Contractors Professional Liability

Contractors professional liability insurance (CPL), protects contractors and building professionals in the event construction errors and other losses occur during construction of a building project.  This coverage is usually reserved for contractors that provide design-build or construction management services.  However, in many instances, this coverage becomes a contractual requirement by vendors wanting to mitigate possible future claims.

Designing and building a structure can be a complicated process involving many parties, including architects, designers, engineers, building contractors, and other building specialists. 

CPL is a core coverage within commercial insurance programs designed for Architects & Engineers.

 

What does Contractors Professional Liability Insurance Cover?

In today’s competitive environment, contractors are assuming nontraditional risk that their core insurance coverages may not address. Professional liability coverage has become just as essential to a contractor as it is to an architect or engineer.

Contractors and Third-Party Related Hires

Contractors that hire third parties (subcontractors) to perform specific aspects of construction requiring specialized skills, such as electrical, plumbing, drywall and more.  In addition, Contractors may either have engineers and architects in house or work closely with outside firms, thereby becoming closely related to the design and engineering of projects by default.

CPL policies provide protection to contractors from mistakes made by third-party vendors associated with a project, as well as other losses related to repairs.

New projects without an existing structure may not be eligible for CPL insurance.  A Builders Risk policy may be best suited for these projects and situations. 

 

What Happens When Contractors and Architects Work Together?


Architect’s that design an entire project will be subject to other parties outside the architect’s control being involved with the design. Contractor responsibilities thereby are expanded beyond construction to include professional risk associated with construction management, design delegation, hiring design firms, and actually self-performing design. These are discussed in more detail below.

Construction Management Responsibilities: A contractor may perform construction management services as the owner’s agent (agency construction management) or they may also hold separate contracts with the trade subcontractors (at-risk construction management). In both situations, the contractor takes on responsibility for supervision of the subcontractors, scheduling, and cost estimating. All these activities create a recognized standard of care by the construction manager and a corresponding professional liability risk.


Design Delegation: Based on “performance” specifications, specialty subcontractors have effectively designed curtain wall and sprinkler systems for years. In addition, the contractor’s mechanical and electrical subcontractors are often engineering the heating, ventilating, and air conditioning (HVAC) and other systems. Currently, the 1997 version of the AIA A-201 General Conditions Document specifically outlines when design may be delegated to the contractor with a corresponding waiver of liability by the architectural team.


Hiring Design Firms as Subcontractors or A/E Joint Venture: A growing number of projects are utilizing design-build project delivery where the contractor is acting as the lead design-builder or enters into a joint venture with a design firm. When a contractor assumes a single point of responsibility role for an owner by use of the design-build project delivery, they are now responsible for project design in addition to their construction obligations. In addition to design-build project delivery, the project owner may hire separate design consultants to provide the interior design, landscape architectural, or other services and then assign these contracts to the contractor.


Self-Performed Design: Some contractors have an in-house design staff consisting of legally qualified architects, engineers, land surveyors, and landscape architects who have the responsibility for reviewing and stamping drawings.

What are the Potential Contractor Damages Resulting from Professional Liability Risk?

There are significant financial risks, including economic loss, that contractors assume by promising to deliver a project complete, on time, and within budget. Errors and omissions associated with performing professional services can result in costly time delays, budget overruns, rework, and third-party bodily injury and/or property damage. Knowing and anticipating this financial risk can make the difference between a profitable project and one that ends up in costly litigation for years.


Third-Party Bodily Injury or Property Damage: Design errors have contributed to some of the most catastrophic losses resulting in direct damage to the project and fatalities to both construction workers and members of the public. These types of claims have occurred both during construction and after the project has been turned over to the owner.

What are the minimal acceptable insurance limits when outsourcing to Architects & Engineers?

Architects & Engineers Professional Liability Policy: When a contractor leads a design-build project and hires an architect/engineer as a subcontractor, the contractor may rely on the professional liability policy of the design firm. Certificates of Insurance and Insurance Policy Declaration pages should be attained by any and all subcontracted work. It is critical to know the following information: However, it is important to know the limitations associated with the architect or engineer’s annual practice professional coverage.

  • Policy inception and expiration dates of each policy
  • Per Claim and Aggregate Policy Limits – Policy limits apply to all current and past work, inclusive of defense costs. Adequate limits should be in place to cover possible claims for project and post project.
  • Claims-Made Policy — If the design firm non-renews their policy or moves the retroactive date forward after they finish your project, you will be left with no protection.
  • Additional Insured Protection — Adding your company name as an additional insured on all relevant policies is a must to gain protection specifically for your company.

What are Alternative Solutions for Contractors Professional Coverage?

Additional coverage is now available for contractor’s professional risk that traditionally may have been considered business risks that are not insurable. Full professional liability insurance for a contractor can be purchased as an add-on to a general or umbrella liability policy, covered under a stand-alone contractor’s professional policy, or handled under a separate project professional policy.


Project Specific Professional Liability Coverage: For large or more complex projects, the owner may elect to purchase a separate policy that will provide a single source of recovery for all professional liability losses related to their project. This policy would be purchased in place of an annual professional liability. This approach can provide significant, noncancelable limits that remain in place up to 10 years after the project is completed. However, the terms and conditions should be thoroughly reviewed and discussed., the contractor should review the following policy terms and conditions carefully.