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.
Caveats
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.
Conclusion
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.