Over the past year, I (just like everyone else) have seen an increase in requests for professional liability insurance limits for contractors of all types. Some requirements are warranted, some are not. In some instances, the contractor being required to evidence professional liability may not even be performing "professional services."
Furthermore, I have seen an increase in the amount of professional liability insurance required of many contractors. Some appropriate, some absolutely ridiculous, such as requiring that a $10 million limit be evidenced on a $450,000 interior renovation project with no professional services being performed. Seriously, is that appropriate?
But, before I get carried away with ridiculous contract provisions, I wanted to focus on a fairly simple alternative to buying a potentially costly project professional liability policy when a contractor, architect, or engineer is required to evidence professional liability limits that exceed their practice program limits.
"We Need To Buy a Project Policy." Maybe Not.
Unless the insurance requirements specifically request the required limits to be dedicated to a project, the firm only has to be able to certify that the firm has purchased or maintains those required limits. A simple alternative in this case is a project excess endorsement. Although it's been available for many years, I have come to realize that it's not as common as I once believed.
Simply put, the project excess endorsement is an endorsement that is added to the insured's practice policy which provides excess limits that are solely dedicated to a designated project or contract. It is a cost-effective alternative to purchasing a project specific policy since the insured is utilizing its practice program as a primary layer and merely buying excess insurance for the project on an annual basis rather than for the entire term up-front.
For example, assume a contractor purchases a combined contractors professional liability (CPrL) and contractor's pollution liability (CPL) practice program with a $5 million limit of liability. In accordance with the insurance requirements in a contract, it is required to carry $10 million in CPrL (let's say it's warranted) and $5 million in CPL limits. The contractor has fulfilled the CPL insurance requirement but not the CPrL. Rather than going into the market and securing a project CPrL policy with a $10 million limit (which can start at about $100,000 premium, depending on the scope of the project and the size), which can cause all sorts of headaches due to the restricted marketplace for project CPrL, the contractor can secure a project excess endorsement for this project with a $5 million limit excess of the $5 million practice program for CPrL only and specifically dedicated to the project. This enables the contractor to fulfill the contractual obligation for a fraction of the cost of purchasing a project policy.
This concept could be applied in a variety of ways depending on the product and limits purchased under the contractor's practice program.
Pros and Cons
Project excess endorsements benefit not only the buyer of the insurance (architect, engineer, contractor), but it also benefits owners and other firms that require professional liability insurance of the firms they contract with. Rather than paying for costly project policies, owners working with any architect, engineer, or contractor can approve the use of project excess endorsements to still allow some certainty that a specified limit of insurance may be available and, at the same time, reduce the cost of such insurance substantially.
That said, there are trade-offs. As I said in the previous sentence, the required limit may be available, so in the event of a claim, the owner needs to understand that the full amounts of required limit may not be available since the primary/practice limit may be impaired or exhausted by other claims made against the architect, engineer, or contractor.
When using project excess endorsements, be aware of a few things. One, you need to make certain that under the insurance requirement, the insurance is not to be dedicated to the project. If it is, there may only be one option available, and that is to buy a project specific policy.
Two, be sure to understand the practice insurer's appetite or attitude toward project excess endorsements (and project policies). Some insurers will limit the amount of the project excess endorsement they will offer. Typically, the rule of thumb is that insurers will offer project excess endorsements no higher than three times the limit purchased under their practice program. So, if a firm has purchased a $1 million practice program limit, some insurers will not offer a project endorsement that exceeds $3 million for this particular program. Of course, there are exceptions to every rule, so keep that in mind.
Three, as with any professional liability policy, they are all manuscript policies, and there is little standardization when compared to commercial general liability (CGL) policies. Each project excess endorsement will differ from insurer to insurer. Understanding the intent of how limits are applied and the application of any additional definitions, exclusions, and conditions is crucial.
The next time you are reviewing that professional liability insurance requirement, keep the project excess endorsement in mind. While it's rather simple, it may offer you a much more inexpensive way of fulfilling the requirement and reduce the headaches associated with securing project-specific professional liability programs.
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