In today’s commercial construction environment, risk and reward are deeply interconnected. This is especially true in increasingly popular design-build scenarios, which virtually eliminate the steadfast boundary of responsibilities that traditionally existed between contractors, architects and other building professionals.
As a result, the efforts of general contractors have intertwined with design professionals so deeply that their consultative advice alone could lead to extremely complex, costly and timely liability issues when problems arise. Many project owners demand evidence of professional liability insurance from both the design and construction teams, while others even purchase project-specific coverages to insure the entire design team from exposures. In legalese, the goal of these policies is to indemnify the owner against the damages, claims and expenses incurred as a result of the negligent acts, and errors & omissions arising from the design and construction team’s services.
Two coverages address this exposure: a project-specific policy, which insures specified design professionals on a primary basis in replacement of the practice insurance; and a protective E&O policy, which protects owners or design-builders against design professional claims in excess of the practice coverage. Both types of policies usually include retroactive dates, course of construction coverage and extended reporting periods for filing latent design claims.
Significant limitations exist under the project-specific policy. If recovery is isolated to firms specifically named on the policy, it may preclude owners or design-builders from accessing the design firm’s or contractors’ practice professional liability policy due to cross-liability exclusions. The reality is that the owner or design-builder could wind up paying for two policies with access to only one with limited coverage.
There are numerous recorded instances where the full limits of a project-specific policy were exhausted solely by defense costs without the owner or design-builder receiving any financial sum in restitution. The premiums for project-specific policies are often 10 times more expensive than a standalone practice policy.
Since owners and design-builders are not insured under project-specific policies, another concern is that the carrier can negotiate virtually any claim, absent bad faith. Furthermore, if the project-specific policy has a “unified defense approach,” every insured designer must abide by the carrier’s defense, even if only one litigant contests a negligence claim. In many cases, it’s only after years of litigation that owners or design-builders recognize these policy flaws and must settle for pennies on the dollar.
In contrast, depending on the underwriting criteria and terms and conditions, protective E&O can cost approximately one-third of a project-specific policy, while insuring against a broad range of liabilities that do not fall under the direct supervision of the prime architect. This can include delegated design liability, professional services performed by the contractor or construction manager, specifically retained consultants outside the prime designer, and other negotiated professional activities particular to the project.
The main differentiator between project-specific policies and protective E&O is naming the owner or design-builder as the named insured since they suffer the most from a loss. With a protective E&O policy, 95% of all payments go toward the settlement of owner or design-builder claims, enabling those entities to recover their losses from a policy with limits that are both reserved and protected.
Another advantage of protective E&O is that the indemnity limits are fully reserved to pay for claims. It’s impossible to hide behind indefensible positions because the protective insurer must exercise good faith. With such impetus, the protective carrier is also positioned as a strong advocate of the insured and incentivized with procuring prompt and effective claim settlements.
In short, structuring a project-specific policy incorrectly can create a myriad of potential coverage issues. But many new entrants to the market are repeating past mistakes by insuring nearly every entity under a project-specific policy. In order to address the limitations, some enable cross-party claims, while others still name either the project owner or the design-builders as the insured rather than protecting the best interests of both parties.
Like all insurance, the policy’s value lies in effective claims resolution. It only takes one catastrophic event to ruin a company. Asking questions about an insurance carrier’s claims philosophy and the claims team’s experience is an important part of analysis when choosing these coverages.
Raymond F.H. Bustamante is executive vice president of Berkley Construction Professional, a Berkley Company.