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Zeroing in on CPL Insurance
By Ann Rudd Hickman, CPCU, ARM
International Risk Management Institute Inc. / Dallas, Texas
(Copyright 2002 International Risk Management Institute Inc.)


Like many industries, the design and construction industry is in a period of great transformation. The growth of design-build as a construction method is one aspect of this transformation. As design-build grows in popularity, construction and design firms are realigning, changing their services, forming new partnerships and repositioning themselves in response to changing market conditions. While these changes present new and existing opportunities for contractors, they must understand that in taking on responsibility for design, in addition to construction, they also take on new risks. Failing to realize the extent of their responsibilities and liabilities as design-builders can be a devastating oversight.

Independent agents and brokers need to understand the risks their design and construction clients face when performing as design-builders or participating in design-build joint ventures in order to advise them on their additional coverage needs. The commercial general liability (CGL) policy is not adequate to cover the expanded liabilities design-build con-tractors assume. Contractors professional liability (CPL) insurance also is needed. This article will identify some of the professional liability coverage issues contractors must consider in devising a comprehensive risk and insurance program.

Risk Transfer is Not Enough

Typically, construction contractors venturing into design-build work will do so with the intention of subcontracting project design to separate entities. Often, these contractors (and their agents) mistakenly assume that by hiring a licensed design profession-al they have shifted the design risk away. Unfortunately, that is not the case. Even where the contract with the design professional contains all the right risk transfer provisions (indemnity agreements, waivers of sub-rogation and insurance requirements), the design-build contractor still bears significant risk because of the following factors:

Because the design-builder's obligation to the project owner is not relieved by the inability to collect for damages from a design subconsultant, design-build contractors should buy their own professional liability insurance.

CPL Insurance

Contractors professional liability insurance was introduced in the late 1990s as a specialized coverage to ad-dress contractors' vicarious and/or direct liability for design errors or omissions. The insurance can be written on an annual basis to cover all of a con-tractor's operations, or on a project-specific basis.

Many of the first-generation CPL policies were little more than architects and engineers errors and omissions policies with a different name, and they did not always match up to contractors' coverage needs. For ex-ample, most of the original forms covered only contingent liability and did not cover a contractor's direct liability for professional services. The second generation of forms, most of which bear a post-2000 edition date, are more tailored to contractors' professional liability needs, but they still do not cover all of the incremental de-sign-build exposures. By learning more about this specialized coverage, agents and brokers can help their con-tractor clients assess their profession-al liability exposures and obtain appropriate coverage.

Definition of `Professional Services'

A CPL policy's definition of "professional services" is a key determinant of the scope of coverage. Some forms specifically define the services that are covered, while others allow the insured to participate in defining it. In the former case, the definition may omit certain services provided by many contractors, especially those involved in complicated design-build construction. For example, claims arising from facility management, program management, furnishing construction computer software and leasing personnel to others for their expertise are not covered by most standard definitions.

Defining professional services on a case-by-case basis (by reference to an endorsement, the application or the declarations page) allows contractors to shape the coverage to fit their activities. However, contractors also run the risk of failing to include some activity, which could create an unintended coverage gap. It is imperative that con-tractors provide an exhaustive list of all services they perform that could even remotely be considered professional in nature. Some insurers will agree to a broader scope of services than others, depending on their com-fort with the contractor's qualifications to provide certain services.

Many policies use a combination of these two methods, including a standard definition of professional services (e.g., architectural, engineering, landscaping, surveying, and sometimes construction management) and ex-tending that definition to also include any other services listed on an attached endorsement to the policy.

Another important consideration in the definition of covered services is whether the policy covers the insured's own provision of professional services (direct liability), those provided on its behalf (contingent, or vicarious, liability) or both. Most of the major markets' forms (including those of Zurich, AIG, CNA and ECS) cover both direct and contingent liability, but contractors should confirm this point before buying a professional liability policy. Even where all design work is contracted to others, design-build contractors could be sued directly for damages arising out of a design subcontractor's work (for failure to properly supervise, negligence in hiring an incompetent design profession-al, etc). Therefore they need coverage for both exposures.

Joint Venture Coverage

Joint ventures between contractors and design professionals are commonly used to provide full design-build services with respect to a project; therefore, contractors should pay close attention to the scope of coverage a policy provides for such entities. Some CPL policies automatically include the named insured's joint ventures as insureds, but most cover only those joint ventures that are specifically listed on the policy. Where joint venture coverage is provided, it is typically limited to the named insured's liability arising out of its participation in the joint venture; joint venture partners are not covered.

Where joint ventures must be listed on the policy to be covered, contractors should be careful to add them before any services are performed. Further, because of the claims-made coverage trigger, past joint ventures must be carried over as insureds on renewal policies for coverage to remain in force with respect to these ventures. Some insurance professionals recommend changing "joint ventures" to "co-ventures" to cover a wider array of business relationships in construction projects. However, to avoid exposing their limits to unintended persons or entities, contractors should make sure this term is clearly defined in their policies.

