Special thanks to Daniela Compton, CRIS, ARM, senior account manager at RT Specialty, for coauthoring this article.
Catastrophic design or engineering errors have always been and will always be an inherent risk in the construction industry. Disasters such as the pedestrian bridge collapse at Florida International University in 2018, the Hard Rock Hotel collapse in New Orleans in 2019, and the Champlain Towers South condominium collapse in Florida in 2021 highlight the persistent risks of design flaws, engineering errors, aging infrastructure, and climatological impacts on the building industry. Incidents don't have to make national headlines to tragically alter lives either. From a parking garage collapse in Massachusetts during demolition that killed a worker to a fatal building collapse in Washington, DC, during a renovation, the costs of design and engineering mistakes are high for all parties involved in a project, including owners.
The following are among the common causes of design or engineering errors in construction.
Ignoring or overlooking dynamic forces such as wind, water, snow loads, or seismic activity
Poorly designed foundations and other structural support systems
Geotechnical errors such as improperly accounting for ground-related conditions
Misapplication of materials and building products
Unclear or insufficient communication between involved parties
Accelerated project schedules
Improper planning
Poorly engineered temporary structures
An overarching trend in construction in recent years is owners and developers looking to acquire revenue-generating assets earlier than in the past, leading to compressed project timelines. This mindset for speedy completion and fast-track delivery methods can also lead to poor communication and errors in any type of professional services performed on a project.
Owners, design professionals, and contractors all have a role in reducing these risks—minimizing the impact and even eliminating the risks. From an owner's perspective, the first step is creating a clear project scope, coupled with the selection of quality design professionals and construction teams, not to mention the proper project delivery method (PDM) for parties involved and project type. Design and engineering risks are exponentially greater on larger, more complex projects involving multiple PDMs for separate phases or contracts that are all for the same project.
Contracts also play a significant role in managing risk for owners, primarily shifting the design and overall professional liability risk to the design and construction teams through various provisions such as indemnities and professional standards of care. When those tactics fail, all parties suffer the financial consequences of the failure or error. Even more, when contracts fail to shift risk to responsible parties or insurance proceeds aren't enough to pay for the resulting damages, the owner ends up holding the proverbial bag.
In addition to the above strategies, owners should find more effective ways to manage the potential financial impact. Insurance is an important method of funding a loss once it occurs. Professional liability insurance is a foundational tool to protect owners, but securing the proper coverage for a project is no easy task and typically comes at a high price. Catastrophic professional liability claims, coupled with exorbitant rates, have resulted in today's tight project professional liability insurance marketplace.
Many owners use project-specific professional liability (PSPL) insurance. However, PSPL policies, regardless of whether they insure the design professionals, design builders, contractors, or all of those parties, can be costly because they circumvent the design and/or construction team's professional liability insurance and provide professional liability for the team on a primary basis.
In many cases, PSPL premiums could be a simple percentage of the limit of insurance purchased. However, a product developed about 25 years ago, but has seen increasing demand over the past 10 years, is owners protective professional indemnity (OPPI) insurance. OPPI is a valuable form of excess insurance that typically provides defense and indemnity coverage for owners and developers of construction projects for damages in excess of the professional liability limits available to them from the design and/or construction team.
A Closer Look at OPPI Insurance
OPPI is a type of excess insurance designed to protect project owners from damages resulting from errors in professional services committed by the design and construction teams. The main benefits of OPPI include the following.
Direct protection of the project owner for professional liability that may not be fully covered by the design professionals' or contractors' own professional liability insurance policies. OPPI insurance ensures the owner is covered even if the responsible party's insurance is inadequate or unavailable. It does not extend coverage to the design or construction teams.
If the design professionals or contractors have exclusions or insufficient insurance limits in their policies, OPPI coverage steps in to provide difference-in-conditions coverage, protecting the owner where the design or construction team's insurance does not.
Primary defense coverage in the event that an owner is brought into third-party legal actions from professional services performed by the design and construction teams.
Because OPPI is an excess insurance, the cost is greatly reduced depending on the limits of professional liability insurance evidenced by the design and construction teams. In most cases, insurers underwriting OPPI coverage represent that the cost of an OPPI policy should be 40–50 percent less than a PSPL policy.
