In traditional project delivery (design-bid-build), an architect or engineer
provides design services while actual construction or implementation of the
design is carried out by the contractor. Under this scenario, you may expect
that the potential liabilities facing the design professional and contractor
would be fairly well defined. However, as the complexity of projects increases
and new construction contracts are introduced, design responsibilities are becoming
more fragmented. In addition, project owners are requiring their contractors
to take on additional construction management activities and, with greater frequency,
are looking for the contractor to provide a single point of responsibility for
design and construction.
As the lines of responsibility between design firms and contractors merge,
contractors are assuming nontraditional risk that their core coverages may not
address. In this article, we are going to review activities that increase a
contractor's professional risk and then discuss how well the liability insurance
is responding. You may discover that professional liability coverage will become
just as essential to a contractor as it is to an architect or engineer.
Understanding Contractor's Professional Risk Exposure
New methods of project delivery have created challenges and exposures that
need to be understood, assessed, and adequately insured by the parties accepting
the risk. One of the most significant challenges faced by the project participants
and their risk managers is identifying and managing the risks when the design
and engineering responsibilities are shared and fragmented among many project
participants.

Today, when a primary architect is hired to design the entire project, other
parties outside the architect's control will be involved with the design. Contractor
responsibilities are often expanded beyond construction to include professional
risk associated with construction management, design delegation, hiring design
firms, and actually self-performing design. These are discussed in more detail
below.
Construction Management Responsibilities: A
contractor may perform construction management services as the owner's agent
(agency construction management) or they may also hold separate contracts with
the trade subcontractors (at-risk construction management). In both situations,
the contractor takes on responsibility for supervision of the subcontractors,
scheduling, and cost estimating. All these activities create a recognized standard
of care by the construction manager and a corresponding professional liability
risk.
Design Delegation: Based on "performance" specifications,
specialty subcontractors have effectively designed curtain wall and sprinkler
systems for years. In addition, the contractor's mechanical and electrical subcontractors
are often engineering the heating, ventilating, and air conditioning (HVAC)
and other systems. Currently, the 1997 version of the AIA A-201 General Conditions
Document specifically outlines when design may be delegated to the contractor
with a corresponding waiver of liability by the architectural team.
Hiring Design Firms as Subcontractors or A/E Joint
Venture: A growing number of projects are utilizing design-build project
delivery where the contractor is acting as the lead design-builder or enters
into a joint venture with a design firm. When a contractor assumes a single
point of responsibility role for an owner by use of the design-build project
delivery, they are now responsible for project design in addition to their construction
obligations. In addition to design-build project delivery, the project owner
may hire separate design consultants to provide the interior design, landscape
architectural, or other services and then assign these contracts to the contractor.
Self-Performed Design: Some contractors have
an in-house design staff consisting of legally qualified architects, engineers,
land surveyors, and landscape architects who have the responsibility for reviewing
and stamping drawings.
Potential Contractor Damages Resulting from Professional Liability Risk
Errors and omissions associated with performing professional services can
result in costly time delays, budget overruns, rework, and third-party bodily
injury and/or property damage. Knowing and anticipating this financial risk
can make the difference between a profitable project and one that ends up in
costly litigation for years.
Economic Loss: There are significant financial
risks that contractors assume by promising to deliver a project complete, on
time, and within budget. Claim examples include the following.
- Design Delegation — The contractor subcontracts
the design of a ventilation system to a mechanical engineer. The engineer,
who did not carry errors and omissions (E&O) insurance, miscalculated the
cooling needs of the building and specified an inadequate ventilation system.
The building owner demanded $180,000 to replace the poorly performing system.
- Design Error — The contractor made a cost
estimate of $2 million for a warehouse project. A loading platform was later
found to be inadequate to meet the stated needs of the warehouse. With the
revisions, the project cost $2.5 million. The contractor was held liable
for the $500,000 difference.
Third-Party Bodily Injury or Property Damage: Design errors have contributed to some of the most catastrophic losses resulting
in direct damage to the project and fatalities to both construction workers
and members of the public. These types of claims have occurred both during construction
and after the project has been turned over to the owner. Claim examples include
the following.
- Design Delegation — In a "sick building
syndrome" claim, a subcontractor improperly designed and installed an HVAC
system. Mold formed in the chillers, and the air in the building made people
ill. Multiple claimants filed suit against the contractor in addition to
the owner who suffered business interruption losses.
- Construction Management — A contractor
failed to detect the faulty workmanship of a masonry contractor who placed
hollow concrete block without proper re-bar reinforcement as specified in
the plans. Once discovered, the structure had to be torn down and rebuilt
at a cost of approximately $1 million plus resulting delays in project completion.
Before we examine the availability of traditional coverages for professional
risk, it is critical to first understand the fundamental differences between
a general liability and professional liability policy. Basically, general liability
policies will cover losses caused by "ordinary construction means and methods"
as long as it results in bodily injury and/or property damage arising from an
occurrence. Professional liability policies cover any damages that arise from
the rendering or failure to render professional services.
| Contractors General
Liability | Architects & Engineers Professional Liability |
Policy Form | Occurrence | Claims Made |
Coverage Trigger | Bodily Injury or Property Damage | Negligent Acts |
"Pure Economic" Loss | No | Yes |
Contractual Liability | Yes | No |
For example, under the general liability policy, project delays and cost
of reinforcing a faulty structure would not be covered unless there was a corresponding
occurrence that resulted in bodily injury or property damage. However, this
type of claim would be covered under a professional liability policy as long
as it was caused by professional negligence. It is important to note that negligence
occurs when services are not performed with the standard of care exercised by
any other design professional facing the same or similar facts and circumstances.
