Design-build contractors typically subcontract the design of a project to a 3rd party A/E firm. Many do so with the misconception that the A/E firm’s professional liability will fully protect them in the event of a claim arising out of their professional services. Here are 5 reasons why they can’t and need to obtain their own Contractors Professional Liability (CPL) coverage.
- Professional liability policies are written on a claims-made basis. By the time a claim is made, it could be years after the completion of a project. At that point, the contractor has little assurance that the design firm’s policy will still be in force or that the design firm will still be in business.
- Professional liability policies have aggregate limits of liability, and the contractor has no assurance that the full limit is available at the time of a loss or that the design firm has the assets needed to cover its liability above available insurance.
- Indemnification clauses may be unenforceable. While the contract with the design firm likely contains an indemnification clause, it’s possible for the courts to declare such clause unenforceable. Anti-indemnification laws vary from state to state, placing additional burden on contractors to carefully craft their contract language, especially those who work in multiple jurisdictions.
- The contractual liability exclusion of design firms’ professional liability policies…PART I: When faced with a liability claim arising out of a project’s design, the design-build contractor usually turns to the design firm. They are then surprised to find that the design firm’s professional liability insurer will not assume their defense. Even if the contract between the two has an indemnification clause that includes “defend” language, the defense of a third party is liability created by the contract and is therefore excluded by the design firm’s policy’s contractual liability exclusion. To enforce the “defend” language of an indemnification clause, the contractor now knows that they may need to bring a separate suit against the design firm while the initial suit against them proceeds. [side note: a careful design firm will always strike the “defend” language from an indemnification clause for this reason].
- The contractual liability exclusion of design firms’ professional liability policies…PART II: Let’s assume the contractor spends $100,000 to defend themselves against the initial claim and settles for $50,000 in damages – all out of pocket. They then send a demand letter to the design firm, triggering their professional liability coverage. The best case (and therefore least likely) scenario is that the insurer quickly agrees that their insured was negligent and sends the contractor a check… for $50,000. In most cases and in most jurisdictions, liability for the contractor’s defense costs is likely to be considered a contractual liability and therefore excluded under the policy’s contractual liability exclusion – leaving the contractor at least $100,000 poorer.
Because of these, contractors engaging in design-build contracts need to protect themselves with CPL insurance. Coverage is available on a practice-wide or project-specific basis.
To learn more about CPL or your construction risks, contact Cliff Veirs at cliff[at]veirsinsurance.com. Cliff is a certified Construction Risk & Insurance Specialist® as designated by International Risk Management Institute.Filed Under: Commercial Insurance