In the past few years, more insurers have entered the OPPI marketplace, creating more competition. Many of those markets can offer limits up to $25 million per claim/aggregate, making it a bit easier to build $100 million programs for larger, more complex projects.
Insurers can also offer pollution coverage arising from the physical work of the construction team, providing similar excess insurance in the event a pollution condition arises.
Another important aspect to OPPI insurance is that many owners tend not to think about the professional liability risks of the contractors they hire. Most professional risk does reside with the design team and the engineers, but within the realm of physical construction, many services pose professional liability risk. OPPI should be structured above all firms that present the owner with professional liability risk, not just the design team.
Construction-related Professional Liability Risks/Exposures
Management of subcontractors
Failure to detect faulty work
Failure to provide proper direction/inspection or mismanagement
Scheduling/sequencing
Construction means/methods (temporary works)
Engineering associated with scaffolding, tower crane bases, footings, trenching/shoring, and flatwork—temporary support systems and the like.
Utilization of specialty subcontractors/engineers (lower-tier "design/build")
Installation "design"/engineering
Equipment installation, such as rooftop compressors
Field modifications to design
Design assist/delegation
Specifications—design/prescriptive versus performance; each presents a degree of professional risk
Value engineering
Building information management systems—management of data
Management of as-builts
Going Deeper into OPPI Coverage
OPPI offers two main coverage parts: protective indemnity and third-party claim defense and indemnity. Protective indemnity is a first-party coverage that protects the insured (the project owner) for damages the insured incurs and is legally entitled to recover from the negligent design professional with which they are under contract. It is an excess coverage for damages incurred in excess of the hired design professional's available limits of professional liability insurance.
An OPPI policy typically does not attach a self-insured retention (SIR) to the protective indemnity coverage but only the third-party claim defense coverage part. In addition, insurers will apply/refer to a minimum insurance requirement (MIR) as a virtual attachment point—the level of insurance at which the protective indemnity coverage is supposed to attach when a claim occurs. The insurer uses the MIR to set a virtual attachment point for the design professional/any other professional under contract with the owner as a limit required of those individuals and what they must carry/evidence. This also helps the insurer price the insurance. It's a virtual attachment point because, at the time of the claim, the attachment could be the MIR as stated in the policy, or it may be higher or lower than the established MIR. It all depends on what the design professional has available to the owner from its professional liability insurance. The point is, don't rely on the MIR as the true attachment point.
How Do Contractual Limitations of Liability Influence OPPI Coverage?
If an owner enters a contract with a design professional that includes a limitation of liability, the owner needs to ensure that limitation of liability is not less than the MIR set by the insurer. If it is, they would need the insurer to agree to this limitation of liability to prevent any gaps in coverage. If a claim resulted in a loss of $15 million, and the MIR/attachment point was $5 million, but there was a limitation of liability in the contract not approved by the insurer of $1 million, in a best case scenario, the insurer would provide coverage excess of the MIR/attachment point of the design professional, which would leave the owner/insured responsible for the difference of $4 million.
A worst-case scenario would include the insured voiding coverage altogether, since the damages insured under an OPPI policy are damages that the insured is legally entitled to recover from the design professional or contractor. This is because the insured agreed to limit its recovery from the design professional or contractor to the limitation of liability in the contract.
How Does an OPPI Policy Benefit the Owner?
An OPPI policy protects a project owner from any losses incurred from the negligent acts of a design professional/any professional in contract with the owner. Because the owner is the first named insured, it gives the owner dedicated limits in the event that a professional's insurance is exhausted or reduced by other claims. If those limits are exhausted, an OPPI policy would drop down to provide primary coverage for the owner and may be subject to a SIR.
Typically, the protective indemnity coverage part does not apply an SIR, which means the insurer would attach at zero dollars. However, it should also be noted that, if a firm's MIR is less than the agreed-upon amount, the owner might have to pay the difference out of pocket to preserve its OPPI coverage.
What Does the Third-Party Claim Defense and Indemnity Do?
When it comes to the OPPI's third-party defense coverage part, it's a bit simpler. It will typically provide defense expenses to the owner in the event it is a party to any legal actions brought by a third party caused by the negligent acts, errors, and omissions of the hired design and construction professionals.
