coverage.
As this product continues to evolve, look for it to become a more desired
option for owners than the alternatives currently available to them.
Tony Polini
is Assistant Vice President of New Day Underwriting Managers in Bordentown,
NJ.& He can be reached at (609) 298-3516 ext. 107 or at
.
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