Call it whatever you want—owners protective, protective, "Opie," or
owners protective professional indemnity (OPPI)—the coverage has secured its
place as a valuable option to owners looking to protect against the
catastrophic design errors that can occur during nearly any construction
project.
In fact, nearly 10 separate insurers offer similar OPPI policies on at least
a macro basis. All also offer at least two core insuring agreements that
include first-party indemnity and third-party defense coverage forms.
Simply put, first-party indemnity, referred to as "protective,"
indemnifies the named insured (i.e., the owner) for damages in excess of the
available design professional's insurance or the "underlying
insurance." In addition, third-party defense was developed to protect
owners from the third-party actions arising from the vicarious liability
assumed through the contracting of professional services with design
professionals (DPs). A third coverage part, excess contractors pollution
liability coverage, can either be baked right into the form or offered via an
endorsement.
OPPI Policy Benefits
So, there it is. It's just that easy. Because we all know how simple
excess insurance is to place, until all of the nuances are considered to place
the insurance properly. But, before we get into the complexities, here
are the basic OPPI benefits.
The Professional Liability (PL) Limits of the DP
DPs often carry low limits of professional liability (PL) insurance to cover
all of the work performed by the firm on an annual basis. According to the
American Council of Engineering Companies 2018 annual insurance survey, DP
firms generating $49.9 million in fees or less typically purchase PL limits at
$5 million or less. Even more alarming, 32 percent of the firms buy $3 million
or less in coverage. Furthermore, when it comes to certain engineering
disciplines, especially structural and geotechnical, 50 percent of the
structural engineering firms surveyed purchased $2 million or less in PL
insurance or less, while 43 percent of the geotechnical engineering firms
surveyed purchased $2 million or less. OPPI relieves this concern of minimal PL
limits offered by the AE.
Expansive Architects/Engineers (A/Es) PL Market
To exacerbate the concern, there are an estimated 60 insurers insuring
design professionals with varying scopes of coverage. This has made it
extremely difficult to verify the quality of coverage carried by those design
professionals unless a lengthy insurance specification is created. But, even
then, who's to say that the firm complied with the specification? OPPI
includes difference-in-conditions (DIC) coverage over the contracted design
team's PL policies. In other words, the OPPI offers a broader coverage form
than the DP's PL insurance in the event the DP's PL insurance contains
something like habitational, mold/bacteria exclusion, cost estimating, or
design/build.
Changes in the A/E "Defense Landscape"
There is a continuing trend for A/Es to remove defense provisions from their
professional service agreements. In some cases, this has left owners and/or
general contractors to fend for themselves when legal actions are brought as a
result of the services performed by the architect or engineer. In California,
for example, under Senate Bill 496, architects or engineers are only liable to
pay a proportionate percentage of the related attorneys' fees if they are
found at fault under the professional service agreements they entered into on
or after January 1, 2018. This has the potential to minimize payments made to
the owner or general contractor for costs incurred by these entities caused by
the AE's services.
OPPI Policy Pitfalls
Now, onto the dangers or pitfalls facing OPPI placements. First and
foremost, the contract flow needs to be identified and thoroughly understood.
The perfect triangulation of contracts can occur on smaller projects but can be
far more complex on the larger ones. For instance, not all professional
services firms contract directly with the prime or project A/E. Some owners
hire geotechnical engineering firms well in advance of hiring the prime A/E to
determine if the site will accommodate the proposed structure. There could also
be various wind, environmental, or related studies that may have occurred prior
to the selection of the actual prime A/E, meaning that the owner is holding
contracts with multiple professional service firms. In other situations, there
may be prime A/Es that do not want to retain the services of structural
engineering firms, forcing the owner to contract them directly. In most cases,
if the firm isn't listed, the protective indemnity will not apply.
As a result, ALL contracts held by the owner MUST be identified up front
since the typical OPPI provides an excess coverage to the owner for the
negligent acts or the firms in which they are under direct contract. This
includes firms that are either under direct contract or directly retained by
the owner. There is nothing more embarrassing than placing an OPPI only to find
months later that additional professional services contracts are held by the
owner, or worse, learning that an error committed by the firm created potential
insurance gaps under the project OPPI placement.
