Over the past year, I have seen an increasing request for contractors to
evidence PL insurance. That is a good thing. In addition, many of those
requirements required a dedicated PL program/limit of liability for the
project. That makes a lot of sense. However, before you require any entity
to provide evidence of PL insurance, you have to ask yourself, what do I
want to insure against? This is a basic question, I know, but I think one
that is often overlooked.
As an example, I have seen PL insurance specifications written for a
design-builder to purchase PL insurance for the design team (not part of the
design-build entity) and the design team subs/members. In this case, it
would appear that the owner wants to insure
only against design errors arising from the design services provided
by the design team. Or does he? It's clear to me that this owner doesn't
want to insure the project against PL risk, just design liability.
I have seen other instances where an owner has accepted a certificate of
PL insurance from the engineering firm under contract with the construction
firm, not even under direct contract with the owner. So, there is no
contractual relationship between the owner and the engineering firm. Is this
supposed to help owners sleep at night and protect against costly PL claims?
I've also seen specifications where the owner requires project PL
insurance in the name of the construction firm or construction joint venture
(not including any design professionals) but the project policy is
positioned excess of all the practice PL policies of all the design
professionals on the project. While conceptually, this may sound logical and
prudent, I could envision a nightmarish event when a PL claim arises and the
design professional responsible for the error has not amended its practice
PL policy to be primary and noncontributory, therefore also triggering the
project policy via other insurance provisions in both policies.
Marketplace Realities
Many of the specifications I have seen recently do not take into account
practicality or its availability in the marketplace. For example, I recently
came across a $20 million PL insurance requirement on a $3.2 million
industrial renovation project. The professional risk was extremely low, if
any, but the owner held steadfast to the $20 million requirement. The cost
of PL insurance alone was nearly 20 percent of the project cost!
I've seen a $10 million PL requirement on a $5 million parking garage
dismantling project. Again, the professional risk was not significant, but
the contractor needed to purchase a dedicated $10 million PL insurance
policy. Maybe there are ulterior motives, but as Harry said to Lloyd in the
movie Dumb and Dumber when they were looking for Mary
Swanson in the Aspen, Colorado, phonebook, "I ain't seeing it, Lloyd."
Maximizing the Benefit
As already stated, the good news is owners are waking up to the
overriding fact that all construction projects present PL risk and the owner
is the ultimate holder of that risk. The not so good news is that I think
the majority of these specifications are not written properly to maximize
the benefit of PL insurance. So, back to the question: what do you want to
accomplish when requiring evidence of PL insurance for your design-build
project? Do you want to merely insure against design errors—a narrower
approach—or do you wish to protect against a broad range of
construction-related PLs, therefore optimizing your insurance dollar?
Many times, the contractor's professional risk is overshadowed and
minimized by the design risk; however, such exposures can also tremendously
impact the project. For instance, and aside from prime design risk,
contractors present owners with unique PL risks such as:
- Design liability via lower
tier subcontract agreements (not under the auspices
of the prime design professional). For example, a
mechanical/electrical/plumbing (MEP) contractor may perform
some of the design, as well as the installation. In this
case, the design-builder or general contractor holds a
contract for both design and construction/installation and
assumes the liability of any negligent acts as a result of
the MEP's services. This can occur for contracts related to
curtain walls, glazing, exterior insulation finishing
systems, fire suppression systems, retaining walls, alarm
systems, landscaping, etc.
- Construction means and
methods (CMM). For example, assume a civil contractor
is building a bridge and is responsible for creating the
false work. Because this is a fairly sophisticated area of
work, the contractor hires a design professional to design
it. Therefore, the contractor has a vicarious design
liability exposure—even though it falls into the realm of
CMM. This occurs on a variety of tasks such as tower cranes,
scaffolding, shoring, etc. Many believe this to be covered
under a commercial general liability policy, but what
happens if the loss has nothing to do with bodily injury or
property damage. What if the loss is pure economic damages?
- Subcontractor management.
Project scheduling, sequencing, and coordinating of
subcontracts can expose both owners and contractors to PL
risk. When subcontractors incur additional expenses due to
negligent schedule management, they may initiate suits
against the general contractor or design-builder. Another
potential exposure involves faulty construction or work.
Typically, the contractor has a contractual obligation to
ensure the work is constructed or installed free of defects.
Potential exposure develops when the contractor fails to
identify a subcontractor's faulty work. (Of course, the
degree of exposure will vary depending on the delivery
method and scope of services agreed to via the contract.)
- Constructability
reviews/assessments. Professional opinions/input
provided by the contractor via traditional methods or use of
building information modeling brings about exposure to
professional risk.
- Value engineering.
Contractors are often presented with providing opinions or
collaborating on alternatives to the designed process,
product, or material.
- Performance specifications.
Unlike design or prescriptive specifications where the
contractor constructs or installs exactly as the designer
drew it up, performance specifications require the
contractor to determine what products, processes, or
materials will provide the performance required. This allows
the contractor the freedom to apply its professional opinion
in selection of products, processes, or materials. Selecting
the improper materials could present the contractor with
professional risk. This exposure is magnified when you apply
sustainable design and construction techniques where new
processes and products are introduced daily.
Conclusion
So, the next time you sit down to create a PL insurance specification,
you really need to think about all the possible pitfalls and whether it is
necessary to insure against professional risk or merely the design
liabilities posed by design teams. There is a big difference. If it's the
former, then it is imperative to require the design-builder to carry the PL
limits/policy, because, ultimately, they are the entities holding the
contract for the services that pose the professional risks inclusive of
design.