Protect Against Design Errors With Owners Protective Professional Indemnity Coverage

Joseph Nawa | Construction Executive | February 28, 2018

Prior to the devastation caused by Hurricanes Harvey, Irma and Maria, the AIA Consensus Construction Forecast had predicted “slower growth for the construction industry for the remainder of 2017 and through 2018.” But, given the hundreds of billions of dollars in damages caused by these horrific events, Mark Zandi, chief economist at Moody’s Analytics, estimates a lift to the economy through the rebuilding of these areas. This, of course, is dependent on insurer funds and the amount of aid offered through government sources.

Nonetheless, the process will be costly, timely and exhaustive. Under such circumstances, speed is a necessity. In addition to being drawn into the earliest stages of the project development cycle, the services of construction professionals have merged so intensely that even their “consultative advice” have produced exposures in “collaborative” environments rife with liability.

A challenge for contractors in today’s design/build marketplace is securing professional liability insurance policies that will not only manage the risks associated with their own errors and omissions, but also the problems caused by designers and others contracted to work on the project. However, this too is not very easy. Such policies when purchased by contractors can be exceedingly cost prohibitive.

On a project basis, Contractor’s Professional Liability (CPrL) programs are still a costly solution even though policy forms have never been broader and premiums lower. While there are more carrier alternatives than a year ago, there are still only five or six carriers willing to offer project coverage (with the ability to include protective and rectification/mitigation coverage) on a primary basis for large ($500,000,000 or higher) applications. In addition, on larger projects coverage customizations have to be made with certain project delivery methods like Integrated Project Delivery (IPD) and Public Private Partnerships (P3); when the design professional becomes part of the primary named insured; and/or design professionals are partnered in joint ventures to pursue work.

As a result, Owners Protective Professional (OPP) has become a viable option for filling coverage gaps and protecting both owners and the contractors they hire from the costly consequences resulting from design and construction problems. Designed primarily to protect owner assets, OPP provides first-party indemnity to the owner/developer (insured) for damages incurred as a result of the negligent acts, errors and/or omissions of the design professionals they hire. This includes coverage that sits beyond the excess of the design professionals’ professional liability insurance limit. Under an additional coverage part, defense expenses are also provided to protect owners from third-party actions arising from design professional’s errors.

Furthermore, this supplemental form of protection has become popular among owners and contractors alike, who are keenly aware of the potentially catastrophic effects design errors can have on their projects. Typically, many design professionals buy lower limits of insurance. This was exemplified by a recent American Council of Engineering Companies (ACEC) survey, which found that the median per claim limit of liability purchased for all member firms generating $50 million in annual fees or less is only $3 million. It also revealed that the average per claim limit of liability purchased by all such firms in the two high hazard classes of engineering – geotechnical and structural – was under $2.5 million. Subsequently, many owners and developers have begun supplementing the limits of design professionals with OPP limits of $10 million or more on larger projects valued at $100 million or higher.

In addition, OPP coverage forms from one carrier to the next have become fairly consistent over the years. Rates have actually decreased as result of the additional entrants in the OPP marketplace. In fact, owners can receive a 40 to 50 percent savings when compared to a primary project professional liability for the design team, while securing a limit of liability that protects their best interests rather than the interests of the design professionals.

As for the coverage itself, OPP terms continue to morph, but for the most part, remain stable. For example:

  • Self-Insured Retention (SIR) coverage terms have evolved to apply to the defense portion of the program, whereas in the past it applied to the indemnity coverage part as well the minimum insurance requirement (MIR) if it was not met.
  • Professional service definitions have been expanded to track closer with typical architect/engineer (A/E) definitions like the inclusion of building information modeling (BIM) and technology services.
  • The defense coverage restriction for third-party claims on habitational (commercial or residential condominium) projects has been removed by some carriers. This restriction was driven by the continued litigation associated with construction defects on habitational projects in certain regions of the country.
  • Recent policy form changes have addressed the specific needs of design-builders. A few have even developed specific OPP policy forms to reflect the contractual relationship between the design-builder and the owner, rather than the older more dated forms that only insured the owner for damages incurred by design professionals (DPs) directly under contract to the owner.
  • Pollution Legal Liability (PLL) coverage for pollution (pre-existing and unknown) on, at, under or emanating from the property on which the project is being built is now offered by several carriers. This provides the insured/owner the added benefit of an insurance product in the event construction activities only uncover and do not create environmental issues.

Although still an undersold and/or under-purchased product, OPP has become a very cost-effective method for insuring against catastrophic loss. Considering the size of the construction industry and the expense associated with insuring design teams and contractors on a project basis, OPP is continuing to expand in terms and use as owners become keenly aware of the ever-growing risks associated with design professional errors in a market increasingly driven by design/build contractual agreements.