Ready or not, the US economy is reopening. This includes the commercial
construction marketplace, which, in some cases, either delayed or shuttered
projects altogether once COVID-19 became a reality.
But it's not all good news for an industry that was expected to
experience a downturn even before the pandemic. In addition to the 4 percent
drop in construction starts predicted by the 2020 Dodge Construction
Outlook, other likely challenges surround the industry, including
the ongoing shortage of skilled labor as well as the overall rise of
contractor's claims within the commercial, habitational real estate,
manufacturing, health care, and institutional sectors.
A competitive marketplace with stable premiums, contractor's
professional liability (CPrL) policies have subsequently become increasingly
popular for their ability to potentially, depending on the facts and
circumstances of the loss and the wording of the specific policy, cover the
damages arising from acts, errors, and omissions in the professional services
performed by or on behalf of any construction firm. In recent months,
additional coverage such as faulty workmanship coverage forms has even been
added to some policies to protect against the errors and omissions resulting
from the workmanship of the insured's self-performed work and/or use of
defective materials or products.
But, questions abound in an environment filled with uncertainty. The
coronavirus has forced insurers to reevaluate their responsibilities as
identified by the terms, conditions, and exclusions written into existing
coverages as well as the exposures that may or may not be covered in future
policies.
And, unfortunately, this discussion has just begun and is likely to extend
well into the next year. For instance, the following are only some of the
talking points that any insured must be prepared to contend with when
determining if the policy covers viral matter such as the coronavirus, SARS,
and influenza. Plus, it's also extremely important to keep in mind that
each insurer has the right to interpret and determine their policy language
according to their professional and legal guidelines.
CPrL Insuring Agreements
Generally speaking, the CPrL pays for the third-party "damages"
arising from the negligent acts, errors, or omissions committed during the
performance of the insured's "professional services." The key to
understanding the insurer's responsibilities lies not only in the
definition of these terms but also the direct connection demonstrated between
the "damages" and "professional services."
Depending on how the language is structured and the services listed,
"professional services" as defined in CPrL policies commonly pertain
to negligence allegations, the failure to maintain work environments or project
sites (including site safety), improper sequencing or scheduling, project
and/or subcontractor mismanagement, and the typical engineering errors made by
contractors or those hired to perform these services. Many, if not all,
insuring agreements require that any resulting damages must be directly
connected to the act, error, or omission of professional services to ensure the
damages fall within the scope of coverage.
In addition, in such an evolving and unprecedented environment, does the
standard of care for construction professionals change or even exist to
establish negligence? While "guidelines" and "protocols"
are being developed by states, industry associations, and other entities, is
that enough to establish some type of standard of care? Unfortunately, in this
area, there are only questions at this point that must be contended with since,
as noted, the insuring agreements typically require "negligent" acts,
errors, or omissions as a condition precedent to coverage.
Lastly, there is still some debate in the marketplace when it comes to the
definition of "damages." For instance, it's not uncommon to find
bodily injury (BI) and property damage (PD) exclusions in the typical
miscellaneous professional liability policies for other professions, such as
attorneys or accountants that insure against pure financial loss. In fact,
BI/PD exclusions can also be found in some (albeit, relatively few) CPrL
policies today.
However, if you have ever handled CPrL for construction professionals, such
as architects, engineers, or contractors, then you know this can present a
major setback because these events may not be covered by other policies.
Consequently, brokers and agents should consider advising their insureds to
include, if possible, language that would provide that any damages arising from
the negligent performance of professional services are included within the
coverage. The ability to include such wording will, of course, be dictated by
the insurance market.
Rectification/Mitigation Expenses
While it's typically offered under a separate insuring agreement,
similar to the liability coverage part, the coverage under these terms is
oftentimes tied to the same definition of professional services and predicated
on the potential negligent act, error, or omission. In short, rectification or
mitigation coverage is applied to those events when the insured and insurer are
looking to avoid costlier liability claims. In cases of microbial matter, an
argument can be made that the intent is to simply avoid professional liability
claims by paying for reasonable and necessary costs incurred in excess of any
applicable self-insured retention to disinfect, properly manage, or better
control the project site. It may not be that easy, however, unless those costs
or damages are the direct result of the insured's negligent acts, errors,
or omissions in performing professional services as discussed.
Pollution Conditions (PC) Exclusions
Pollutants are commonly defined as any solid, liquid,
gaseous, or thermal irritant or contaminant including smoke, soot, vapors,
fumes, acids, alkalis, chemicals, hazardous substances, hazardous materials,
and/or waste materials including medical, infectious, and pathological wastes
at levels in excess of those that occur naturally. Also, generally included are
electromagnetic fields, mold matter, Legionella pneumophila, and, in
some cases, microbial matter, specifically viruses or viral matter.
While it's common to see such definitions in a contractors pollution
policy (CPL) or the CPL coverage part under a CPrL program, the definition is
seldom used under a monoline CPrL unless the insurer intends to exclude such
risks or events. If there is an exclusion, the conversation may end there, but,
of course, the applicability of any exclusion will depend on the specific
wording and facts and circumstances of each potential claim. However, if
affirmative coverage is provided, and the definition is present, then one must
look closer at the definition to ensure the existence of viral or microbial
matter.
Even if viral matter doesn't explicitly exist in the definition, could
an argument be made that COVID-19 is an "irritant" dispersed as a
virus by workers? Maybe. But there seems to be little doubt that many insurers
would likely disagree and ultimately contest the claim.
In addition, considerations exist under the coverage for emergency response
costs, which are typically defined as the costs and expenses needed to mitigate
a job-site pollution event or pollutant resulting from the work performed by
the contractor or insured. To be covered, generally, the insurer must determine
whether the "event" is an emergent situation that requires immediate
action to avoid the imminent and substantial endangerment of people and the
environment. So, depending on the specific policy wording, a connection must be
made between the work being done at the job site by the insured and the
resulting spread of viral matter. Insurers are likely to contend (and insureds
are likely to disagree) that the mere presence of viral matter is not enough to
trigger coverage.
Communicable Disease Exclusions
This one seems easy and may not be as uncommon in the future as it is today.
It is highly likely that any CPrL policy containing a communicable disease
exclusion would outright exclude any claims or losses related to COVID-19 and
similar communicable diseases. Most of these exclusions are intended to be
all-encompassing, applying to any claims based on or arising out of
any exposure to, or contact with, bodily fluids of infected humans.
Once again, however, be cautious since wordings can vary, and each potential
claim needs to be assessed based on the potentially applicable exclusion and
unique facts and circumstances of each situation.
Every Situation Accompanies Its Own Circumstances
It bears repeating that each separate incident will accompany its own set of
facts and coverage circumstances. That is especially true in a COVID-19
environment where the rules and details are changing almost daily.
In addition, since the situation is so "new," insurers are
currently in the process of assessing and reevaluating their own policy
language and the conditions under which a coronavirus claim may or may not be
covered.
Several years ago, insurers were unsure about the classification of
Stachybotrys/ Aspergillus. Was it a CGL or an environmental claim? For
the most part, it ultimately became an environmental claim with the
environmental forms modified to include "microbial matter" or
"mold" under the definition of pollution conditions. The same could
hold true for the coronavirus, although the next steps are likely uncertain for
the foreseeable future.
Conclusion
While it's in no one's best interests to inundate insurers with
frivolous claims and incidents, it is always prudent to seek expert advice and
directions in a time filled with doubt and questions.