Choosing the right professional liability insurance for a specific commercial construction project can be tricky and complicated, if not damn near exhausting and frustrating. It doesn't matter if the policy is designed to protect owners, design professionals (DPs), design builders (DBs), or general contractors (GCs), all the complexities surrounding today's project delivery methods, contracts, and insurance requirements can sometimes make perfect sense, while others can make little to no sense at all.
For example, it can be baffling for even industry experts working with DBs to understand the benefit of naming the primary design professional (or the entire design team) to the project professional liability policy when the DP is not under contractual privity with the owner. This is because the design build entity is typically obligated to the owner for the design and not the prime DP in such instances. As a result, it's my opinion that, in most instances, the person or entity that need to be insured are the ones obligated to the service provided, regardless of whether or not that service is performed by in-house professionals or subcontracted professionals.
Requiring the DPs to be insureds within the insurance specification in most instances just muddies up the water, while adding unnecessary costs to the policy in my opinion. That said, we have structured policies in that manner when insureds determine that this structure is a better fit for their situation when weighing all the pros and cons.
And this brings us to today's topic—the advantages and disadvantages of the three basic professional liability insurance program structures that should be considered when purchasing the ideal project-specific professional liability insurance for a design build project.
Under the typical PSPL policy, only the DP (or the design team) is insured against the negligent acts, errors, or omissions resulting from the professional services performed by the DP as well as the vicarious liability of the engineering firms under contract with the DP. Coverage may also be structured to extend to all lower tier design and engineering firms that can be listed explicitly or provided on a more "blanket" basis—providing primary professional liability coverage to all design and engineering firms on the project. (If those firms are smart, they'd ensure their practice professional liability program will act as excess over any project placements under which they are a named insured in the event of a catastrophic error creates damages above the limit of liability on the PSPL policy.)
In such cases, the PSPL policy will typically have a dedicated limit associated to the project on a primary basis. Ideally, the proper coverage should be relatively simple to construct given that the primary coverage applies to only one project, thus establishing certainty of the coverage among all insured entities.
Another advantage of PSPL policies is that project owners can be added as an indemnified party—affording protection to the owner in the event they are named in any lawsuits or other actions as a result of the professional services provided by the design team. 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 they be named as additional insureds under the PSPL policy. This can be totally avoided with the indemnified party endorsement.
Now the disadvantages. 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 the majority of the professional risk, there are other professional risks presented by the construction firm (or DB) not addressed by a PSPL policy. It's always important to remember that the coverage will typically not extend to the DB and the professional services performed outside of their design function. This may include construction management, construction techniques, means and methods, and lower-tier engineering activities whereby the engineers are hired by the construction entities or DB, among others.
Another problem is that the limit of liability may become the maximum recovery amount if the practice programs of the other insured firms are not modified to sit excess of the existing PSPL polices as explained above. Other issues surround the defense costs included within the limit, which can erode fairly quickly in complex claims situations, and the overall cost or premium can be significant since this program would replace the design firms' practice program. In some cases, it could reach as high as 40 or 50 percent of the limit of liability purchased for larger, more complex projects. So, if a $20 million limit is being purchased, the total premium could be $8 million or higher, depending on the duration of the project, self-insured retention required, and the extended reporting period requested.
This structure takes a bit of a wider approach—protecting DB entities from the negligent acts, errors, or omissions committed in the performance of the professional services listed on the policy. As such, it not only provides coverage for professional liability associated with the design and engineering firms hired by the DB but also the typical professional risks of the construction entities as mentioned above. The key aspect here is that the insurance is providing coverage to the entity that is obligated to the owner for all design, engineering, and construction management, which is the DB. For design build contracts, this tends to be a more comprehensive approach as all of the professional risk on the project is insured and not simply design and engineering.
Specific program details include a dedicated project limit provided on a primary basis. Other advantages include the following.
Lastly, under the CPrL structure, an additional coverage is typically added—rectification or mitigation coverage. Rectification/mitigation is a primary first-party coverage that every agent or broker should include in their project CPrL policies. The coverage generally pays costs to mitigate (prevent the damage from getting worse) and/or rectify (redesign and replace) failures or errors in the design, engineering, or professional services in general. The premise of this coverage is to reduce the likelihood that a third-party claim be made against the DB.
It is also important to note that rectification oftentimes will not apply to faulty work, where the contractor simply did not follow the plans and specifications (however, it may apply to the DB in the event they failed to inspect and/or to identify or missed the faulty work). The damaged construction many times must be caused by a professional negligent act in design, engineering, field oversight, or field decisions that vary from plans and specifications, in addition to the management of the construction process.
When appropriate, rectification may potentially save the named insured, the insurance company and even the owner from the long-drawn process and high costs associated with claims. The coverage may also potentially allow projects to quickly get back on track by helping all the involved parties to overcome the challenges that can arise when the "ideal design plans" or field decisions create the "reality" of damaged construction.
The defense of claims can quickly gobble up the limits of liability affixed to insurance policies. Project-specific CPrL programs are no different and include the very real chance that the first-party claims could negatively impact the policy's ability to cover third-party claims made by the owner when needed. However, this structure allows the DB to have recourse against the design/engineering firms for damages resulting from their negligent acts or errors under the policy. Conceptually, this ultimately reduces the likelihood of third-party claims primarily from the owner.
The last structural form for construction projects is a bit more complex. It looks simple enough and, theoretically, appears to be the most comprehensive approach for owners since both firms providing professional services on the project—the DB and the prime DP—are to be included as named insureds under the program, a major benefit. It is used primarily when the professional liability insurance specification in the contract requires both the DB and DP be named insureds under the same program.
While this can be achieved, it creates multiple headaches for the entity that is actually obligated to the owner for any errors in professional services as whole—the DB. First, it can render the protective indemnity coverage part useless for the DB because of the insured-versus-insured exclusion. Second, it increases cost because the DP (or the team) is provided primary coverage, not to mention the inclusion of rectification coverage for the DP (team). Lastly, it has the ability to exhaust limits of liability even quicker since multiple defense may be needed for multiple insureds. Not that this is a bad alternative, it just may not be the way to maximize the cost of professional liability insurance on the project.
As for the near future, project CPrL rates/premiums, in general, will likely increase as the marketplace is seeing larger claims more frequently. In addition, underwriters will scrutinize each insured's services on projects, the project delivery method applied, and project type even more so than in the past. Furthermore, with multiple markets introducing new policy forms in 2023 and 2024, attention to all details in product offerings will only increase in importance of placing proper project coverage. Finally, capacity is becoming more of an issue as well with many major insurers not willing to provide their full capacity but rather providing reduced capacity leading to multiple insurers layered on the same project placement that could lead to an entirely separate set of issues that requires attention.
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