Professional Construction Risk Society of Risk Management Consultants

Professional Construction Risk Society of Risk Management Consultant's (SRMC) 2016 Spring Conference April 8, 2016

Building Expansion • Your client wants to add an extension to their existing facility • It’s a major project for them • They hire consultants to: A. Evaluate the existing facility (structural engineer) B. Determine soil/underground conditions for supporting the new extension (geotech engineer) • Post completion, the floor on the new facility settles and becomes uneven, which also causes cracking in the prior existing facility • Who pays for this? | 2

Fast-Track Project • Your client needs a new facility to be designed, built and opened in record time • The new facility will generate substantial revenue and profit and if it is not completed on time, a market opportunity will be missed • The project is built on an aggressive fast-track basis as required by the owner • At the end of the project, change orders, cost overruns, and other extras are 6% of the total – For a $50 M project, that’s $3 M! | 3 A key concept in professional liability is “negligence. ”

Communication | 4

Some Basics • Professional liability concepts in the construction sector – Allocation of risk to the party that best controls it – Negligence standard – Perfection isn’t realistic – Limitations of professional liability coverage § No coverage for liability assumed under contract § No additional insured status § Claims-made § Aggregate policy limit including defense costs | 5

Impact of Owner’s View of Risk • From actual contracts between owners and design firms: – “…Architect shall design the project [on the Gulf coast] to withstand a category 5 or greater hurricane…” – “…project will be completed on schedule…” • Recommendation – Engage counsel that understands construction risk – Have one contract for contractors and another for design/professional firms | 6

Construction Professional Risk • Pre-project advisors – Project feasibility study – Environmental/permitting – Geotech/soil condition analysis • Contractor – Subcontractors • Design firm – Subconsultants • Others – Program manager or owner’s representative | 7

Project Delivery Method • Traditional (in the U. S. ) – Design-Bid-Build Owner Contractor Architect Subcontractors Engineers and Other Subconsultants and maybe here | 8 Geotech Environmental Professional Risk

Project Delivery Method – Other • Construction Manager (agency) • Construction Manager (at-risk) • Design-Build • Delegated design within Design-bid-build • Integrated Project Delivery (IPD) • Design-Build-Operate-Maintain (DBOM) • Build-Operate-Transfer (BOT) • Public-Private-Partnership (P 3) | 9

Owner Challenges • Professional liability coverage (via the firms that work for your clients) can come from many sources • Some firms that create a professional exposure—subcontractors, other consultants—often don’t have coverage • Most firms don’t carry much limit - $1 M or $2 M • The existing limits apply to every project the insured firm has ever designed and include defense costs • The existing limits shown on the certificate of insurance may be depleted even as you receive the certificate • Claims can occur years in the future—will the design firm that worked for your client still be around with coverage 10 years into the future? | 10

Potential Solutions • Fix it via contract – Good insurance specs • Buy a project-specific professional liability policy – A PL wrap • Buy an Owner’s Protective Professional Indemnity (OPPI) policy | 11

Fix Via Contract • Ask for higher limits – Need to be maintained for many years – Cost adds up – May limit competition Note that in many countries outside the U. S. ; limits apply with no aggregate cap and much higher limits are purchased • Ask for confirmation that limits are unimpaired and for updates if limits are reduced by claims and/or defense costs – Can’t be done • Specify broadness of coverage – Difficult to enforce/achieve over time • Ask for liability assumed under contract – Does not exist in the U. S. | 12 One Contractor PL insurer now offers, on a limited basis, a per-project aggregate limit

Project-Specific Professional Liability • A professional liability policy dedicated to one project • It normally covers the prime architect or engineer, all of their subconsultants and other periphery consultants hired by the owner (replacing their annual practice coverage) • The policy should be placed when design starts, but can be purchased as late as beginning of construction • Coverage will apply to the design phase, plus construction, and then an extended reporting period—up to a combined maximum of ten years • The policy is non-cancelable | 13

Buy a Project-Specific PL Policy (PSPL) • Pros – Coverage can apply to all design and other professional exposures related to a project – Requires joint defense; makes settling a claim much easier – Can provide risk management benefits – Coverage is easier to coordinate if done with OCIP/CCIP and builders risk programs • Con – Cost is high, no offsetting bid deducts – Managing deductible can be challenging – Insured vs. insured exclusion – Owner buys policy for others; limits can be used for legal fees to defend against an owner’s claim | 14

Owners Professional Protective Indemnity OPPI Policy Architect’s Policy Environmental Consultant | 15 Geotech Owner’s Rep.

How does it work? 1. The loss must exceed available underlying professional liability insurance 2. The owner must pursue the claim against the design firm(s) working for it (and inform the OPPI insurer) • Third-party claim 3. The owner can then pursue OPPI coverage with its insurer • First-party claim 4. The OPPI insurer will indemnify the owner | 16

Deductible • Every OPPI policy has a deductible • It does not apply in-between the third-party design firm’s coverage and the OPPI policy – This is true even if the limits of the third-party design firm’s policy are impaired • But if the third-party design firm’s policy limits are exhausted, or if the OPPI policy is broader than underling coverage, the deductible will apply | 17

Does the OPPI insurer care about underlying limits? • The policy has a Minimum Insurance Requirement (MIR) • The MIR can vary – $____ for the prime design firm – $____ for the structural engineer – $____ for all others • What happens if there is non-compliance? – The difference is uninsured | 18

Project changes • What happens if the project scope changes substantially? – Most insurers have an audit feature—if the project changes in cost or scope by a specified amount, there is an additional premium? – That premium will be due years later – Who pays? | 19

A key point • In the event of a $15 M loss caused by a design firm’s (DF) negligence, protective coverage should pay as follows: $15 M (Total Loss due to DF negligence) - $5 M (Available insurance from DF) = $10 M (Protective Claim) • But what if the owner had agreed to a limitation of liability (Lo. L); what happens? | 20

Limitation of Liability (Lo. L) Example • The prime architect has a Lo. L of $5 M • The owner buys an OPPI policy with a $10 M limit • There is a $15 M loss • The owner collects $5 M from the architect • And then the owner attempts to collect $10 M from the OPPI insurer, but it has no claim—the negligent design firm’s liability is capped at $5 M • In this case the design firm owes $0 in excess of $5 M due to the Lo. L | 21

Lo. L Example • The fix is an Lo. L endorsement • It allows coverage in excess of an Lo. L, as if the Lo. L didn’t exist • The Lo. L amount usually has a minimum of $1 M • Some firms, esp. geotech, won’t work with an Lo. L that high (or want more money to do so) • The gap is self-insured | 22

What else? • Mix and match PSPL and OPPI • Scope of coverage • Project definition • Third-party liability • Coordinate with other coverage – Builders risk – General liability • Rectification coverage • Contractor’s pollution | 23

Advice for your clients • For large projects that use an OCIP or CCIP, an OPPI or even a PSPL can make sense • The fees charged by brokers to place and administer these programs are competitive • But not every OCIP/CCIP broker knows the ins and outs of professional liability insurance • If your client puts out an RFP for the insurance on a major project, we suggest that the PL portion stand on it’s own – One broker could still be selected for all lines of coverage, but not without the right credentials | 24

Greyling Insurance Brokerage Atlanta | St. Louis | Tampa (770) 552 -4225 www. greyling. com | 25