An important issue that needs to be addressed at the beginning of any construction
project is the professional liability arising out of project design and construction
management services. There are many examples of losses arising out of professional
services, including costly delays, bodily injury, sick building syndrome, and
environmental losses. Design firms do carry professional liability insurance,
but it has significant limitations from the owner's perspective, including the
- Owners share the design firm's professional policy limit with many other
firms. Professional liability policies have a single aggregate policy limit
that applies to all liabilities and defense costs arising from current and
past work of the insured. If there is a claim, the owner has to hope it
is near the front of the line to be sure of adequate protection.
- Protection is here today and gone tomorrow. Many professional liability
claims arise well after project completion. An owner has to depend on a
design firm to stay in business and continuously renew its insurance in
order to have a policy against which to claim in the future.
- Owner cannot be added as an additional insured. Most professional liability
underwriters for design firms will not name the owner as an additional insured.
If the owner is sued for a professional loss caused by the design firm,
the indemnification clause in the owner/design firm contract may provide
protection but the professional policy will not defend the owner.
- Low limits. Most design firms are small and carry professional liability
limits of $1 million or less.
- Limitation of liability. Many design firms will not work without a limitation
of liability equal to their fees and a waiver of consequential damages.
When facing the limitations of design firm professional liability insurance
combined with typical contractual allocation of professional risk, an owner
has two choices.
- Assume the professional risk that exceeds available insurance or existing
- Purchase a professional policy dedicated to the owner's project.
In most cases, owners decide to assume the professional risk that exceeds
the design firm's insurance or contract terms. For projects with a higher degree
of risk, however, many owners are deciding to purchase project specific coverage.
Program Design and Coverage
There are two options for structuring project specific professional liability
policies: stand-alone project-specific policy and the owner's protective policy,
which is described later in this article.
Stand-Alone Project-Specific Professional Liability Policies
Project-specific professional liability policies are negotiated as dedicated
limits over a deductible and the policy term is from the beginning of design,
through construction plus 3 to 10 years afterward. The project policy automatically
replaces the practice policy of each design team member because the professional
policy purchased by almost every design firm excludes all projects insured by
a project policy. A project policy may be procured by either the owner or the
lead design firm, although the premium is normally paid entirely by the owner.
A project policy may be placed by itself or in combination with a general liability
and workers compensation wrap-up.
Coverage can be placed up until the start of construction. Almost every underwriter
will backdate coverage to the beginning of design. Of course for a design-build
project, coverage should start at the beginning of the design firm/contractor
relationship-normally the bid preparation phase.
The advantages of a project specific professional liability policy include
- Noncancelable coverage, premium, and limits are dedicated to the project
- Single source of responsibility for claims
- The ability to sponsor a projectwide professional liability risk management
- Coverage for all professional consultants including design work delegated
- Owner can be named as an additional insured
Of course no approach is without its disadvantages. Some concerns include
the cost (combined with limited or no premium credits available from the design
firms' professional liability underwriters) and concerns by design firms about
the quality of the project policy coverage and deductible size.
Also, owners need to understand that a project policy is being purchased
for the design team. Sometime owners are surprised when years later a claim
occurs and the project policy underwriter assists, sometimes aggressively, the
design team with its defense.
Owner's Protective Approach
When an owner considers a project specific policy, the following question
is frequently asked.
Can a project specific policy be designed to provide excess coverage
over the insurance maintained by the design firms working on the project?
It seems such an approach has the potential to be simpler and cheaper, but
the excess approach doesn't work well. Almost every design firm in the United
States has an exclusion in its annual professional liability policy similar
to the following wording.
If you, the insured, work on a project where there is a project specific
policy, then any claims arising from such project will be excluded by this
policy. This exclusion will apply regardless of whether you are able to
collect from the project-specific policy for any reason (i.e., even if the
project policy applies on an excess basis).
In theory, an owner could ask every member of the design team to amend its
annual policy to state that the project policy exclusion will not apply to the
owner's project. The problem with this approach is that to be assured of continuing
protection after project completion, the owner would have to get evidence of
the proper endorsement from every design firm that worked on the project every
year for the next 5 to 10 years. This may prove to be quite an administrative
In addition, project-specific professional liability underwriters have proven
to be reluctant to consider the excess approach and typically offer a limited
credit for providing excess versus primary coverage.
However, there is a way around this problem known as the owners protective
(OP) policy. Unlike a project-specific policy, which covers the design team
with dedicated limits, the OP policy directly covers the owner (and not the
design team) and therefore does not trigger the onerous project specific exclusions
(described above) in every design firms' professional liability policy. The
OP program works as follows.
- Coverage is provided to the owner for claims in excess of the design
firms' annual primary professional liability policies up to the amount of
the limit provided by the OP policy.
- Coverage applies on a first-party basis. To collect on a claim, the
owner needs to prove to the underwriter that a design firm working on the
project committed a "negligent" act, error, or omission resulting in a loss
and that the amount of the loss exceeds any available professional insurance.
Frequently, this is proven by the payment of a claim by a primary underwriter.
- If the insurance of a design firm working on the owner's project is
exhausted by payment of a claim-even a claim unrelated to the owner's project-the
OP policy will drop down to a preagreed amount.
- If the owner is sued directly for the actions of the design firms, the
owner can be covered-giving the equivalent of additional insured protection.
The advantages of an OP policy are as follows.
- The design team does not have a reason to know or care that coverage
is in place. Coverage and claim payments are direct between the owner and
the insurance company. This eliminates meetings with the design team to
explain a project policy.
- The cost should be approximately 50 percent less than a standard project-specific
professional policy. However, this does not always apply. There are still
more underwriters for the "stand alone" approach, and the additional competition
sometimes makes the cost difference minimal.
While the owners protective approach has a number of advantages, there are
- With a standard project-specific policy, the owner has the benefit of
one source of recovery regardless of the number of members of the design
team involved in a claim. With the OP approach, this is not the case. If
a claim involving several firms occurs, the owner will have to settle with
several insurers to be able to determine the size of the OP claim.
- While coverage is provided on a first-party basis, the trigger for an
owner's claim is the design firm's liability to the owner. This can create
a significant problem in the event the design firm's contract with the owner
has a limitation of liability and/or waiver of consequential damages clause.
For example, if a design firm causes a $20 million loss but its liability
is limited to $1 million, then the OP underwriter will only pay $1 million.
This problem should be fixed by endorsement.
- There is little experience with claims in the OP coverage format. Some
underwriters are concerned that a primary coverage dispute could cause a
problem in settling a claim under the OP policy.
Program Design Should Match Project Needs
Regardless of the option chosen, the program design needs to be tailored
to meet the needs of everyone involved in the project. There are many important
details that cannot be addressed here. Public projects have different needs
than private ones. Stadiums generate different risks than offices. And project
delivery methods-design-build versus design-bid-build-should impact program
design as well. Understanding these differences and designing an effective program
that works requires an insurance broker with the proper experience to place
project-specific and/or owners protective programs and effective cooperation
and communication between all parties involved in the project.