How Does an OPPI Policy Work?
Generally, during construction, the overall team notices a potential discrepancy from the construction documents. This could be the way something looks, inconsistencies in drawings or plans, conflicts in specifications, failed inspections, cost overruns, building code violations, change orders, or some other similar events. Further investigations led to the conclusion that one of the design team members committed an error that may rise to the level of negligence. All parties will try to remedy the situation, but it's typical for the owner to notify the lead design professional that they should report the issue to their professional liability insurer or, in some cases, make a claim against the negligent party and their professional liability insurer.
At this point, it is imperative for the owner to notify its OPPI insurer to trigger the protective indemnity coverage part and to ensure the owner does not commit any reporting violations under its coverage. This is excess insurance, so the OPPI insurer may simply investigate the underlying cause and monitor the actions of the professional liability insurer on the underlying claim. If it is a valid claim against the underlying insurer, which can take months or years to determine the ultimate cause and value of the damages, then the proceeds from the underlying professional liability insurer are applied against the owner's total damages.
If the professional liability limits of the underlying insurer exceed the total damages incurred by the owner, then the owner is made whole, and the OPPI policy pays nothing. If the damages exceed the limits of the underlying professional liability insurer, then the OPPI policy will pay the difference.
There are situations where this process is circumvented or expedited, especially when the underlying professional liability policy has exclusionary language leaving the owner with no underlying insurance. Therefore, the OPPI policy responds sooner, but one should understand the typical benefits and drawbacks of excess insurance to establish proper expectations of the coverage.
For a simple example, an owner is damaged in the amount of $10 million. The underlying insurer/design firm eventually pays its maximum limit of liability on its professional liability policy of $5 million. The OPPI policy would pay the difference, or $5 million.
Other Alternatives Available to Owners
Owners have various alternatives, or a combination thereof, to mitigate the financial impact of design or engineering errors on any given project.
Requiring No Professional Liability Insurance in the Contract
Relying solely on contractual risk transfer via indemnity agreements is a simplistic alternative to insurance. Owners have the option to not require a design professional or design builder to provide evidence of professional liability insurance, let alone carry insurance limits specifically for a project. Owners or contractors engaged in lower-risk construction and design, such as some retail or box stores, may want to transfer the risk contractually. Maybe there is just no need to back up any contractual indemnities with an external financial mechanism? Maybe the architect or engineer is financially solvent with substantial assets to back the indemnity? Betting on "maybe" could prove costly.
Requiring Design/Construction Teams to Carry Professional Liability Insurance
The most common alternative is requiring the design professionals or design builders to evidence specific limits of professional liability insurance. However, this option may be inadequate. For example, is the owner of a $300 million structure properly insured for professional liability when it only requires the design professional to carry $1 million or $5 million in professional liability limits? Even if the entire design team, usually comprising five or six firms, carries $1 million in limits, that doesn't leave much professional liability insurance if severe issues arise.
To compound the issue, often owners can't even be sure that the limits requested in the contract will be available when needed. In fact, there are a variety of reasons that the coverage may not exist at the time of a claim, such as the following.
Impairment or exhaustion of the evidenced limits due to claims on other, unrelated projects.
Coverage restrictions and exclusions around specific services or projects, such as habitational projects or bodily injury exclusions, along with microbial matter-related exclusions. A simple certificate of insurance to evidence coverage will not show these kinds of restrictions, and the quality of coverage varies greatly among the insurers writing construction-related professional liability risks.
Insuring liability through the state statute of repose. When simply requiring evidence of professional liability insurance, there is no guarantee that the architect, engineer, or contractor will be able to secure the required coverage term to meet the state's statute of repose.
Compounding these concerns is the lack of professional liability insurance purchased by many design professionals. There could be good reasons for carrying such low limits of professional liability insurance, starting with cost. However, engineering and design errors may lead to substantial damages. This is one reason why owners and contractors can benefit from considering alternative financing mechanisms rather than just relying on the design or engineering firms' professional liability insurance.
