Perhaps one of the more vexing risk management issues that arise in construction projects is the professional liability exposure for design professionals, also known as architects, and construction managers. Architects have significant professional liability exposures and most purchase professional liability insurance to cover those exposures, but will they buy enough?
If project owners sign the standard American Institute of Architects Agreement Form B141-1997 before specifying the amount of professional liability insurance to be carried by the architect, they will likely end up paying for the added cost to meet their limit requirements. The form includes, as a reimbursable expense to the architect, in addition to the compensation for their services, the "expense of professional liability insurance dedicated exclusively" to the project "or the expense of additional insurance coverage or limits requested by the owner in excess of that normally carried by the architect. . ."
Negotiating the limits of professional liability to be maintained by the architect before signing the agreement with the architect should help owners achieve desired levels of coverage in a more cost effective manner.
When insurance requirements are considered for the architect, keep in mind the potential for requiring project-specific coverage rather than just a practice policy. Depending upon the size of the architectural firm and the types of projects in which the firm is involved, a practice policy (which essentially shares the limit for the architect's work with all owners with whom the architect contracts) may not be adequate. Project-specific policies, on the other hand, will afford owners the benefit of insurance limits dedicated to their specific project. This option will always cost the owner more (even if negotiated up front or required in the bid documents), but may be worth it.
Construction managers--firms or individuals retained to manage and coordinate the entire project from beginning to end--have many professional liability exposures as well, but frequently do not maintain any coverage for those exposures. In addition, the 1992 edition of the AIA Agreement between owner and construction manager specifies that the expense of additional insurance coverage or limits required by the owner in excess of that normally carried by the construction manager will be paid for by the owner. Here again, planning early is critical.
Agreements between owners and architects or construction managers include provisions that essentially call for all three parties to waive rights of recovery against each other. With such waivers running in favor of the latter two, it is easier to understand their lack of concern about professional liability limits since the damages for most construction-related claims will be paid by the owners? builder's risk policy with little worry of recourse against the architect or construction manager.
There may, however, be some change on the horizon. In recent months, some insurers offering builder's risk quotes for fairly large construction projects have made some of their quotes contingent on there being no waivers of rights of recovery in favor of the architect. Such departures from the norm are just beginning to surface and, in most known cases, the standard permission to waive rights of recovery has ultimately been negotiated back into the builder's risk insurance contracts. There may soon be a time, however, when construction project professionals will feel differently about their professional liability exposures if insurers retain the right to subrogate against them.
CHARLES COX, a principal of the Orchard Park, N.Y., consulting firm of Aldrich & Cox, writes a regular column for
Risk & Insurance®.
April 15, 2006
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