Even though the professional liability marketplace has expanded greatly in recent years, construction project owners still have few cost-effective alternatives offered on a project-specific basis. The first and most recognized options insure only the design team and will add the owner only as an “indemnified party.” They do not provide the “insured” status that many firms may want if they were to pay the premium on a project professional liability policy.
Unfortunately, there are few carriers currently offering project professional liability coverage for large construction projects not in some way related to corporate or practice insurance programs; other carriers may offer project coverage, but only if they are insuring their practice program. Even though this market is expanding, carriers are still very cautious about offering project coverage for fear of adverse selection.
However, each carrier’s program has benefits and drawbacks and careful consideration must be given to identifying the primary beneficiary of coverage: architects, engineers, construction firms, owners or all of these. Many times, this can be a difficult, if not impossible task. Couple this with the high cost of project professional liability programs, and we see many project owners passing on project coverage and opting to rely merely on the design professionals’ practice insurance, which may not be a prudent move for sizable projects.
The other insurance product gaining more attention with construction project owners is the Owners’ Protective Professional Indemnity (OPPI) or Owners Protective Professional and Excess Contractors Pollution Policy (OP3). Offered to owners (“owners protective”) of construction projects that hold contracts with design professionals either directly or via design-build projects, the OPPI provides first-party indemnity to the owner (insured) for damages incurred as a result of professional design negligence.
But it does not extend coverage to the design team, so the possibility of defense costs eroding the limit of liability—usually a concern with a project professional liability program—is drastically reduced, if not eliminated. The OPPI/OP3 is in the name of the owner and sits in excess of the design professional’s professional liability insurance and essentially supplements the coverage that the design firms bring to the project via their practice programs. No design professionals are named to the policy.
Generally, the major attraction to the OPPI/OP3 is cost, since premiums are usually 30% to 40% lower than typical project professional liability placements. However, it has benefits for owners of large construction projects that want to ensure they are protected from professional liability.
First, the OPPI/OP3 provides the benefits of having an owner-controlled program that offers primary protection to the named insured (owner) while ensuring coverage consistency and reduced administration costs. In addition, the policy supplements the design professional’s liability program by providing direct benefits to the named insured and allowing the design professional to apply his or her own practice program. This eliminates potential coverage problems that may arise when constructing a project professional liability program to replace the design professional’s practice coverage, such as separately insured project exclusions.
Second, the policy offers “difference in conditions” (DIC) coverage above the underlying professional liability policy that extends to the insured if the underlying policy is deficient. Some good examples of DIC include mold, habitational, construction management and/or contractual liability exclusions that may exist in a design professional’s practice program.
Third, this form of coverage also can be offered on a project-specific basis for up to 10 years (the extended reporting period, or ERP, is included in that term) or annually for all construction (“blanket” coverage) of the named insured. Plus, the contractor’s pollution coverage can be included to offer the insured excess coverage for pollution claims, including mold, over the general contractor’s pollution liability coverage.
Furthermore, in the event the underlying design professional’s policy is intact (limits and coverage) at the time of claim payment, the self-insured retention (SIR) under the “protective” policy does not apply. In other words, SIR is “erodable” by recovered design professional’s available limit. Other benefits include the ability to:
Unfortunately, only a few carriers offer “protective” policies. However, the market continues to expand. In 2008, we had only a single market offering such coverage.
Today, we have five, and that is likely to expand. In addition, coverage terms and conditions can vary, so it is imperative that a sound understanding of the contractual relationship between the named insured and the design professional exists before pursuing the coverage.