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: Evaluate the existing facility (structural engineer) 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?

A key concept in professional liability is “negligence.” 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 $50M project, that’s $3M! A key concept in professional liability is “negligence.”

Communication

Professional liability concepts in the construction sector 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

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

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

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

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 (P3)

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 - $1M or $2M 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?

Buy a project-specific professional liability policy 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

Fix Via Contract Ask for higher limits Note that in many countries outside the U.S.; limits apply with no aggregate cap and much higher limits are purchased Ask for higher limits Need to be maintained for many years Cost adds up May limit competition 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. 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

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

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

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

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

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

What happens if the project scope changes substantially? 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?

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

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

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

Mix and match PSPL and OPPI Scope of coverage Project definition 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

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

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