Contractor's Professional Liability and the CGL
Jeff Slivka | October 1, 2012
Yes, coverage of some professional liability exposures is available under the commercial general liability (CGL) policy, depending on how the policy is modified by endorsements. Unfortunately, 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.
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.
- Most insurers writing general liability coverage for contractors attach professional liability exclusions to their policies as a matter of course.
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 determining whether the CGL will respond to professional liability is the insurer—its underwriting philosophy with respect to contractors' professional exposures, and the scope of professional exclusions it customarily endorses onto the policy. Almost all CGL insurers now insist on some sort of professional liability exclusion when a policy is issued to a contractor. Not all insurers offer the two less restrictive standard Insurance Services Office, Inc. (ISO). Nonetheless, the availability of CG 22 79 or CG 22 80 as an alternative to a sweeping professional exclusion like CG 22 43 should be explored with each CGL insurer to determine its willingness to offer such coverage.
Let's examine the three endorsements commonly used by insurers to define the CGL policy's professional liability coverage for contractors.
- CG 22 43—Broad Professional Liability Exclusion Endorsement (loosely interpreted)
- CG 22 79—Construction Means and Methods Endorsement (loosely interpreted)
- CG 22 80—Design Build Endorsement (loosely interpreted)
Most contractors shopping for CGL coverage will have to accept one or another of these endorsements, depending on the insurer's willingness to insure a range of contractors' professional liability exposures.
Endorsement CG 22 43
ISO endorsement CG 22 43 is pretty straightforward. It is a broad exclusion of 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.
Endorsement CG 22 79
This less restrictive endorsement 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 as compared with the use of CG 22 43, 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 (GC) may not be covered under this endorsement if the 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.
Endorsement CG 22 80
ISO endorsement CG 22 80 was created to address professional liability exposures 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.
- 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 forgo the use of exclusionary endorsement CG 22 43 in favor of 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.
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