Call it whatever you want—owners protective, protective, "Opie," or owners protective professional indemnity (OPPI)—the coverage has secured its place as a valuable option to owners looking to protect against the catastrophic design errors that can occur during nearly any construction project.
In fact, nearly 10 separate insurers offer similar OPPI policies on at least a macro basis. All also offer at least two core insuring agreements that include first-party indemnity and third-party defense coverage forms.
Simply put, first-party indemnity, referred to as "protective," indemnifies the named insured (i.e., the owner) for damages in excess of the available design professional's insurance or the "underlying insurance." In addition, third-party defense was developed to protect owners from the third-party actions arising from the vicarious liability assumed through the contracting of professional services with design professionals (DPs). A third coverage part, excess contractors pollution liability coverage, can either be baked right into the form or offered via an endorsement.
So, there it is. It's just that easy. Because we all know how simple excess insurance is to place, until all of the nuances are considered to place the insurance properly. But, before we get into the complexities, here are the basic OPPI benefits.
DPs often carry low limits of professional liability (PL) insurance to cover all of the work performed by the firm on an annual basis. According to the American Council of Engineering Companies 2018 annual insurance survey, DP firms generating $49.9 million in fees or less typically purchase PL limits at $5 million or less. Even more alarming, 32 percent of the firms buy $3 million or less in coverage. Furthermore, when it comes to certain engineering disciplines, especially structural and geotechnical, 50 percent of the structural engineering firms surveyed purchased $2 million or less in PL insurance or less, while 43 percent of the geotechnical engineering firms surveyed purchased $2 million or less. OPPI relieves this concern of minimal PL limits offered by the AE.
To exacerbate the concern, there are an estimated 60 insurers insuring design professionals with varying scopes of coverage. This has made it extremely difficult to verify the quality of coverage carried by those design professionals unless a lengthy insurance specification is created. But, even then, who's to say that the firm complied with the specification? OPPI includes difference-in-conditions (DIC) coverage over the contracted design team's PL policies. In other words, the OPPI offers a broader coverage form than the DP's PL insurance in the event the DP's PL insurance contains something like habitational, mold/bacteria exclusion, cost estimating, or design/build.
There is a continuing trend for A/Es to remove defense provisions from their professional service agreements. In some cases, this has left owners and/or general contractors to fend for themselves when legal actions are brought as a result of the services performed by the architect or engineer. In California, for example, under Senate Bill 496, architects or engineers are only liable to pay a proportionate percentage of the related attorneys' fees if they are found at fault under the professional service agreements they entered into on or after January 1, 2018. This has the potential to minimize payments made to the owner or general contractor for costs incurred by these entities caused by the AE's services.
Now, onto the dangers or pitfalls facing OPPI placements. First and foremost, the contract flow needs to be identified and thoroughly understood. The perfect triangulation of contracts can occur on smaller projects but can be far more complex on the larger ones. For instance, not all professional services firms contract directly with the prime or project A/E. Some owners hire geotechnical engineering firms well in advance of hiring the prime A/E to determine if the site will accommodate the proposed structure. There could also be various wind, environmental, or related studies that may have occurred prior to the selection of the actual prime A/E, meaning that the owner is holding contracts with multiple professional service firms. In other situations, there may be prime A/Es that do not want to retain the services of structural engineering firms, forcing the owner to contract them directly. In most cases, if the firm isn't listed, the protective indemnity will not apply.
As a result, ALL contracts held by the owner MUST be identified up front since the typical OPPI provides an excess coverage to the owner for the negligent acts or the firms in which they are under direct contract. This includes firms that are either under direct contract or directly retained by the owner. There is nothing more embarrassing than placing an OPPI only to find months later that additional professional services contracts are held by the owner, or worse, learning that an error committed by the firm created potential insurance gaps under the project OPPI placement.
And then there're the complexities surrounding the contract documents themselves—specifically the limitations of liability (LoL) provisions. Enforceable LoLs minimize the recovery the insured receives under the protective indemnity portion of the policy since it includes the damages the insureds are legally entitled to recover from the negligent DP. In the event that the insured accepts an LoL that is lower than the minimum insurance requirement (MIR), the insured may be forced to pay the delta between the LoL and the MIR or forfeit their protective indemnity (PI) coverage altogether. Ideally, the owner should not accept any LoL. In this way, the PL coverage can be structured to attach as excess to whatever PL insurance the DP provides to the insured. However, you still run the risk of the underlying DP's PL insurance being depleted by other unrelated claims. I guess the latter is the better of two evils.
Now the areas to watch under the policy itself. The following are just a few of the conditions that typically trip insurance professionals who are not intimately familiar with the product or process.
The MIR is just that—it's a minimum. Unfortunately, many insurance professionals do not understand this. They incorrectly see the MIR as an attachment to the PI; it is not. The PI attaches to whatever limit of PL insurance is available to the owner from the DP's PL insurance. This also applies to every professional services firm under direct contract with the owner. So, if the MIR is set at $1 million for each claim/aggregate with $2 million available from DP's PL insurance, the PI attachment point would be $2 million, provided all of the other terms and conditions were met. The same would also occur in the event that the DP's PL limits are exhausted or are not applicable due to the exclusionary wording. In a similar scenario, if the MIR is set at $1 million for each claim/aggregate and the DP's PL provides nothing, the PI would attach at the first dollar. However, it must be noted that not all OPPI programs act in this manner unless they are written accordingly.
And another thing about MIRs. There can actually be several different MIRs applied to the architect; geotechnical engineering firm; structural engineering firm; mechanical, electrical, and plumbing engineering firm; and anyone else who contracts separately with the owner. As a result, they all need to be confirmed and accounted for the OPPI to act properly.
Under some OPPI programs, the self-insured retention (SIR) applies regardless of the costs available to the owner from the DP's PL insurance. In some cases, this can be expensive as many insurers apply a $250,000 or higher SIR for each claim. Subsequently, it would be prudent to ensure the SIR is as low as possible or even removed entirely. You certainly don't want to find yourself in the precarious situation where the insured is forced to pay hundreds of thousands of dollars to just get to their PL layer.
This provision allows the OPPI to "drop" into a primary insurance position in the event that a DP's PL insurance has been eroded or is more restrictive than the OPPI. With so many varying coverage forms available to architects and engineers, this is an important OPPI feature that could prove essential during catastrophic situations. Why do I bring up this "simple" concept? You guessed it, not all OPPI forms allow for DIC. Some provide true "follow-form" OPPI insurance. In other words, if it's excluded under the underlying DP's PL insurance, it's likely excluded in the OPPI PL coverage as well. Missing this will remove one of the primary benefits offered through OPPI programs.
This provision can have many different titles, but typically refers to the limit of PL insurance that the DP is provided via a certificate of insurance as stated by the MIR. Many insurers require this PL limit to be evidenced prior to construction. Others, however, demand its inclusion throughout the life of the policy and the entire project term. While it's prudent regardless of the OPPI placement, this condition could actually void the coverage altogether if violated—another situation that may not be uncovered until a claim or error is discovered or submitted. During any given project, a DP can reduce its limit of insurance, have exclusionary wording attached, or be canceled altogether. As stated above, it's prudent to apply this technique, but it should not be a condition of the owners' OPPI coverage.
OPPI placements are far more complicated than often realized. Honestly, it's just flat-out wrong to think of it as "only excess insurance." The time really needs to be taken to understand how it all comes together—contracts, delivery method, structure, and insurance—because even "simple" errors can lead to devastating repercussions that will leave the owner-client in deep financial trouble and with far less coverage than either promised or anticipated.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.