Construction projects are often complex undertakings, involving a variety of different stakeholders, including contractors, architects, designers, subcontractors, suppliers, and project employees. With several entities involved, the potential liability exposures of construction projects can be extensive. While project owners typically require subcontracted design professionals and construction managers to carry Architects & Engineers (A&E) insurance, coverage for a project owner under an A&E policy is still far from guaranteed.
COMMON RISKS FOR PROJECT OWNERS
The intertwined nature of construction projects can generate a variety of claims or disputes, but the top ten causes of claims include:
- Change in Project Scope
- Unforeseen Physical Conditions
- Incorrect Design
- Deficient Workmanship
- Incomplete Design
- Poor Subcontractor or Supplier Management
- Late Issue of Design Information
- Contract Administration or Management Failure
- Contract Interpretation Issues
- Restricted or Late Site Access 4
Compounding such errors and disputes is the current hyperinflation of construction costs. In 2021, the annual construction input inflation rate reached a shocking 19.6%. For the sake of perspective, the non-residential construction inflation rate was 4.4% in 2020 and 1.8% in 2019.2 These inflationary trends are driving up claim severity and putting owners at greater risk.
Project owners that rely solely on their subcontractors’ A&E professional liability policies to protect them when construction issues arise are likely to find that there are disadvantages, including:
- Inadequate Limits. Design professionals may not carry limits adequate for the size of a project and its inherent risks. Research shows that 32% of design firms buy $3 million or less in annual limits - far less than the value of today’s massive projects.
- Eroded Aggregate Limits. Design professionals often carry low professional liability limits 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, design firms generating $49.9 million in fees or less typically purchase $5 million or less in professional liability limits.1 Design professionals’ insurance may extend to claims from project owners, but claims from unrelated projects may also tap those same policy limits. In such cases, a project owner could end up with little to no coverage under the A&E policy if other claims have already been filed.
- Defense Limitations. There is a continuing trend for A&E policyholders to remove duty to defend provisions from their professional service agreements. States are also moving to limit design professionals’ defense responsibilities. For example, in California, architects or engineers are only liable to pay a portion of attorneys’ fees based on their proportionate percentage of fault. This potentially minimizes payments made to the owner for defense costs incurred due to A&E services regardless of contractual language to the contrary.1,5 Should a third-party claim arise from a design error, for example a retaining wall fails as a result of a design error and a neighboring property owner sues both the owner and the engineer, the project owner may be at the mercy of a policy on which they are not a named insured and which does not ultimately have a duty to defend them.
- Narrow Coverage Period. Most A&E professional liability policies are written for an annual term and on a claims-made basis, meaning coverage extends only to claims made within the annual term for incidents occurring after the designated retroactive date. Experience shows many claims arising from a construction project occur 2 or more years after the project is actually completed. For that reason, design professionals should renew A&E policies throughout a project, and ensure that a reasonable discovery period for claims after completion is included in policy language. Otherwise, design professionals and project owners may end up facing claims without adequate insurance coverage.
- Coverage Lapse. Renewal of an A&E policy or availability of higher limits is not guaranteed. If a project owner relies on such coverage and the design professionals are unable to renew or maintain it, the owner’s potential source of recovery can disappear.
What can project owners do to better manage their liability exposures? Fortunately, there are various forms of specialized coverage available, including:
PROJECT-SPECIFIC PROFESSIONAL LIABILITY
Project Specific Professional Liability (PSPL) insurance is intended to cover design professionals’ errors and omissions arising from a specified construction project for a multi-year term. An extended reporting period (ERP) usually applies to the coverage for up to ten years beyond the project’s completion. However, PSPL has several major disadvantages, such as:
- Limited Availability & Expense. PSPL coverage is not widely available and it’s cost prohibitive.
- Single Use. A PSPL policy applies to a specific project, and its limits do not apply to other projects or activities.
- Limit Erosion from Third-Party Claimants. Losses resulting from services performed by design professionals can attract multiple third-party claimants and create competition for the project owner vying for access to the policy limits.
- Project Owner is not the Named Insured. PSPL policies are written in the name of the design professional. Therefore, the project owner does not have control over the policy nor does the carrier have a duty to defend the project owner in the event of a third-party claim.
OWNERS PROTECTIVE PROFESSIONAL INDEMNITY (OPPI) FOR PROJECT OWNERS
The best coverage option for project owners is Owners Protective Professional Indemnity (OPPI). This form of coverage offers several advantages, including:
- Designated Coverage. An OPPI policy directly insures the project owner; it does not extend coverage to design professionals or others, making it less susceptible to erosion by claims from unrelated projects or third-party claimants.
- Expansion of Limits. OPPI supplements A&E professional liability limits, enabling project owners to layer their protection with their own excess limits. If A&E limits are available, OPPI serves as excess coverage.
- Cost Savings for Higher Limits. The cost of higher limits under an OPPI policy is significantly less than (often almost half) the cost under a project-specific A&E policy. Rather than cover the expense built into bids for policies and higher limits for their design subcontractors, owners can buy their own dedicated limits at a lower price point.
