Today's contractors must thoroughly understand all of their exposures.
By Edward L. Sheiffele, Jr.
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Historically, professional liability insurance policies related to construction have been created for specific individual risks: architects and engineers, contractors, developers, environmental consultants and other miscellaneous related professionals. There were also policies that addressed the exposure for the design, manufacture and installation of products.
As a result, the technical expertise of underwriters has developed rapidly with almost all of the supporting talent pools seldom straying from their individual niches. That is until this past decade when the professional liability insurance market began to change in response to evolution within the construction market.
With respect to contractors’ professional liability, the growth of design/build as a project delivery method hastened this evolution, especially during the past 15 years. According to the Design-Build Institute of America (DBIA), this project delivery method is expected to represent nearly half of the construction dollars spent in the U.S. by 2021, according to a DBIA market study.
Although design-build is purported to deliver projects faster, lower costs and streamline processes from design to construction with one single-point-of-contact for an owner, it also creates significant additional professional liability exposures for contractors. Under the traditional design-bid-build project delivery method, contractors and designers have clearly defined the roles and the risks associated with their respective services. In contrast, design-build blurs the lines of responsibility. This is because the design team contracts directly with construction professionals in an environment that not only creates liability but also complicates the traditional methods of resolving issues and claims.
To gain greater control of these projects and reduce the liability associated with the errors and omissions of outside design firms, many contractors responded by expanding their businesses with in-house design services. They essentially became construction firms that offered clients both design and construction capabilities.
Expanded services, liabilities
This vertical integration concept is gaining momentum industrywide. If it worked for contractors, why couldn’t design professionals embrace the same approach by expanding their services with a construction entity that enabled them to construct the work they specifically designed? The same could be said for property developers, environmental consultants and other entities involved with the design, manufacture and installation of specified products. Why not combine the expertise of each of these parties into one firm that directly supports the majority of the customer’s needs from design through specification and construction?
For some, the concept has been a gold mine. For others, including underwriters, it has created a number of new liability questions which they need to answer. As each of these entities encroached on the activities of their former partners, the siloed underwriting approach to professional liability insurance began to dissolve. Numerous carriers have looked to add new coverages by either creating new, broader policy forms or adding endorsements to current policies to address the new exposures caused by the combined range of services and activities now offered by these firms.
Policy language matters
At the heart of all of these changes to professional liability insurance policies is the definition of professional services. To support the entirety of the firm’s services, this definition should completely and accurately include the potential exposures and liability that result from all of their activities. For a contractor, the definition could include construction management, architectural and engineering services, development management services, environmental management services as well as any additional specific miscellaneous professional and technology-related services. If necessary, it should even include the support of technologies like drones, Building Information Modeling (BIM), robotics and 3D printing.
The problem is that there are still numerous ways to define these activities and the services of companies. Some insurers use very broad definitions that read something like “professional services covered: all activities undertaken by the insured,” while others offer very narrow definitions that only list the specific services “provided for a fee.”
There are also policies with definitions that sit somewhere in-between. That’s why it is important to consider a policy where all of the professional services actually performed by the insured are considered as opposed to siloed policies that focus only on a small range of services or the ones that tie their professional service definitions to the carrier’s perception of the company’s activities.
The broker’s critical role
Given the potential complexity of ensuring adequate coverage for a contractor that performs a multitude of professional services, it is critical that contractors work with knowledgeable insurance brokers who thoroughly understand the construction industry as well as the challenges faced by contractors, designers and owners.
Another consideration for contractors when choosing a professional liability insurance policy is the ability of insurers to appropriately expand their policy to address ancillary exposures. This can include Contractor Pollution Liability (for both design and construction exposures), Protective Indemnity, Cyber Liability and Media & Personal Injury Liability. Most recently, the market evolved once again with the introduction of a genuine Faulty Workmanship Liability coverage that addresses the ISO Commercial General Liability (CGL) policy gap for ‘your work’ faulty workmanship claims triggered by third-parties against policyholders.
However, even when the right policy form is in place, policyholders should make sure that the carrier they’re working with has the technical expertise to thoroughly understand the complexities surrounding combined professional liability exposures. This includes not only having the underwriting knowledge but also the right claims expertise with the ability to service claims quickly, effectively, and in the best interest of the policyholders. Risk management expertise is also an important consideration.
In an ever-evolving world marked by uncertain conditions and an expanded repertoire of services, it is essential for contractors to thoroughly understand all of their exposures. This starts with choosing a knowledgeable broker and should be followed by the choice of professional liability insurance carriers that have the underwriting, claims and risk management expertise to effectively keep minor exposures from becoming costly catastrophes.
Edward L. Sheiffele, Jr. (ESheiffele@berkleycp.com) is executive vice president at Berkley Construction Professional, a Berkley Company. Sheiffele has more than two decades of insurance industry experience acquired within the construction and environmental business units of leading worldwide insurance carriers. These opinions are the author’s own.
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