Project-Specific Excess Professional Liability Endorsement
Project size and complexity drive the limit of professional liability insurance needed, and not all design professionals buy substantial limits or limits commensurate to the risk. Design professionals that carry inadequate practice limits can often secure a project-specific excess professional liability endorsement on their program to meet contractual requirements. While a cost-effective way to secure higher limits, the endorsement must be carried throughout the statute of repose where the project is occurring and needs to survive the switching of insurers if that happens when the insurance renews. Since the endorsement is attached and is excess of the firm's practice policy, similar issues as stated above exist.
PSPL Insurance
While some PSPL programs may include the design and construction teams, under the typical policy, only the design professional or the design team is insured against the negligent acts, errors, or omissions resulting from the professional services performed by the design professional as well as the vicarious liability of the engineering firms under contract with it.
Coverage may also extend to all lower-tier design and engineering firms that can be listed or provided on a more "blanket" or "wrap-up" basis—providing primary professional liability coverage to all design and engineering firms on the project. In such cases, the PSPL policy will typically have a dedicated limit on a primary basis. Ideally, the proper coverage should be relatively simple to construct, establishing coverage certainty among all insured entities.
Another advantage of PSPL policies is that project owners can be added as indemnified parties—affording protection if owners are named in lawsuits or other actions resulting from the design team's professional services. The indemnified party endorsement was crafted to provide the owner coverage for both defense expense and indemnity payments, avoiding issues the typical insured-versus-insured exclusions cause when owners require that they be named as additional insureds under the PSPL policy. This can be avoided with the indemnified party endorsement.
While PSPL coverage is a more comprehensive approach to insuring the design risk on the project, it does have drawbacks. PSPL programs are normally written to protect only the design team and their associated services. Although the design and engineering services on a typical construction project are most of the professional risk, the construction firm (or design builder) can present professional risks that are not addressed by a PSPL policy.
Another drawback is that the limit of liability may become the maximum recovery amount if the other insured firms' practice programs are not modified to sit in excess of the existing PSPL policies. Even if a PSPL policy is purchased, it may be prudent for those insured firms to ensure their practice professional liability program is structured properly to act as excess insurance above the PSPL program in the event that liability or damages exceed the limits under the PSPL coverage.
Other issues surround defense costs included within the limit, which can erode quickly in complex claims, and the overall premium can be significant because this program would replace the design firms' practice program.
Finally, PSPL coverage can be costly. In some cases, the premium for PSPL insurance can reach as high as 40 or 50 percent of the limit purchased for larger, more complex projects. For example, if a $20 million limit is purchased, the total premium could be $8 million or higher, depending on the duration of the project, the SIR required, and the extended reporting period requested.
Conclusion
It should be well understood that liability resulting from any error in professional services is not equal to the overall size or type of projects. In other words, while risk may scale with the type of project, OPPI coverage can provide the owner with protection from catastrophic design, engineering, and construction errors on any project type and any project size. It also may be driven more by the amount of professional liability insurance that the selected designers, engineers, and contractors carry. As projects get bigger and more complex, the risk of errors and liability increases, and more owners and developers are expressing interest in OPPI protection.
Insurers can structure OPPI coverage in multiple ways: for a single project, on a blanket basis for multiple projects over a 3-year period, or on a rolling basis as projects come online. The limits of the policy are shared among projects, but each project can have its own policy term.
The reality is that more projects with values exceeding $1 billion are in the works, creating more risk than encountered in past projects. By obtaining OPPI coverage, project owners can mitigate their financial risks and ensure they are protected from liabilities that might arise from the professional services involved in their construction projects.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do 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.
Special thanks to Daniela Compton, CRIS, ARM, senior account manager at RT Specialty, for coauthoring this article.
Catastrophic design or engineering errors have always been and will always be an inherent risk in the construction industry. Disasters such as the pedestrian bridge collapse at Florida International University in 2018, the Hard Rock Hotel collapse in New Orleans in 2019, and the Champlain Towers South condominium collapse in Florida in 2021 highlight the persistent risks of design flaws, engineering errors, aging infrastructure, and climatological impacts on the building industry. Incidents don't have to make national headlines to tragically alter lives either. From a parking garage collapse in Massachusetts during demolition that killed a worker to a fatal building collapse in Washington, DC, during a renovation, the costs of design and engineering mistakes are high for all parties involved in a project, including owners.
