PMPL Policy Remains a Mystery for Many Contractors
Ann Hickman | March 1, 2000
An optional coverage requirement under the revised American Institute of Architects (AIA) General Conditions of the Contract for Construction (A201) is project management protective liability (PMPL) insurance. There is no standard form and although the PMPL limit applies separately to each project, the owner, architect, and contractor share the policy limit for that project.
In late 1997, project management protective liability (PMPL) insurance made its debut as an optional coverage requirement under the newly revised American Institute of Architects (AIA) General Conditions of the Contract for Construction (A201). Although most construction insurance professionals are now familiar with the term, many remain unsure of what the policy covers and how they should advise their clients regarding the PMPL policy. This article examines the scope of coverage under the PMPL policy, and compares it with the more traditional methods of providing protection for various parties to the construction contract against liability arising out of the performance of the work.
PMPL Insurance
Project owners routinely require contractors to provide some form of direct coverage for the owner's liability incurred as a result of the contractor's operations; general contractors typically do likewise with respect to subcontractors' operations. The purpose of these coverage requirements is to protect the hiring party from liability in connection with operations over which it had little, if any, control. The most common methods of providing this coverage are (a) naming the hiring party (owner, or general contractor in the case of a subcontract) as an additional insured on the contractor's (subcontractor's) commercial general liability (CGL) policy, or (b) purchasing an owners and contractors protective (OCP) liability policy for the benefit of the hiring party. Interestingly, it was some concerns of architects, who are not even a party to the construction contract, but nonetheless frequently demand additional insured status on the CGL or OCP, that led to the creation of an alternative product for covering these types of risks.
Project management protective liability insurance, which was developed by CNA Insurance Company, first appeared as an optional insurance requirement in the 1997 edition of A201, which is commonly used to set forth the contracting parties' various rights and obligations, including the purchase of insurance coverages for the project. Provision 11.3.1 of A201 gives the owner the option of requiring the contractor to purchase PMPL insurance to cover the owner's, the architect's, and the general contractor's vicarious liability from the project. When PMPL insurance is required, the owner agrees not to require additional insured status on the contractor's CGL policy.
The PMPL policy, which applies on a project-specific basis, provides coverage comparable to that provided by the more familiar owners and contractors protective liability form. That is, it covers the named insured for vicarious liability arising out of the contractor's operations, as well as for the named insured's direct liability arising out of its general supervision of the contractor's work. Fundamentally different, however, is the automatic inclusion of the owner, contractor, and architect as named insureds. (In the case of the named contractor, coverage is provided for its vicarious liability arising out of a subcontractor's work, or its general supervision of a subcontractor's work.) One of CNA's stated goals in marketing the policy is to reduce the adversarial nature of claims against one or more of the insured parties, and to allow a more cohesive defense of such claims. Whether these objectives will be achieved remains to be seen.
Although a few other insurers have shown a willingness to provide this coverage, demand so far has been somewhat less than anticipated, and CNA remains the only insurer actively marketing the coverage. Perhaps demand will increase as more information about the coverage becomes available, but regardless, agents should be prepared to answer contractor clients' questions about the coverage.
A Good Alternative?
PMPL insurance was created, in part, to address architects' concerns regarding coverage for their vicarious liability for the contractor's performance of "professional" services. Although every PMPL policy CNA writes will include a mandatory professional liability exclusion endorsement, this endorsement only eliminates coverage for liability arising out of professional services performed by that insured, or on its behalf. Vicarious liability for professional services performed by another insured, or on another insured's behalf, is not excluded. In this way, AIA's coverage concerns are addressed without providing sweeping professional liability coverage to insured parties.
While the policy is similar to the OCP form, providing coverage to multiple insureds with vastly different roles in the project presents some complex challenges in the drafting of policy language. One noticeable manifestation of this is in the addition of a definition of the term "general supervision", which is reproduced below.
"General supervision" includes all activity except preparing designs, drawings, specifications, or taking charge of or control over the means and methods of the "named contractor's" operations, or in the case of the "named contractor," taking charge of or control over the means and methods of the subcontractor's operations. In this context, subcontractor means anyone having a contract with the "named contractor" to perform a portion of the "work" at the site.
Given the fairly broad interpretation most courts have applied to the term "general supervision", (which is included, but not defined, in the OCP policy), this definition does not appear to place any substantial restrictions on the coverage for this exposure versus what is provided in the OCP. However, merely introducing a definition for this term could lead to additional litigation as insurers and insureds look to the courts to interpret the provision.
Surprisingly, the biggest advantage of PMPL insurance appears to belong to the contractor. In fact, if owners honor the intent of A201, which is to use it as an alternative to (and not in addition to) additional insured status, contractors may favor this approach as it will help preserve their CGL policy limits. (Contractors should resist attempts to strike provision 11.3.3 - in which the additional insured requirement is waived - from the contract.) Further, since the contractor is a named insured, and since the A201 specifically provides for the cost of PMPL insurance to be charged to the owner, the contractor receives additional coverage on the project at the owner's expense.
The only obvious disadvantage for the contractor of requiring PMPL insurance is that it may cause problems in the contractor's overall insurance program. While the PMPL insurance is purchased for all the parties, it is purchased by the contractor, and since most insurers have not developed PMPL forms, many contractors will not have access to the coverage from their normal insurance markets. Even if coverage can be purchased from other markets, it will likely be at a higher rate than that charged of the PMPL insurers' own contractor clients. This situation could create problems for contractors in competitive bid situations. However, if demand for PMPL coverage becomes sufficient to persuade more insurers to offer the coverage, the latter problem should disappear.
From the owner's perspective, even if more insurers develop PMPL forms, the lack of a standard policy to require as a "minimum" level of acceptable coverage could result in a scope of coverage that is narrower than expected. Unless ISO develops a standard PMPL form (which has been discussed, but no intention to do so has been announced by ISO), each insurer will develop its own form, therefore actual coverage under the PMPL could vary widely from one insurer to the next. Perhaps more importantly, the owner loses one of the primary benefits of an OCP, which is a separate limit of insurance; although the PMPL limit applies separately to each project, the owner, architect, and contractor share the policy limit for that project.
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