Even though the professional liability marketplace has expanded somewhat over the past few years, and in 2008 we will definitely see rate decreases, most of this news resides with practice or corporate programs. When it comes to insuring professional liability on a project-specific basis, construction project owners still have few alternatives. 1
The first—and most recognized—alternative is a project professional liability program that insures the design team, and may include the contracting firms that are performing certain professional services. Only two insurers are willing to offer project professional liability coverage even if they are not providing the firm's corporate or practice insurance program. They are Lexington Insurance Company and Zurich Construction, via Steadfast Insurance Company. (Note: other insurers may offer project coverage but only if they are insuring their practice program.)
Each insurer's program has its benefits and drawbacks, and careful consideration must be given to identifying the primary beneficiary of coverage: architects, engineers, construction firms, owners, or all of the above. Many times, this can be a difficult task, if not impossible. Couple this with the high cost for project professional liability programs, and we see many project owners passing on project coverage and opting to rely merely on the design professionals' practice insurance. On sizeable projects, this may not be a prudent move.
The other option or insurance product that is gaining more and more attention with owners of construction projects is the owners' protective professional indemnity or OPPI policy. Offered to owners ("owner's protective") of construction projects who hold contracts with design professionals, the OPPI provides first-party indemnity to the owner (insured) for damage they incur as a result of negligence of the design professionals. It does not extend coverage to the design team so the possibility of defense cost eroding the limit of liability, which is usually a concern with a project professional liability program, is drastically reduced, if not eliminated. The OPPI is in the name of the owner and sits excess of the design professional's professional liability insurance and essentially supplements coverage and capacity that the design firms bring to the project via their practice programs. No design professionals are named to the policy.
At first, the major attraction to the OPPI is usually cost. Theoretically speaking, the premiums are usually 30 to 40 percent lower than a typical project professional liability placement. However, for owners of large construction projects that want to ensure they are protected properly from professional liability of the design team, there are numerous benefits, as outlined here.
- All the benefits of having an owner-controlled program exist, such as primary protection for the named insured (owner), consistency in coverage, and reduced cost to administrate the program.
- The policy supplements the design professional's professional liability program, providing direct benefits to the named insured, and allows the design professional to apply its own practice program. This eliminates potential coverage problems, such as separately insured project exclusions, that may arise when a project professional liability program replaces the design professional's practice program.
- The policy offers difference-in-conditions (DIC) coverage above the underlying professional liability policy, extending coverage to the named insured in the event the underlying policy is deficient in coverage. Some good examples include mold exclusions, habitational exclusions, construction management exclusions, or contractual liability exclusions that may exist in a design professional's practice program.
- Defense costs for third-party claims arising out of the design professional's services are provided to the named insured under a specific coverage part.
- Contractor's pollution coverage can be included providing the named insured with excess coverage for pollution claims—including mold over the contractor's pollution liability coverage.
- Coverage can be provided for the liability of the owner's professional services in the event the owner has an engineering/construction entity on staff.
- The policy can be offered on a project-specific basis for the construction term plus up to 10 years on the extended reporting period (ERP) or annually for all construction ("blanket" coverage) of the named insured.
- In the event the underlying design professional's policy is intact (limits and coverage) at the time of claim payment, the self-insured retention (SIR) under the "protective" policy does not apply. In other words, the SIR is "erodable" by recovered design professional's available limit.
- It can be an effective alternative for those owners requiring design builders and general contractors to secure professional liability from their design professionals.
- Limits of liability can be secured up to $25 million with one single insurer. Higher limits may be obtained through use of multiple insurers.
Markets
There are only a few insurers offering "protective" policies: Lexington Insurance Company, Zurich Construction/Steadfast Insurance Company, and Arch Insurance Group have been offering the product for some time. However, in 2007 Beazley USA began offering OPPI as well.
All insurers have capacity up to $10 million however; Zurich is the only one with $50 million in capacity. Zurich is probably the insurer with the most experience in OPPI having offered the product for over 10 years. Coverage terms and conditions can vary, so it is imperative that a sound understanding of the contractual relationship between the named insured and the design professional exists prior to pursuing the coverage.
As this product continues to evolve, look for it to become a more desired option for owners than the alternatives currently available to them.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Footnotes
1 Thanks to Tony Polini for cowriting this article.
