Are You Really Covered?

By Daniel Conway, President Construction Risk Management & Surety, and Thomas Boudreau, SVP Excess Construction, both Chartis

With the real and anticipated increase in infrastructure projects funded in part by the American Recovery and Reinvestment Act, now is as good a time as ever to take a closer look at the coverage you are buying. Chartis has been increasingly asked to provide levels of professional liability coverage under the primary CGL policy via endorsements CG 2279 and CG 2280 for coverage on design-build projects. We believe it is necessary to point out that this does not solve all the professional needs that a client may have.

Owners are increasingly turning to design-build teams for their project delivery. There are many reasons for this- including efficiency, speed of delivery and their removal as the intermediary (a role they play in design-bid-build project delivery). Many of these design-build teams are contractor-led with the design portion subcontracted. It is often too late when a contractor is made aware that their CGL policy provides limited (at best) design coverage. The CGL policy is not intended to cover economic loss suffered by an owner such as the damage caused by any delay due to negligent design. It also does not provide coverage for the redesign or reconstruction resulting from negligent design. The CGL policy does however, provide coverage for damages which fall within the definition of "Bodily Injury" or Property Damage" as long as they are the result of an "Occurrence" as defined in the policy.

CG 2279 is commonly given in the market these days and provides coverage for construction means, methods, sequences, techniques and procedures of the contractor. CG 2279 does not however, provide coverage for professional services; and will exclude coverage for claims arising out of professional design services whether subcontracted or performed in-house. It should also be noted that CG 2279 does not pay for redesign or reconstruction costs due to negligent design.

Lately, we have been approached more frequently to endorse CG 2280 to our CGL form to address professional needs beyond means and methods. When attached to the CGL policy, it does provide limited coverage for professional design services that are either subcontracted to a design firm for a design-build project or performed in-house. Coverage is however, limited to damages that fall within the definition of "Bodily Injury" or "Property Damage" as the result of an "Occurrence". No coverage exists for economic damages under CG 2280.

Here is an example that shows how there can be a coverage gap using just a CGL policy for a design-build project:

The owner of a new multi-sport arena has a problem. After the arena is complete, it is discovered that the temperature/humidity levels cannot be properly maintained and as a result the owner is forced to bring suit against the contractor because the basketball court (which sits above where the hockey rink is located) is constantly moist and slippery. As a result, no home basketball games can be played in the new facility. The owner is forced to lease a nearby arena until the problem can be corrected causing financial loss.

Although the CGL policy with a CG 2280 endorsement attached may respond to the claim for defense, it certainly will not respond for the economic damages that are associated with the rental of a new arena, and any economic damages for current or future lost productivity as these types of losses do not fall into the definition of either "Bodily Injury" or "Property Damage" under a CGL policy.

Since CG 2279 and CG 2280 do not address all the professional needs of a design-build project, how should design errors and omissions concerns be addressed?

Traditionally, there has been a reliance on the E&O or Professional Liability policy of the design firm. It is important to remember that design professional liability insurance is available only on a claims-made basis. This is in sharp contrast to what the contractor is used to seeing on a CGL policy. If a claim is made and the design professional no longer maintains E&O coverage, carries lower limits than before or has had their limits exhausted due to prior claim activity, there is no coverage available for the contractor to rely on for either indemnity or defense. It is imperative for the contractor if using this method, to be certain that the design firm is buying sufficient limits, and maintains their policy (which is often out of their control). It is also important for the contractor to ascertain that the design firm's E&O policy not exclude design-build projects.

An efficient way to avert many of these concerns is to place a Project Specific Design Professional Liability Policy. Project specific policies generally cover all designers performing work on a given project. Some of the advantages of project specific policies are they offer certainty of coverage and dedicated limits for a designated construction period plus a discovery period after the completion of the project; they may protect a GC for professional services rendered either in-house or for their contingent exposure if they sub out to an architect; and they eliminate disputes regarding allegations of design negligence among the design team.

A less robust, but more cost-effective solution, Owners Protective Professional Insurance (OPPI) policies are available in the market and can provide excess limits for the owner above what the design firm has on their practice policy. OPPI is a first-party policy that that extends coverage to the owner for damages the owner incurs from professional liability created by the project design team. Some of the advantages of these policies are they can be priced specifically for the project at hand and can provide higher limits for the owner than otherwise might be available.

There is much to consider when evaluating your insurance program. One suggestion is that you work with brokers who know the construction industry and know what is available in the marketplace from the insurance carriers. It is imperative that they know what coverages are available and what they provide. So, the next time you are involved in a design-build project make sure you are asking your broker if you are really covered...