In the past, contractors didn’t need to be concerned about professional liability insurance. It was traditionally carried by architects, engineers and other design professionals for errors and omissions. But these days, construction companies must consider this coverage to complement their general liability insurance.

With contractors now performing design-build work, managing all aspects of a project, and accelerating completion through fast-track and collaborative delivery methods, the risk of professional liability exposure has increased. As the lines between design, bid and build have blurred, contractors are finding their general liability coverage isn’t enough.

As a result, contractors professional liability (CPrL) insurance is becoming essential for many contractors.

Even if you’re a small contractor, you may need CPrL. Any firm involved in the design of a project, or responsible for changes in the design, probably needs this coverage. Contractors can also be held liable for damages caused by third parties they hire or partner with, such as architects, engineers or surveyors.

The difference between general and professional liability

When considering whether to purchase professional liability coverage, it’s wise to review what your commercial general liability (CGL) policy or business owners policy (BOP) covers and doesn’t cover. CGL is a common coverage nearly every contractor carries. It’s also required on many construction projects. BOPs include CGL coverage but usually not professional liability.

CGL covers bodily injury and property damage caused by your company. This includes injuries to individuals, other than your employees, on job sites. CGL covers the cost of your legal defense and pays damages up to the limits in your policy if you are found liable. But CGL doesn’t pay for negligent or errant professional acts. For those, you need a professional liability policy.

Let’s consider a few potentially expensive claims that wouldn’t be covered by your CGL policy but could be covered by professional liability policy:

• You hire an engineering firm to design the HVAC system for a building. The engineer makes a mistake in calculating the building’s HVAC needs, and the tenants can’t properly heat or cool the building. The owner sues you because the engineer didn’t have enough professional liability insurance.
• You hire a cement contractor to design and pour the foundation of a building. You later discover the foundation wasn’t adequately reinforced and won’t bear the load of the walls. You have to tear down what you’ve built and repour the foundation.

Professional negligence and the limits of relying on others’ insurance

Professional negligence occurs when design services aren’t performed with the standard of care exercised by other design professionals performing similar services under the same circumstances. While many things could go wrong on a project due to professional negligence, most of them fall into three categories:

• Design delegation — This is when you delegate design and other professional services to a subcontractor or third party.
• Design error — This is when you make a design mistake or changes to a design that lead to damages. With many construction firms now offering design and build services, this is a significant liability exposure.
• Construction management — This is when the owner hires you to manage the entire project, including the design work.

Design errors can be far more serious, life-threatening and expensive than other types of construction errors. Think about claims such as “sick building syndrome” where a contractor can be held liable for millions of dollars in claims from a poorly designed or improperly installed HVAC system.

While your architects, engineers and subcontractors should have their own insurance, most of them have liability limits of $1 million or less.  As a result, you may find yourself sharing a policy’s limit with other firms whose coverage comes up short. In addition, if your subcontractor terminates coverage after its work on your project is finished, you might not be covered for a future claim at all.

How to get coverage and what to look for

The good news is the insurance marketplace has responded to these risks with CPrL. CPrL continues to expand and broaden to accommodate changing liability exposures. You can purchase CPrL as a stand-alone policy or combine it with a GCL or an umbrella policy. As you might expect, a stand-alone policy allows for higher limits and has fewer restrictions. For example, if you have in-house designers, you may have to purchase a stand-alone policy.

Policies can be written on an annual basis to cover all of your operations or on a project basis to cover a specific job. CPrL covers your legal defense, settlement costs and judgments from claims of negligence, errors, omissions, inaccurate advice, failure to complete work or misrepresentation.

CPrL policies have dollar limits, which can be exhausted by high legal and settlement costs. Discuss the two main types of limits with your insurance professional: aggregate and occurrence. The aggregate limit is the maximum amount your policy will pay during the policy’s term, usually one year. The occurrence limit is the maximum it will pay for a single claim.

CPrL is not a standardized coverage, so terms and conditions vary from carrier to carrier. Here’s what CPrL policies typically cover, which can you also add by endorsement:

• Your in-house design work
• Design work you delegate to another party
• Subcontracted design work under a design-build contract
• Faulty workmanship by subcontractors when you manage the contract
• Faulty self-performed work, including defective products and materials
• Third-party and first-party indemnity coverage
• Pollution coverage
• Rectification/mitigation of a negligent act that would otherwise lead to a professional liability claim

Remember that most CPrL policies are written on a claims-made basis. In this type of coverage, only claims that are made while the policy is in force will be insured. Since errors and omissions might not be discovered until after your project is complete, you’ll need to keep your policy in force for an extended period.

For large projects, a controlled insurance program, or “wrap-up,” may be worth considering. Wrap-ups ensure adequate insurance coverage for all of the parties on the project. They are managed by the general contractor or owner.

You can reduce your liability risk by properly vetting your designers and having a well-documented work process. Make sure those you hire are bonded and insured, carry their own professional liability insurance and understand the scope of work in their contract. Institute a formal process for change orders and meet regularly with the owner to keep lines of communication open.

Professional liability is a complex and continually evolving risk in construction. Ask your Rathbun Account Manager to review your exposure and discuss an appropriate level of liability coverage. With rising legal costs and increased project responsibility, CPrL is becoming an essential part of a contractor’s insurance program.