Professional Indemnity Insurance for Civil Contractors

The exposures faced by contractors have become more complicated as a result of changes in project delivery systems over the past 20 years. This has forced construction executives to examine professional liability coverage—a complex and often misunderstood type of coverage.

While a Public Liability policy covers physical activities that result in bodily injury and physical damage, professional liability claims often come from issues relating to faulty design, cost overruns or a delay in completing the project due to professional negligence.

In construction litigation, professional negligence is usually defined as failure to perform duties according to the rules or standard of care or practice that would have been expected of another professional performing a similar task in the same region or location.

“Professional” Defined

A professional is defined as someone who possesses specialized skills and experience and a higher level of competence resulting from acquired learning. A crane operator may have specialized skills and experience, but operating a crane would not be considered a professional service. It would be considered “means and methods.” Similarly, if a contractor uses detailed design for the temporary foundation of the crane and performs studies of the load bearing or handling capacity of the crane, these activities are considered means and methods. On the other hand, an engineering firm could potentially incur professional liability if the firm designs the supporting structures for the crane or offers opinions about the crane’s operating capacity but do not actually operate the crane as they would be acting within the capacity of a “professional.”

Professional Liability Coverage for Contractors

A professional liability policy broadly covers design claims. To the extent the construction manager acted negligently, they incur professional liability. Construction companies can take the following kinds of insurance coverage for financial protection.

Defensive Coverage

Professional liability policies are defensive in nature. Contractors should purchase protective indemnity coverage if they enter a design-­‐build contract and provide design and construction services while subcontracting the design portion of the work.

Protective Indemnity

If the design firm is at fault and their professional liability insurance is not adequate, protective indemnity coverage will pay the contractor for such a loss in excess of the designer’s availability insurances. Such insurance is essential in design/build as it may be the only recourse available to help the contractor defray the costs of fixing the project. Since protective indemnity only pays for established losses, it typically takes some time to vet out its value.

Mitigation

Mitigating damage is a more proactive insurance coverage for a project, especially for design claims discovered during the course of the construction or warranty period. The coverage looks at the significant project design problems early on. If the problems require immediate attention, the coverage brings all parties to the table without litigation, while potentially providing immediate funds to remedy the design problems.

The issue of fault can be resolved later after the project meets the owner’s satisfaction. Once full design liability has been established through mediation or litigation, the contractor and his or her insurer jointly look to recover mitigation of damage advance payments that have been made from the negligent third-­‐party designer.

A contractor who subcontracts design or provides design-­‐build or construction management services should purchase a professional liability policy. The Public Liability policy does not cover the risks involved in these contracts.

In some cases, design liability is inadvertently assumed on an indirect basis (e.g., fire protection, life safety/lighting, signage, roofing, mechanical, electrical, curtain walls, etc.) when the contractor subcontracts the activity to a non-­‐professional entity. This entity may also subcontract design services. Claims have arisen when a critical part of the job had a design-­‐build component that resulted in a professional liability loss despite the fact that the contract for work was a general construction lump sum agreement.

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