Contractor's General Liability Policy: A general
liability policy without a professional exclusion amendment can provide limited
protection for design errors as long as the loss results in bodily injury or
property damage. However, many insurers will attach an endorsement to their
contractor's policies that excludes liability arising from design error (Insurance
Services Office, Inc. (ISO), Form CG 22 43). At a minimum, this exclusion needs
to be clarified so that excluded professional services will not incorporate
any activities included within construction means or methods (ISO CG 22 79).
Another endorsement, "Limited Exclusion — Contractor Professional Liability
Endorsement," gives back coverage for bodily injury or property damage from
professional design services in connection with a project the contractor is
also constructing (ISO CG 22 80). Even if the contractor is successful in amending
the primary policy, this does not guarantee that the lead umbrella or excess
limits will follow form.
Design Firms Professional Liability Policy: When a contractor leads a design-build project and hires an architect/engineer
as a subcontractor, the contractor may rely on the professional liability policy
of the design firm. However, it is important to know the limitations associated
with the architect or engineer's annual practice professional coverage.
- Single Aggregate Limit — The policy limit
applies to all current and past work and the limit includes defense cost.
If you have a claim, you could be sharing the limit with many other firms.
- Low Limits — A majority of design firms
carry professional limits of $1 million or less.
- Claims-Made Policy — If the design firm
nonrenews their policy or moves the retroactive date forward after they
finish your project, you will be left with no protection.
- No Additional Insured Protection — Most
professional liability underwriters for design firms will not name another
firm as an additional insured.

Alternative Solutions for Contractors Professional Coverage
Additional coverage is now available for contractor's professional risk that
traditionally may have been considered business risks that are not insurable.
Full professional liability insurance for a contractor can be purchased as an
add-on to a general or umbrella liability policy, covered under a stand-alone
contractor's professional policy, or handled under a separate project professional
policy.
Endorsement to General or Umbrella Policy: True professional coverage can be added on an "occurrence" basis to an existing
general liability policy. This option does offer the advantage of providing
high limits at a relatively low cost. However, this coverage is normally more
restrictive than a "stand-alone" policy and is not offered to contractors who
have in-house design capabilities. In addition, there are only a few underwriters
who provide this option, and none offer both primary and umbrella coverage.
Contractors Professional Liability Policy: This coverage is written on a "claims-made" basis and insures a contractor for
damages arising out of negligence of the contractor or its subconsultant architect/engineer
in performing professional services under the contract. The policy includes
coverage for a wide array of professional circumstances including design errors
from a contractor's:
- In-house design staff
- Design delegation under provisions of AIA A-201 General Conditions
Document
- Subcontracting design under a design-build contract
- Agency and at-risk construction management
- Faulty workmanship of subcontractors when there is a construction
management contract
- Pollution Coverage — In addition, most
insurers providing this coverage will add "Contractors Pollution" coverage
to the policy that will cover pollution claims arising from job-site activities
and failure to detect or quantify the presence of pollutants.
- Indemnity Coverage — For an additional
premium, there is one insurer that will provide coverage for first-party
claims by a contractor against its architect/engineer. To recover under
the policy, the contractor must demonstrate that the design professional
is legally liable to the contractor for the loss. Although the policy is
designed to be excess of the architect/engineer's underlying insurance,
coverage will drop down to a lower self-insured retention (SIR) in the event
that the architect/engineer's policy has been eroded by other claims. In
addition, if this policy is broader than the underlying design firm policy,
indemnity coverage will provide the contractor with difference-in-conditions
coverage.
Project Specific Professional Coverage: For
larger or more complex projects, the owner may elect to purchase a separate
policy that will provide a single source of recovery for all professional liability
losses related to their project (see IRMI.com, Project-Specific
Professional Liability: Who Really Pays for Design Errors?). The policy
replaces the annual professional liability coverage provided by individual design
firms, construction manager, general contractor, and subcontractors. While this
approach can provide significant, noncancelable limits that can be in place
up to 10 years after the project is completed, the contractor should review
the following policy terms and conditions carefully.
- "Who is an insured" — The contractor and subconsultants should be named.
- "Insured versus insured exclusion" — This should be deleted.
- Policy deductible — A sharing agreement should be drafted.
| Common Limit | Common Deductible | Minimum Premium |
General Liability (BI/PD
only) | $1mm to $50mm | $5K to $250K+ | Negotiable |
Full Endorsement to GL/Umbrella
Liability | $1mm to $25mm | $5K to $250K+ | Negotiable |
Contractors Professional
Liability Policy | $5mm to $15mm | $5K to $10K | $3,500 to $6,500 |
Contractor's Professional
Liability Policy Plus Indemnity Cover | $5mm to $15mm | $10K to $20K | $7,000 to $12,000 |
Project Professional | $5mm to $50mm | $50K to $250K | $10,000 to $1,000,000+ |
Conclusion
Even with the most basic forms of project delivery, there is an increased
chance of having fragmented design responsibility. Before a project is started,
all participants should be satisfied that professional risks have been adequately
assessed and insured by the responsible parties. The contractor needs to have
assurance that professional coverage will be in place when a design error is
discovered, especially after project completion, and that the limits are adequate.
The addition of a contractors professional policy can provide broad protection
for alleged errors or omissions in the delivery of design and construction management
services.