Thinking about Professional Liability
In the world of insurance, a contractor requires professional liability coverage if expected under contract to provide “professional” services. Examples of such services would include, among others, those provided by architects, engineers, designers or surveyors. Because of the unique circumstances represented by these services, they present their own set of risk transfer considerations when crafting appropriate insurance coverage requirements for a particular engagement.
Does a contractor need professional liability insurance?
No, unless they are providing “professional” services. If the work is entirely of a physical nature, such as simply constructing a house, then the insurance provided under the contractor’s liability policies will most likely cover all your exposures to loss. However, if the work involves the application of professional knowledge then professional liability coverage would be required. Using the example above, if the contractor were to be involved in designing the house, or knows a better way to build it and alters the blueprints accordingly, then that contractor would have crossed the line into providing a “professional service” and professional liability insurance should be required.
What is the difference between an “occurrence” policy and a “claims-made” policy and why does professional liability insurance utilize “claims-made”?
An occurrence policy covers claims resulting from an injury or another event that occurs during the policy term. Coverage depends on the timing of the event. A claims-made policy covers claims that are made during the policy period or during an extended reporting provision. It is important you be protected as long as possible after completion of the project so that any claims caused by faulty design or other professional services will be covered. Normally, professional liability policies can be purchased with a three-year “tail” (the reporting period) which will allow claims to be presented up to three years after expiration of the professional liability policy. If you can get a longer tail in your contract, do so.
Can we be named as an additional insured on a contractor’s professional liability policy?
No. The contractor’s professional liability insurer will not comply with such a request. The reason is that the insurer does not want to be responsible for your professional liability hazards, which it would do if you were an additional insured. Professional liability policies are written based upon the professional history of the contractor, it is not interested in underwriting the project’s professional liability hazards. That said, professionals typically require insured status under the general liability policies of their clients. In some cases, the professional’s client will be the project’s owner and the owner’s policy will provide the professional with additional insured coverage.
What about endorsements for professional liability?
For circumstances in which the professional’s client must provide insured status to the professional, the insurance industry prescribes a standard endorsement, the CG 20 07 (“Additional Insured – Engineers, Architects or Surveyors”). This endorsement states that the professional has coverage only with respect to injury or damage that is at least caused, at least in part, by an act of omission of the named insured (the client) or someone acting on behalf of the named insured. The act of omission must have occurred in the performance of the named insured’s ongoing operations or in connection with the named insured’s premises. Insurance is provided on a blanket basis, there is no need to schedule individual professionals involved on the project.
What if the general contractor hires the professional?
Less frequently, professionals will be hired by general contractors; in those cases the contractor will be obligated to make the professional an insured under its policy. The CG 20 32 (“Additional Insured – Engineers, Architects or Surveyors Not Engaged by the Named Insured”) is applicable in such instances. Unlike the CG 20 07, the CG 20 32 provides additional insured status on a scheduled basis. This gives the insurer the opportunity to evaluate the risk created by making a specific professional an insured, that is, to assess the professional itself. The CG 20 32 also requires a contractual obligation to make the scheduled professional an insured under the named insured’s (the general contractor) policy.
Professional liability insurance can be a little confusing to the uninitiated. Clearly there are considerations that warrant the advice of an insurance professional. As always, careful consideration of insurance coverage requirements, and the timely collection and evaluation of the appropriate documentation to ensure you are properly transferring risk, are essential elements of your risk management program.
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