- Broad Coverage. There are at least 50 carriers in the A&E space, and the varying policy form offerings are far from equal in quality. Even if design professionals carry adequate limits per their contractual obligations, those limits may be subject to prohibitive exclusions or limitations for a variety of issues such as habitational claims, mold/ bacteria problems, cost estimating, or design-build issues. OPPI policies can be structured to offer Difference-in- Conditions (DIC) coverage, meaning they can (barring their own exclusions) drop-down and respond as primary coverage, subject to a self-insured retention.1
- Defense Provisions. OPPI provides defense costs coverage to the owner for third-party claims arising out of design professionals’ services. With the increased absence and/or limited enforceability of contractual duty to defend provisions between design subcontractors and owners, dedicated defense limits for the owner are key.
- Flexibility. OPPI gives flexibility to the owner to hire from a broader pool of qualified design firms that may not otherwise be able to meet the higher limit insurance requirements.
- Multi-Use Capability. OPPI is available for the entire duration of specific projects or as annually renewable coverage for all of the owner’s projects.
AVOIDING OPPI COVERAGE PITFALLS 1
When reaching out to establish OPPI coverage, it’s wise to pay attention to details and policy aspects that can impact coverage, such as:
- Identify and Understand All Contracts. The contract flow for a project should be identified and thoroughly understood, especially on larger projects. This is key because the typical OPPI policy provides excess coverage to the owner for negligent acts or the firms with which they are under direct contract.
- Review All Insurance for Applicability. If a problem arises, it’s vital to determine whether or not it resulted from an act, error, or omission in design professional services. It is also important to note that beginning repairs prior to notifying applicable insurance carriers can nullify coverage. Any notifications should be made to each carrier based on the policy’s reporting requirements. Protective coverage typically requires that a protective claim be filed against a design professional in order to trigger the policy.
- Cost of Protective Claims Aren’t Covered. It is up to the project owner to pursue a protective claim and obtain recovery in order to trigger protective coverage. Although the cost of pursuing a protective claim is the owner’s responsibility, the benefit of assuming these costs includes saving initial insurance expenses because protective coverage is typically less expensive than primary design professional project-specific coverage due to its excess position. Protective policy limits also work to protect the owner without being eroded by design professional defense costs, which can amount to around 50% of total claim costs. Owners also have greater assurance that appropriate insurance protection is in place should a catastrophic project issue arise.
- Hire Quality Design Professionals. The importance of the quality of a design firm and its insurance carrier cannot be overstated. Quality design firms will often carry better insurance coverage from top-quality insurance carriers, which can shorten the resolution timeframe.
- Set the Right MIR. As a condition of the OPPI policy, the carrier sets a minimum insurance requirement (MIR) that professional liability insurance owners must require their design professionals to carry by contract. These minimum contractual requirements must be implemented in order to ensure coverage is triggered in the event of a claim. It is worth noting that there can be several different MIRs applied to different design disciplines. As a result, all should be confirmed and accounted for in order for the OPPI to trigger properly.
- Watch Out for Limitations of Liability (LoL) Provisions. Enforceable LoLs minimize the insured’s recovery under the protective indemnity portion of the policy because it limits the damages the insureds are legally entitled to recover from the negligent firm. If the insured accepts a LoL that is less than the MIR, the insured may be required to pay the difference between the LoL and the MIR or forfeit their protective indemnity coverage entirely. Ideally, a project owner should not accept any LoL so that the professional liability coverage can be structured to attach as excess to the professional liability insurance provided by the design firm.
- Pay Attention to Self-Insured Retentions (SIRs). Under most OPPI programs, a SIR will apply to defense costs for third-party claims. In some cases, this can be very expensive as many insurers apply a $250,000 or higher SIR on each claim.
- Confirm DIC Provisions. Not all OPPI forms allow for DIC. Some provide true "follow-form" OPPI insurance. Meaning, if it's excluded under the underlying firm’s professional liability insurance, it's likely excluded in the OPPI professional liability. Missing this can eliminate one of the primary benefits of an OPPI program.1
OPPI coverage was developed to respond to the common risks project owners face in design-bid-build projects, which is a predominant form of project delivery. In the design-bid-build approach, a project owner contracts separately with design professionals for the design and contractors for the construction itself. This means a project owner may incur third-party liability arising from either the design or construction phases, making independent, owner-specific coverage particularly valuable. CRC Group is home to seasoned brokers with extensive experience in addressing the professional liability connected with construction risks. They frequently assist retail agents in finding creative solutions in the marketplace. Contact your CRC Group producer to learn more about OPPI coverage and how we can help policyholders better manage their construction project risks and protect their businesses.
Jenny Finet, CPCU, RPLU+ is a Senior Broker with CRC Group’s Chicago, IL office and a member of the ExecPro team specializing in Professional lines coverage.
- The Dangers of OPPI Insurance, IRMI, December 2019. https://www.irmi.com/articles/expert-commentary/dangers-of-oppi-insurance
- 2022 Construction Inflation Alert, Construction Financial Management Association. https://cfma.org/articles/2-22-constructioninflation-alert
- 25 Essential U.S. Construction Industry Statistics 2022: Data, Trends, and More, Zippia, September 26, 2022. https://www.zippia.com/advice/us-construction-industry-statistics/
- Top 10 Causes of Construction Claims, Construction Dive, November 2, 2022. https://www.constructiondive.com/news/top-10-causes-claim-legal-dispute-construction-crux/635558/
- New Law Limits A Design Professional’s “Duty to Defend,” Rogers Joseph O’Donnell, 2022. https://www.rjo.com/publications/new-law-limits-a-design-professionals-duty-to-defend/