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By G. MARTIN IRONS, CPCU, CIC, ARM, vice president, Technical Development Department, and member of the construction and mergers & acquisitions practice groups at The Graham Co.

As more and more owners look to the design-build delivery system, for contractors the question remains: "Is my insurance program designed to protect me for this additional responsibility?"

The key issue to review from an insurance perspective is the type of professional liability coverage you have. With a design-build approach, the contractor holds the responsibility for the design contract. This exposure can be insured in various ways:

THE DESIGN PROFESSIONAL'S LIABILITY POLICY

Many contractors subcontract the design to a design professional. If this is your approach, here are some key points to remember:

-- The designer's professional liability insurance policy only protects the designer. It will not typically provide a contractor with additional insured coverage or contractual liability coverage if you are sued. Hence, contractors need an insurance policy that will protect them for their responsibility for the design contract.

-- The limit of the design professional's policy is shared over all their other jobs, and a claim from another job could exhaust their limit, resulting in inadequate claims coverage.

GENERAL LIABILITY POLICY

A contractor's general liability insurance policy will typically have an exclusion for professional liability. The most common exclusion excludes liability arising out of engineering, architectural or surveying services provided by you or on your behalf. This would likely exclude a contractor's responsibility for the design contract (whether it is performed in-house or subcontracted to a design professional).

UMBRELLA LIABILITY POLICY

Similar to the general liability policy, a contractor's umbrella liability policy will typically have an exclusion for professional liability. The most common exclusion excludes liability arising out of engineering, architectural or surveying services provided by you or on your behalf. This would likely exclude a contractor's responsibility for the design contract (whether it is performed in-house or subcontracted to a design professional).

CONTRACTOR'S PROFESSIONAL LIABILITY POLICY

Your contractor's professional liability policy will typically have a definition of covered professional services. This definition is critical to understand the coverage provided by your policy. If this definition focuses only on your contracting activities, it may not extend coverage for your responsibility for the design contract (whether it is performed in-house or subcontracted to a design professional).

The definition of covered professional services in your policy should be carefully reviewed to ensure your design-build exposure is properly protected. In addition, because your umbrella policy limits will not typically provide excess professional liability limits, your current professional liability limit should be evaluated to determine if it is adequate to protect you for the additional design exposure you have assumed.

CONTRACTOR'S PROTECTIVE PROFESSIONAL COVERAGE

This coverage is a first-party coverage that indemnifies the contractor for its loss. Coverage applies excess of the design professional's professional liability insurance, for costs the contractor incurs and is legally entitled to recover as a result of negligent acts or errors and omissions of design professionals with whom the contractor holds a contract. This coverage is often not carried by a contractor, but here are several reasons why it should be considered:

-- It provides coverage for costs the contractor incurs as a result of the acts/omissions of the design professional it hired. Note, however, that it does not provide protection for suits brought by third parties against the contractor for its vicarious liability for hiring the design professional. For example, if the design professional designs the project with improperly sized rebar and it is not discovered until the job is nearly completed, the contractor could incur substantial rework costs and schedule delays that may or may not be insured by the design professional's policy.

-- The coverage applies excess and difference in condition of the design professional's own coverage. This means the contractor would be protected if the design professional's coverage is exhausted or determined not to apply. This often happens because the design professional's policy limit is shared over all their other jobs, and a claim from another job could exhaust their limit.

-- This coverage basically operates like automobile uninsured/underinsured coverage. If the design professional hired by the contractor is not properly insured and the contractor sustains a loss from negligent design, this policy provides protection to the contractor for the loss.

While the design-build approach is advantageous for the project's owner, it forces a contractor to assume the responsibility for the design contract. Prior to bidding, it is critical that the contractor's insurance program be designed to protect it for this added responsibility.

November 1, 2010

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