Exclusions

CPL policy exclusions vary widely in number and scope from one form to the next. However, some exclusions present greater coverage concerns than others. Some of the more troublesome exclusions can sometimes be modified or deleted by endorsement. Where they cannot, contractors need to understand the limitations of their coverage and have contingency plans for how these risks will be funded.

In the soft market of the 1990s, a few insurers occasionally would delete this exclusion, but such willingness seems to have evaporated in the current market. Nevertheless, contractors should request that the exclusion be modified to provide coverage for liability they would have in the absence of such warranties or guarantees. This prevents the insurer from applying the exclusion when negligence can be established.

Most second-generation CPL forms have addressed this problem by either removing the exclusion altogether or removing the phrase "occupied by or in the care, custody or control" of the insured contractor. Alternatively, some policies may merely provide an exception to the exclusion for a "construction site occupied by the insured." Contractors should closely examine these provisions and request the appropriate modifications to clarify that coverage applies in such situations. Insurers should be willing to accommodate this request.

Some CPL policies preserve coverage for liability assumed in "insured contracts." The definition of insured contracts varies from one CPL policy to another, but in no instance is it as broad as it is in the CGL. A sample definition of "insured contract" is provided in Figure 1. Note that, unlike in the CGL policy, this definition does not allow for the indemnification of another for that party's sole negligence. But as long as the contractor does not agree to a broad-form indemnification agreement, this limitation does not represent a big problem.

Some CPL insurers may be willing to provide expanded contractual liability coverage by endorsement on either a case-by-case or blanket basis. At a minimum, the exclusion should clarify that it does not apply to liability that would have existed in the absence of a contact. This prevents the insurer from denying coverage for liability arising from a contractor's negligence merely on the grounds that the contractor had agreed to be responsible for such negligence.

Waiver of Subrogation

Unlike most professional liability policies, CPL policies usually allow named insureds to waive their rights of recovery (and thus the insurer's right to subrogation) to some extent. A few contain blanket waiver of subrogation provisions that merely prohibit the insured from doing anything after a loss (or claim) to prejudice the insurer's rights of subrogation. By implication (and successfully tested in the courts), this type of provision does allow the insured to waive its right of recovery prior to a loss. More common, however, is a limited waiver of subrogation provision in which the insurer agrees not to pursue its rights of subrogation against specific parties - typically, the named insured's clients and/or subcontractors - if the named insured has agreed to waive such rights prior to loss. (Although the term "client" is not defined in the policy, presumably it would mean anyone with whom the insured contracted to provide covered services.) A sample waiver of subrogation provision is presented in Figure 2. Note that this provision does not allow the insured contractor to waive subrogation rights against a design professional, whether the design professional is a client or a subcontractor, without the insurer's written consent.

Although the waiver of subrogation provisions found in CPL policies are broader than those included in most other types of professional liability policies, they are more restrictive than what contractors are used to under other types of policies. Contractors who are unaware of the more restrictive provisions in the professional liability policy may unknowingly execute waivers that jeopardize their professional liability insurance coverage. To avoid forfeiting their rights to coverage, contractors should either attempt to negotiate a waiver-of-subrogation provision that conforms to the requirements of their contracts or adapt their contracts to conform to the requirements of the policy.

FIGURE 1
Sample Insured Contract Provision in a Contractors Professional Liability Policy

INSURED CONTRACT means that part of any contract or agreement under which the NAMED IN-SURED assumes tort liability of the INSURED's client to pay for compensatory damages to persons other than an INSURED, because of BOD-ILY INJURY or PROPERTY DAMAGE resulting from an act, error, or omission (...). However, INSURED CONTRACT does not include any; tortious conduct that otherwise; would not be covered under this Policy, nor if the tortious conduct was solely that of the person or persons for whom such liability under the IN-SURED CONTRACT was assumed. For the purposes of this definition, INSURED shall exclude any employee of the NAMED INSURED, solely while acting in their professional capacity on the behalf of the NAMED INSURED.

(Source: Professional and Pollution Liability Policy - General Contractors, Form GIC-PPLGCCP (5/01), Greenwich Insurance Co. [marketed by ECS Underwriting, Inc.]).

FIGURE 2
Pre-loss Waivers Against Clients or Subcontractors Allowed

The Company agrees to waive the right of subrogation against a client or subcontractor of the Insured to the extent that the Insured had, prior to a Claim, a written agreement to waive such rights; however; with respect to Coverage A [Professional Liability], no waiver of subrogation may be granted without the written consent of the Company where the client or subcontractor is a design professional.

(Source: Contractor's Professional and Pollution Liability Insurance, Form #77355 (12/00), CI1256, American International Specialty Lines Insurance Co.)

Ann Rudd Hickman, CPCU, ARM
International Risk Management Institute, Inc.
Ms. Hickman is a senior research analyst with the International Risk Management Institute, Inc., where she serves as primary research analyst for Construction Risk Management, and as curriculum director for the IRMI Construction Risk Conference. She recently edited and was a contributing author on a new IRMI publication, Design-Build Risk and Insurance. Ms. Hickman received her MA degree in risk management and insurance from the University of Georgia, and her BBA degree from Eastern Kentucky University.

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