Professional
Construction
Risk
Society of Risk
Management
Consultant's
(SRMC)
2016 Spring
Conference
April 8, 2016
Building Expansion
• Your client wants to add an extension to their existing
facility
• It’s a major project for them
• They hire consultants to:
A.
Evaluate the existing facility (structural engineer)
B.
Determine soil/underground conditions for supporting the new
extension (geotech engineer)
• Post completion, the floor on the new facility settles and
becomes uneven, which also causes cracking in the prior
existing facility
• Who pays for this?
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Fast-Track Project
• Your client needs a new facility to be designed, built and
opened in record time
• The new facility will generate substantial revenue and profit
and if it is not completed on time, a market opportunity will
be missed
• The project is built on an aggressive fast-track basis as
required by the owner
• At the end of the project, change orders, cost overruns, and
other extras are 6% of the total
– For a $50M project, that’s $3M!
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A key concept in
professional liability is
“negligence.”
Communication
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Some Basics
• Professional liability concepts in the construction
sector
– Allocation of risk to the party that best controls it
– Negligence standard
– Perfection isn’t realistic
– Limitations of professional liability coverage
 No coverage for liability assumed under contract
 No additional insured status
 Claims-made
 Aggregate policy limit including defense costs
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Impact of Owner’s View of Risk
• From actual contracts between owners and design
firms:
– “…Architect shall design the project [on the Gulf coast]
to withstand a category 5 or greater hurricane…”
– “…project will be completed on schedule…”
• Recommendation
– Engage counsel that understands construction risk
– Have one contract for contractors and another for
design/professional firms
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Construction Professional Risk
• Pre-project advisors
– Project feasibility study
– Environmental/permitting
– Geotech/soil condition analysis
• Contractor
– Subcontractors
• Design firm
– Subconsultants
• Others
– Program manager or owner’s representative
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Project Delivery Method
• Traditional (in the U.S.) – Design-Bid-Build
Owner
Contractor
Architect
Subcontractors
Engineers and
Other
Subconsultants
and maybe here
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Geotech
Environmental
Professional Risk
Project Delivery Method – Other
• Construction Manager (agency)
• Construction Manager (at-risk)
• Design-Build
• Delegated design within Design-bid-build
• Integrated Project Delivery (IPD)
• Design-Build-Operate-Maintain (DBOM)
• Build-Operate-Transfer (BOT)
• Public-Private-Partnership (P3)
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Owner Challenges
• Professional liability coverage (via the firms that work for your
clients) can come from many sources
• Some firms that create a professional exposure—subcontractors,
other consultants—often don’t have coverage
• Most firms don’t carry much limit - $1M or $2M
• The existing limits apply to every project the insured firm has
ever designed and include defense costs
• The existing limits shown on the certificate of insurance may be
depleted even as you receive the certificate
• Claims can occur years in the future—will the design firm that
worked for your client still be around with coverage 10 years into
the future?
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Potential Solutions
• Fix it via contract
– Good insurance specs
• Buy a project-specific professional liability policy
– A PL wrap
• Buy an Owner’s Protective Professional Indemnity
(OPPI) policy
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Fix Via Contract
• Ask for higher limits
– Need to be maintained for many years
– Cost adds up
– May limit competition
Note that in many
countries outside the
U.S.; limits apply with
no aggregate cap and
much higher limits are
purchased
• Ask for confirmation that limits are unimpaired and for
updates if limits are reduced by claims and/or defense costs
– Can’t be done
• Specify broadness of coverage
– Difficult to enforce/achieve over time
• Ask for liability assumed under contract
– Does not exist in the U.S.
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One Contractor PL
insurer now offers,
on a limited basis, a
per-project
aggregate limit
Project-Specific Professional Liability
• A professional liability policy dedicated to one project
• It normally covers the prime architect or engineer, all of
their subconsultants and other periphery consultants hired
by the owner (replacing their annual practice coverage)
• The policy should be placed when design starts, but can be
purchased as late as beginning of construction
• Coverage will apply to the design phase, plus construction,
and then an extended reporting period—up to a combined
maximum of ten years
• The policy is non-cancelable
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Buy a Project-Specific PL Policy (PSPL)
• Pros
– Coverage can apply to all design and other professional exposures related
to a project
– Requires joint defense; makes settling a claim much easier
– Can provide risk management benefits
– Coverage is easier to coordinate if done with OCIP/CCIP and builders risk
programs
• Con
– Cost is high, no offsetting bid deducts
– Managing deductible can be challenging
– Insured vs. insured exclusion
– Owner buys policy for others; limits can be used for legal fees to defend
against an owner’s claim
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Owners Professional Protective Indemnity
OPPI Policy
Architect’s
Policy
Environmental
Consultant
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Geotech
Owner’s Rep.
How does it work?
1. The loss must exceed available underlying
professional liability insurance
2. The owner must pursue the claim against the
design firm(s) working for it (and inform the OPPI
insurer)
• Third-party claim
3. The owner can then pursue OPPI coverage with
its insurer
• First-party claim
4. The OPPI insurer will indemnify the owner
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Deductible
• Every OPPI policy has a deductible
• It does not apply in-between the third-party design
firm’s coverage and the OPPI policy
– This is true even if the limits of the third-party design
firm’s policy are impaired
• But if the third-party design firm’s policy limits are
exhausted, or if the OPPI policy is broader than
underling coverage, the deductible will apply
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Does the OPPI insurer care about underlying limits?
• The policy has a Minimum Insurance Requirement
(MIR)
• The MIR can vary
– $____ for the prime design firm
– $____ for the structural engineer
– $____ for all others
• What happens if there is non-compliance?
– The difference is uninsured
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Project changes
• What happens if the project scope changes
substantially?
– Most insurers have an audit feature—if the project
changes in cost or scope by a specified amount, there is
an additional premium?
– That premium will be due years later
– Who pays?
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A key point
• In the event of a $15M loss caused by a design
firm’s (DF) negligence, protective coverage should
pay as follows:
$15M (Total Loss due to DF negligence)
- $5M (Available insurance from DF)
= $10M (Protective Claim)
• But what if the owner had agreed to a limitation of
liability (LoL); what happens?
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Limitation of Liability (LoL) Example
• The prime architect has a LoL of $5M
• The owner buys an OPPI policy with a $10M limit
• There is a $15M loss
• The owner collects $5M from the architect
• And then the owner attempts to collect $10M from
the OPPI insurer, but it has no claim—the negligent
design firm’s liability is capped at $5M
• In this case the design firm owes $0 in excess of
$5M due to the LoL
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LoL Example
• The fix is an LoL endorsement
• It allows coverage in excess of an LoL, as if the LoL
didn’t exist
• The LoL amount usually has a minimum of $1M
• Some firms, esp. geotech, won’t work with an LoL
that high (or want more money to do so)
• The gap is self-insured
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What else?
• Mix and match PSPL and OPPI
• Scope of coverage
• Project definition
• Third-party liability
• Coordinate with other coverage
– Builders risk
– General liability
• Rectification coverage
• Contractor’s pollution
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Advice for your clients
• For large projects that use an OCIP or CCIP, an OPPI or even
a PSPL can make sense
• The fees charged by brokers to place and administer these
programs are competitive
• But not every OCIP/CCIP broker knows the ins and outs of
professional liability insurance
• If your client puts out an RFP for the insurance on a major
project, we suggest that the PL portion stand on it’s own
– One broker could still be selected for all lines of coverage, but not
without the right credentials
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Greyling Insurance Brokerage
Atlanta | St. Louis | Tampa
(770) 552-4225
www.greyling.com
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