The following are among the common causes of design or engineering errors in construction.
An overarching trend in construction in recent years is owners and developers looking to acquire revenue-generating assets earlier than in the past, leading to compressed project timelines. This mindset for speedy completion and fast-track delivery methods can also lead to poor communication and errors in any type of professional services performed on a project.
Owners, design professionals, and contractors all have a role in reducing these risks—minimizing the impact and even eliminating the risks. From an owner's perspective, the first step is creating a clear project scope, coupled with the selection of quality design professionals and construction teams, not to mention the proper project delivery method (PDM) for parties involved and project type. Design and engineering risks are exponentially greater on larger, more complex projects involving multiple PDMs for separate phases or contracts that are all for the same project.
Contracts also play a significant role in managing risk for owners, primarily shifting the design and overall professional liability risk to the design and construction teams through various provisions such as indemnities and professional standards of care. When those tactics fail, all parties suffer the financial consequences of the failure or error. Even more, when contracts fail to shift risk to responsible parties or insurance proceeds aren't enough to pay for the resulting damages, the owner ends up holding the proverbial bag.
In addition to the above strategies, owners should find more effective ways to manage the potential financial impact. Insurance is an important method of funding a loss once it occurs. Professional liability insurance is a foundational tool to protect owners, but securing the proper coverage for a project is no easy task and typically comes at a high price. Catastrophic professional liability claims, coupled with exorbitant rates, have resulted in today's tight project professional liability insurance marketplace.
Many owners use project-specific professional liability (PSPL) insurance. However, PSPL policies, regardless of whether they insure the design professionals, design builders, contractors, or all of those parties, can be costly because they circumvent the design and/or construction team's professional liability insurance and provide professional liability for the team on a primary basis.
In many cases, PSPL premiums could be a simple percentage of the limit of insurance purchased. However, a product developed about 25 years ago, but has seen increasing demand over the past 10 years, is owners protective professional indemnity (OPPI) insurance. OPPI is a valuable form of excess insurance that typically provides defense and indemnity coverage for owners and developers of construction projects for damages in excess of the professional liability limits available to them from the design and/or construction team.
A Closer Look at OPPI Insurance
OPPI is a type of excess insurance designed to protect project owners from damages resulting from errors in professional services committed by the design and construction teams. The main benefits of OPPI include the following.
Another important aspect to OPPI insurance is that many owners tend not to think about the professional liability risks of the contractors they hire. Most professional risk does reside with the design team and the engineers, but within the realm of physical construction, many services pose professional liability risk. OPPI should be structured above all firms that present the owner with professional liability risk, not just the design team.
Construction-related Professional Liability Risks/Exposures
Going Deeper into OPPI Coverage
OPPI offers two main coverage parts: protective indemnity and third-party claim defense and indemnity. Protective indemnity is a first-party coverage that protects the insured (the project owner) for damages the insured incurs and is legally entitled to recover from the negligent design professional with which they are under contract. It is an excess coverage for damages incurred in excess of the hired design professional's available limits of professional liability insurance.
An OPPI policy typically does not attach a self-insured retention (SIR) to the protective indemnity coverage but only the third-party claim defense coverage part. In addition, insurers will apply/refer to a minimum insurance requirement (MIR) as a virtual attachment point—the level of insurance at which the protective indemnity coverage is supposed to attach when a claim occurs. The insurer uses the MIR to set a virtual attachment point for the design professional/any other professional under contract with the owner as a limit required of those individuals and what they must carry/evidence. This also helps the insurer price the insurance. It's a virtual attachment point because, at the time of the claim, the attachment could be the MIR as stated in the policy, or it may be higher or lower than the established MIR. It all depends on what the design professional has available to the owner from its professional liability insurance. The point is, don't rely on the MIR as the true attachment point.
How Do Contractual Limitations of Liability Influence OPPI Coverage?
If an owner enters a contract with a design professional that includes a limitation of liability, the owner needs to ensure that limitation of liability is not less than the MIR set by the insurer. If it is, they would need the insurer to agree to this limitation of liability to prevent any gaps in coverage. If a claim resulted in a loss of $15 million, and the MIR/attachment point was $5 million, but there was a limitation of liability in the contract not approved by the insurer of $1 million, in a best case scenario, the insurer would provide coverage excess of the MIR/attachment point of the design professional, which would leave the owner/insured responsible for the difference of $4 million.