And then there're the complexities surrounding the contract documents
themselves—specifically the limitations of liability (LoL) provisions.
Enforceable LoLs minimize the recovery the insured receives under the
protective indemnity portion of the policy since it includes the damages the
insureds are legally entitled to recover from the negligent DP. In the event
that the insured accepts an LoL that is lower than the minimum insurance
requirement (MIR), the insured may be forced to pay the delta between the LoL
and the MIR or forfeit their protective indemnity (PI) coverage altogether.
Ideally, the owner should not accept any LoL. In this way, the PL coverage can
be structured to attach as excess to whatever PL insurance the DP provides to
the insured. However, you still run the risk of the underlying DP’s PL
insurance being depleted by other unrelated claims. I guess the latter is the
better of two evils.
Now the areas to watch under the policy itself. The following are just a few
of the conditions that typically trip insurance professionals who are not
intimately familiar with the product or process.
Setting the Proper MIR
The MIR is just that—it's a minimum. Unfortunately, many insurance
professionals do not understand this. They incorrectly see the MIR as an
attachment to the PI; it is not. The PI attaches to whatever limit of PL
insurance is available to the owner from the DP's PL insurance. This also
applies to every professional services firm under direct contract with the
owner. So, if the MIR is set at $1 million for each claim/aggregate with $2
million available from DP's PL insurance, the PI attachment point would be
$2 million, provided all of the other terms and conditions were met. The same
would also occur in the event that the DP's PL limits are exhausted or are
not applicable due to the exclusionary wording. In a similar scenario, if the
MIR is set at $1 million for each claim/aggregate and the DP's PL provides
nothing, the PI would attach at the first dollar. However, it must be noted
that not all OPPI programs act in this manner unless they are written
accordingly.
And another thing about MIRs. There can actually be several different MIRs
applied to the architect; geotechnical engineering firm; structural engineering
firm; mechanical, electrical, and plumbing engineering firm; and anyone else
who contracts separately with the owner. As a result, they all need to be
confirmed and accounted for the OPPI to act properly.
Self-Insured Retentions (SIRs)
Under some OPPI programs, the self-insured retention (SIR) applies
regardless of the costs available to the owner from the DP's PL insurance.
In some cases, this can be expensive as many insurers apply a $250,000 or
higher SIR for each claim. Subsequently, it would be prudent to ensure the SIR
is as low as possible or even removed entirely. You certainly don't want to
find yourself in the precarious situation where the insured is forced to pay
hundreds of thousands of dollars to just get to their PL layer.
DIC Provisions
This provision allows the OPPI to "drop" into a primary insurance
position in the event that a DP's PL insurance has been eroded or is more
restrictive than the OPPI. With so many varying coverage forms available to
architects and engineers, this is an important OPPI feature that could prove
essential during catastrophic situations. Why do I bring up this
"simple" concept? You guessed it, not all OPPI forms allow for DIC.
Some provide true "follow-form" OPPI insurance. In other words, if
it's excluded under the underlying DP's PL insurance, it's likely
excluded in the OPPI PL coverage as well. Missing this will remove one of the
primary benefits offered through OPPI programs.
Maintaining Underlying PL Insurance
This provision can have many different titles, but typically refers to the
limit of PL insurance that the DP is provided via a certificate of insurance as
stated by the MIR. Many insurers require this PL limit to be evidenced prior to
construction. Others, however, demand its inclusion throughout the life of the
policy and the entire project term. While it's prudent regardless of the
OPPI placement, this condition could actually void the coverage altogether if
violated—another situation that may not be uncovered until a claim or error is
discovered or submitted. During any given project, a DP can reduce its limit of
insurance, have exclusionary wording attached, or be canceled altogether. As
stated above, it's prudent to apply this technique, but it should not be a
condition of the owners' OPPI coverage.
Conclusion
OPPI placements are far more complicated than often realized. Honestly,
it's just flat-out wrong to think of it as "only excess
insurance." The time really needs to be taken to understand how it all
comes together—contracts, delivery method, structure, and insurance—because
even "simple" errors can lead to devastating repercussions that will
leave the owner-client in deep financial trouble and with far less coverage
than either promised or anticipated.