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

2. 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?

3. 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.”

4. Communication

5. 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

6. 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

7. 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

8. 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

9. 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)

10. 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?

11. 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

12. 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

13. 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

14. 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

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

16. 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

17. 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

18. 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

19. 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?

20. 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?

21. 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

22. 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

23. 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

24. 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

25. Greyling Insurance Brokerage
Atlanta | St. Louis | Tampa
(770)