A worst-case scenario would include the insured voiding coverage altogether, since the damages insured under an OPPI policy are damages that the insured is legally entitled to recover from the design professional or contractor. This is because the insured agreed to limit its recovery from the design professional or contractor to the limitation of liability in the contract.
How Does an OPPI Policy Benefit the Owner?
An OPPI policy protects a project owner from any losses incurred from the negligent acts of a design professional/any professional in contract with the owner. Because the owner is the first named insured, it gives the owner dedicated limits in the event that a professional's insurance is exhausted or reduced by other claims. If those limits are exhausted, an OPPI policy would drop down to provide primary coverage for the owner and may be subject to a SIR.
Typically, the protective indemnity coverage part does not apply an SIR, which means the insurer would attach at zero dollars. However, it should also be noted that, if a firm's MIR is less than the agreed-upon amount, the owner might have to pay the difference out of pocket to preserve its OPPI coverage.
What Does the Third-Party Claim Defense and Indemnity Do?
When it comes to the OPPI's third-party defense coverage part, it's a bit simpler. It will typically provide defense expenses to the owner in the event it is a party to any legal actions brought by a third party caused by the negligent acts, errors, and omissions of the hired design and construction professionals.
How Does an OPPI Policy Work?
Generally, during construction, the overall team notices a potential discrepancy from the construction documents. This could be the way something looks, inconsistencies in drawings or plans, conflicts in specifications, failed inspections, cost overruns, building code violations, change orders, or some other similar events. Further investigations led to the conclusion that one of the design team members committed an error that may rise to the level of negligence. All parties will try to remedy the situation, but it's typical for the owner to notify the lead design professional that they should report the issue to their professional liability insurer or, in some cases, make a claim against the negligent party and their professional liability insurer.
At this point, it is imperative for the owner to notify its OPPI insurer to trigger the protective indemnity coverage part and to ensure the owner does not commit any reporting violations under its coverage. This is excess insurance, so the OPPI insurer may simply investigate the underlying cause and monitor the actions of the professional liability insurer on the underlying claim. If it is a valid claim against the underlying insurer, which can take months or years to determine the ultimate cause and value of the damages, then the proceeds from the underlying professional liability insurer are applied against the owner's total damages.
If the professional liability limits of the underlying insurer exceed the total damages incurred by the owner, then the owner is made whole, and the OPPI policy pays nothing. If the damages exceed the limits of the underlying professional liability insurer, then the OPPI policy will pay the difference.
There are situations where this process is circumvented or expedited, especially when the underlying professional liability policy has exclusionary language leaving the owner with no underlying insurance. Therefore, the OPPI policy responds sooner, but one should understand the typical benefits and drawbacks of excess insurance to establish proper expectations of the coverage.
For a simple example, an owner is damaged in the amount of $10 million. The underlying insurer/design firm eventually pays its maximum limit of liability on its professional liability policy of $5 million. The OPPI policy would pay the difference, or $5 million.
Other Alternatives Available to Owners
Owners have various alternatives, or a combination thereof, to mitigate the financial impact of design or engineering errors on any given project.
Requiring No Professional Liability Insurance in the Contract
Relying solely on contractual risk transfer via indemnity agreements is a simplistic alternative to insurance. Owners have the option to not require a design professional or design builder to provide evidence of professional liability insurance, let alone carry insurance limits specifically for a project. Owners or contractors engaged in lower-risk construction and design, such as some retail or box stores, may want to transfer the risk contractually. Maybe there is just no need to back up any contractual indemnities with an external financial mechanism? Maybe the architect or engineer is financially solvent with substantial assets to back the indemnity? Betting on "maybe" could prove costly.
Requiring Design/Construction Teams to Carry Professional Liability Insurance
The most common alternative is requiring the design professionals or design builders to evidence specific limits of professional liability insurance. However, this option may be inadequate. For example, is the owner of a $300 million structure properly insured for professional liability when it only requires the design professional to carry $1 million or $5 million in professional liability limits? Even if the entire design team, usually comprising five or six firms, carries $1 million in limits, that doesn't leave much professional liability insurance if severe issues arise.
