Minimizing Your Liability Exposure
By Cynthia Evanko Olinger
Professional liability exposures in construction have traditionally been associated with members of the design team such as architects and engineers. With the advent of alternative contracting methods and the expansion of activities considered to be professional services, general and trade contractors are increasingly exposed to professional liability losses. For both evolving forms of risk, contractor professional liability policies can be a solution to crippling financial exposures.
Design/build (DB) contract vehicles have impacted the landscape of professional liability for contractors by changing the contractual relationship between project owners, contractors and the design team. When the design team is subcontracted to the contractor under a DB agreement, the owner only has privity of contract with the DB contractor, as opposed to a traditional design-bid-build arrangement, where the owner holds separate contracts with the design team. The DB contractor assumes responsibility for the entire work on the project, and in the event of a professional liability loss, the owner appropriately takes action against the entity holding the contract: the DB contractor.
As an example, a general contractor won a bid to build a new hospital for the State Department of Health and Human Services (DHHS) under a design-build contract, thereby accepting responsibility for the adequacy of the design. The general contractor brought in various subcontractors to perform aspects of the project, including architectural and engineering services.
Prior to completion, significant problems were discovered, the most serious of which was a discrepancy in the elevation levels of the first and second floors of the hospital, in addition to a potential problem with the load-bearing suitability of the soil, which may have contributed to the elevation issue and structural stability.
The general contractor entered into a Memorandum of Understanding, under which they assumed full responsibility for the aforementioned issues, and agreed to correct the issues at no cost to DHHS. While the DB contractor may have pursued recovery of damages from the design subcontractors and/or other subcontractors for their contribution to the errors, the DB contractor ultimately was responsible to the client.
Many firms pursue DB construction work without appropriate regard for this increased risk, and rely on insufficient limits of insurance provided by their designers or subcontractors. This is particularly true for smaller design firms, where the size of the firm and their respective insurance does not scale proportionally with their work on the project. Because professional liability policies of the designers/subcontractors are provided on a claims-made basis with a retroactive date, the limits are also exposed to their past work. If the limits of insurance are exhausted on a project, these firms rarely have significant asset bases, so recourse through litigation (absent insurance) usually leads to little or no financial recovery. Fortunately, contractor professional liability policies can provide coverage for DB contractors for their liability resulting from the actions of their designers/subcontractors.
Design and engineering services provided by members of the design team previously encompassed our understanding of the professional services provided for a project. The general contractor was not considered to have design and engineering liability. However, activities that are often performed by the contractor, such as project/construction management, scheduling, etc., have contributed to professional liability losses. As a result, general and trade contractors are now considered to have direct professional liability for these types of activities.
In one example, a general contractor was hired to construct a parking garage as part of a retail and transportation center. The general contractor’s work included scheduling, coordinating subcontractors, and quality assurance for the project.
When the project began to fall behind schedule, the general contractor adjusted the curing time for concrete slabs of the parking structure, and removed curing braces sooner than recommended. This resulted in failure of the fourth floor slab, which collapsed and caused failure of the entire structure, killing a worker and injuring others. The general contractor was held liable for the bodily injury damages as well as economic loss to the project.
Because contractors routinely provide professional services on their projects that are not covered by general liability policies, alternative strategies are needed to mitigate this risk. Contractors’ professional liability insurance policies provide coverage for these services, which cover the damages the contractor is legally obligated to pay, as well as legal costs, within the limits of liability.
The extent of a contractor’s exposure to professional liability losses needs to be assessed on an individual basis, and will depend upon activities being performed and the contract mechanism, among other factors. The need for professional liability coverage should be evaluated in an anticipatory way, based on a contractor’s individual business plan and pursuit of work.
Cynthia Evanko Olinger is senior vice president of construction at JLT Specialty USA. In her role, she works with JLT account teams to assist clients in managing construction professional and pollution liabilities by evaluating client exposures and risk management objectives to structure effective risk management solutions. She has more than 14 years of experience in the insurance industry, including 11 years as an insurance broker specializing in construction professional and environmental exposures and insurance.