Written by Gary Pearson, CPCU, RJ Ahmann Company
Traditionally Professional Liability Insurance has been understood to be inside the realm of Architects, Engineers, Doctors, Attorneys and Accountants. More recently attention has been drawn to the subject of Contractor’s Professional Liability. The attention of Owners, Contractors, Attorneys, Insurance Companies and Courts can have catastrophic effects when a contractor’s insurance program is discovered to be inadequate when a contractor is accused of a negligent act, error or omission.
Contractor’s Professional Liability Insurance vs. General Liability Insurance
Most contractors carry General Liability insurance and feel comfortable that their firm is well protected. Unless they directly employ Architects or Engineers, few contractors perceive there is a need for contractor’s professional liability insurance, since they do not believe they supply "professional services". It should be noted that these policies are not standardized like general liability insurance policies.
That comfort zone is changing, due to a better understanding of the fundamental differences between a general liability policy and a professional liability policy. Basically, a general liability insurance policy will cover losses caused by alleged contractor negligence in "ordinary construction means and methods," as long as it results in bodily injury or property damage arising from an occurrence.
A Contractor’s Professional Liability insurance policy or Contractors Errors and Omissions insurance policy covers damages resulting from a negligent act, error or omission. A clear distinction exists between damages and bodily injury or property damage. Damages can be a purely economic or monetary judgment, award or settlement. An owner’s business interruption loss can be significant enough to put a negligent contractor out of business. A contractor’s error or omission can cause a total structure to be torn down and rebuilt, resulting in significant lost profits and revenues, which may be awarded against the negligent contractor.
Trends in Professional Exposures of Contractors
As the lines of responsibility between design firms and contractors merge, contractors are assuming nontraditional risks that their contractor’s insurance program does not contemplate. With construction projects becoming more complex and new construction contracts being introduced, design responsibilities are becoming more fragmented. New methods of project delivery have created new challenges and exposures which are often misunderstood and not properly analyzed.
Recent trends to create a collaborative construction team, exposes contractors to professional liability. Programs such as Leadership in Energy and Environmental Design (LEEDS) and Building Information Modeling (BIM) are exposing contractors to professional liability risks by blurring what were clear lines of responsibility and liability. There is a tendency of contractors to enter the process earlier, as owners and design professionals seek to capture their construction expertise in manners not previously seen.
A difficult aspect of the construction process to clearly identify is the incidental "design" activities that many contractors engage in from time to time. Traditionally these have been thought to be within the "means and methods of construction" and laid outside the realm of design professional services. Courts have taken a different view today. Temporary work like shoring, falsework and dewatering has design implications that many contractors fail to recognize. Specialty contractors such as Fire Suppression have for years been involved with design and employ what are generally referred to as "Engineering Technicians" which seem to fall somewhere between a skilled or trained worker and a degreed Engineer. Mechanical and Electrical subcontractors often engineer or design heating, ventilating, and air conditioning (HVAC) and other systems. A newer method being employed various state Departments of Transportation are assigning design responsibilities to highway/heavy contractors thereby transferring risks previously assumed by the state.
One of the most troubling trends is in the area of "inspection". Inspections have been a part of many specialty trades for a long time. No one thought twice of inspecting something before putting together a proposal and often opinions are rendered. It was commonly understood they couldn’t possibly ascertain problems that were not visible on the surface, but yet existed somewhere underneath.
Courts however have ruled otherwise. One court stated "A professional service is one calling for specialized skill and knowledge in an occupation or vocation. The skill required is predominately intellectual or mental rather that physical." Other cases claim that the widely accepted definition of "professional" has to do with the exercise of advanced or specialized knowledge or technical expertise.
Contractor’s Professional Liability and Contractor’s Errors and Omissions policies will in all likelihood become a staple for many contractors’ insurance programs. With more design responsibilities transferred to contractors and increasing demands by General Contractors for Contractors Professional Liability policies in subcontract agreements, any expectation that this will just fade away, is probably just wishful thinking. Fortunately the insurance industry is taking notice as more products are becoming available and insurance contracts are better tailored to meet the match the newer risks of the construction industry.
Gary Pearson, CPCU is an expert in contractor’s professional liability insurance and difficult to place product liability insurance coverage. He is employed by the RJ Ahmann Company, a regional insurance agency located in Eden Prairie, Minnesota.