To compound the issue, often owners can't even be sure that the limits requested in the contract will be available when needed. In fact, there are a variety of reasons that the coverage may not exist at the time of a claim, such as the following.
Compounding these concerns is the lack of professional liability insurance purchased by many design professionals. There could be good reasons for carrying such low limits of professional liability insurance, starting with cost. However, engineering and design errors may lead to substantial damages. This is one reason why owners and contractors can benefit from considering alternative financing mechanisms rather than just relying on the design or engineering firms' professional liability insurance.
Project-Specific Excess Professional Liability Endorsement
Project size and complexity drive the limit of professional liability insurance needed, and not all design professionals buy substantial limits or limits commensurate to the risk. Design professionals that carry inadequate practice limits can often secure a project-specific excess professional liability endorsement on their program to meet contractual requirements. While a cost-effective way to secure higher limits, the endorsement must be carried throughout the statute of repose where the project is occurring and needs to survive the switching of insurers if that happens when the insurance renews. Since the endorsement is attached and is excess of the firm's practice policy, similar issues as stated above exist.
PSPL Insurance
While some PSPL programs may include the design and construction teams, under the typical policy, only the design professional or the design team is insured against the negligent acts, errors, or omissions resulting from the professional services performed by the design professional as well as the vicarious liability of the engineering firms under contract with it.
Coverage may also extend to all lower-tier design and engineering firms that can be listed or provided on a more "blanket" or "wrap-up" basis—providing primary professional liability coverage to all design and engineering firms on the project. In such cases, the PSPL policy will typically have a dedicated limit on a primary basis. Ideally, the proper coverage should be relatively simple to construct, establishing coverage certainty among all insured entities.
Another advantage of PSPL policies is that project owners can be added as indemnified parties—affording protection if owners are named in lawsuits or other actions resulting from the design team's professional services. The indemnified party endorsement was crafted to provide the owner coverage for both defense expense and indemnity payments, avoiding issues the typical insured-versus-insured exclusions cause when owners require that they be named as additional insureds under the PSPL policy. This can be avoided with the indemnified party endorsement.
While PSPL coverage is a more comprehensive approach to insuring the design risk on the project, it does have drawbacks. PSPL programs are normally written to protect only the design team and their associated services. Although the design and engineering services on a typical construction project are most of the professional risk, the construction firm (or design builder) can present professional risks that are not addressed by a PSPL policy.
Another drawback is that the limit of liability may become the maximum recovery amount if the other insured firms' practice programs are not modified to sit in excess of the existing PSPL policies. Even if a PSPL policy is purchased, it may be prudent for those insured firms to ensure their practice professional liability program is structured properly to act as excess insurance above the PSPL program in the event that liability or damages exceed the limits under the PSPL coverage.
Other issues surround defense costs included within the limit, which can erode quickly in complex claims, and the overall premium can be significant because this program would replace the design firms' practice program.
Finally, PSPL coverage can be costly. In some cases, the premium for PSPL insurance can reach as high as 40 or 50 percent of the limit purchased for larger, more complex projects. For example, if a $20 million limit is purchased, the total premium could be $8 million or higher, depending on the duration of the project, the SIR required, and the extended reporting period requested.
Conclusion
It should be well understood that liability resulting from any error in professional services is not equal to the overall size or type of projects. In other words, while risk may scale with the type of project, OPPI coverage can provide the owner with protection from catastrophic design, engineering, and construction errors on any project type and any project size. It also may be driven more by the amount of professional liability insurance that the selected designers, engineers, and contractors carry. As projects get bigger and more complex, the risk of errors and liability increases, and more owners and developers are expressing interest in OPPI protection.
Insurers can structure OPPI coverage in multiple ways: for a single project, on a blanket basis for multiple projects over a 3-year period, or on a rolling basis as projects come online. The limits of the policy are shared among projects, but each project can have its own policy term.
The reality is that more projects with values exceeding $1 billion are in the works, creating more risk than encountered in past projects. By obtaining OPPI coverage, project owners can mitigate their financial risks and ensure they are protected from liabilities that might arise from the professional services involved in their construction projects.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do 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.