COMMUNITIES: PRIVATE PRACTICE
For the Client: Is Project Insurance a Worthwhile Investment?
BY NAHOM A. GEBRE, ESQ., P.E.
As a client procuring the services of a design professional, you have the right to know that the professional you hire has the capacity to stand behind the professional services provided. You have the right to expect that these services will be performed in a nonnegligent manner and, if those services are performed negligently, that the design firm has the ability to make you whole for those damages caused by the design firm's negligence.
In addition to enquiring about the capability and experience of the design firm, you often require that the design firm carry some kind of professional liability insurance. As such, most firms carry a practice professional liability policy. The professional liability policy has certain features. Generally, professional liability policies do not provide coverage for contractual liability. The contractual liability risks that you impose (such as guaranteeing an outcome or being responsible for the work of others) on the design firm are not covered by the professional liability policy, and design firms are therefore counseled by their advisors to attempt to review their contracts with a view toward making sure that their contractual liability obligations replicate their obligations imposed by the common law—that they are obligated to perform services in a nonnegligent manner. The firm's practice professional liability policy provides coverage for this exposure. For the vast majority of clients, such a policy is sufficient.
There are situations, however, when you want to consider requiring project-specific professional liability insurance. The project-specific professional liability policy provides coverage for a specific, named project. Coverage under the project-specific professional liability policy is triggered by negligence in the performance of professional services by the design firm or the other named professional consultants. If you want the design entities to carry coverage beyond that normally carried by the firms, or want to make sure that there are dedicated policy limits that are solely available for your project, a project-specific professional liability policy may be a viable option.
Also, if the particular project is of such increased scope that it drastically affects the cost of basic coverage of the design team, then a project-specific professional liability policy may again be an alternative. Similarly, if you think that there are underinsured consultants who will not have sufficient policy limits in the event of a claim, then a professional liability policy may suit the project's needs. You should consult with your insurance advisor to determine what policy limits are reasonable and what policies are available in the marketplace at commercially reasonable rates.
The project-specific professional liability policy is usually directly paid for by the client. It has all the features of an insurance policy, including a deductible and policy limits. Coverage is usually provided for the term of the project plus a predetermined discovery period after substantial completion of construction. Clients should realize that the product provides coverage for the named design firms' liability for negligence in the performance of professional services. It is not a contingency fund designed to provide coverage for other shortfalls in the project. If the project-specific policy limits are exhausted, depending on the insurance carriers of those firms covered by a project policy, coverage may revert to the individual firms' professional liability policies.
Large institutional clients who have a lot of projects and are concerned about the adequacy of their consultants' professional liability policies may have the option of purchasing an owner's protective professional liability insurance policy, which is different from a project specific professional liability policy. The owner's professional liability insurance policy is a highly specialized insurance program that protects the client for losses arising out of the design team's negligence that exceeds the design team's available insurance. This policy does not interact with the underlying practice professional liability policies of the design consultants; instead, you as the client make a claim directly against the owner's protective professional liability policy. This is a highly specialized marketplace, and it is best to consult with your insurance advisors about whether such a policy makes sense for your needs.
Ultimately, whether project insurance is worthwhile depends on the particular needs of the client and analysis of the costs and benefits of a project-specific policy. Clients should consult with their insurance advisors whether these policies are available at commercially reasonable rates, and obtain a comparison of available coverage provided by different carriers. If you have a project that drastically increases the costs of professional liability policies of your consultants, or you want to protect yourself against the possibility that some of your consultants may be underinsured at the time a claim is made, then a project-specific policy may be worthwhile.
Nahom A. Gebre, Esq., P.E., is a risk management attorney for Victor O. Schinnerer & Co. Inc. CNA/Schinnerer's professional liability insurance program has been commended by NSPE since 1957.