COMMUNITIES: PRIVATE PRACTICE
For the Client: Owners and Engineers Find Benefits in Project Insurance
BY JOSEPH A. SCHRANCZ, P.E.
Owners of upcoming projects will undoubtedly have many issues to contemplate, including professional liability insurance. While these owners will anticipate a well-designed project that is constructed on time and within budget, they will still want to protect themselves from possible damages caused by their engineering consultants' negligent design acts, errors, or omissions.
As standard practice, the owner's contract will require the design firm to carry a specific liability limit. The contract may also include a provision that will indemnify the owner for the design firm's negligence. However, despite these contract requirements, project owners have expressed some concerns related to professional liability insurance.
For instance, what limits should they require the design firm to carry? Will a request for high limits narrow the project owner's search for well-qualified firms? Considering that the design firm's limits cover all of its projects, not just the owner's specific project, what guarantee does an owner have that these limits will be available if there is a claim? What guarantee exists that the design firm will still be in business and still have a policy in place if an issue arises several years down the road? If multiple design firms are involved in the project, who will take responsibility if the owner is damaged? Will there be finger-pointing among the design team, and will this delay the project or increase the owner's legal expenses in pursuing a claim?
While most projects rely on the design team's annual "practice" policy terms, conditions, and liability limits, project-specific professional liability policies have been a popular alternative risk management tool for project owners for many years.
A project-specific professional liability policy covers claims resulting from negligent acts, errors, or omissions by the design team members occurring between the start of design through construction. Project-specific policies also include an extended reporting period that allows negligent acts, errors, or omissions by the design team members to be discovered and reported. Extended reporting periods are generally three to five years and begin after construction completion.
With many design team members generally included as named insureds within a project-specific policy, an important feature is the inclusion of a mandated joint-defense system. The joint-defense provision treats all named insureds as one and, similar to their "practice" policy requirements, obligates them to cooperate in the defense and prompt resolution of issues that arise within the scope of policy coverage. More importantly, this provision prohibits design team members who are named insureds under the policy to bring any claims, cross-claims, or third party claims for negligence, indemnification, or subrogation against any other design team member named on the policy. This confirms the policy's intent to act on behalf of all design team members named on the policy.
There are many benefits to a project-specific professional liability policy. Considering the policy covers one specific project, the limits of liability provided are dedicated to that project. Therefore, claims made against any of the design team members from any other project will not erode these limits. Project owners find great comfort knowing that limits will be available for their project.
Considering that the design team's annual practice policies are "claims-made" and are renewed annually, a project policy allays several related concerns. First, a project policy's terms and conditions are guaranteed for the entire policy term (barring any significant changes to the project), while the terms and conditions of a practice policy could change annually. Further, a project policy's liability limits will be available even if design team members are acquired or go out of business.
Project policies also allow project owners to set the limits of liability without concern of restricting the search for qualified firms. If asked to increase their practice limits to meet a professional liability limits requirement, a firm may not be able to obtain these limits from their insurance carrier or may not want to carry higher limits for business reasons.
Owners will find other benefits in a project policy's joint-defense provision of a project policy. Eliminating finger-pointing and cross-claim opportunities between design team members within the policy can lead to quicker resolution of design errors, which can minimize project delays. Moreover, the owner's potential legal fees in pursuing restitution for damages may also be much less if negotiations are only with the project-policy insurer, rather than multiple practice-policy insurers.
As demonstrated, project-specific professional liability policies offer project owners significant benefits, and they're also popular with design firms. Among the reasons for their popularity: having projects separate from a practice policy, avoiding the need to secure higher limits, having set terms and conditions for the life of a project, and minimizing claims discussions. While the availability of project-specific policies has declined over the past several years, recent changes in insurance underwriting criteria and processes have allowed these policies to continue being an effective risk management tool and viable alternative on many projects.
Joseph A. Schrancz, P.E., is a manager at Risk Specialists Companies, which provides direct, local access to Lexington Insurance Company's products and services for architects and engineers.