Importance of Professional Protective Indemnity for Large Construction Projects
What to do when your architects’ and engineers’ policies do not have sufficient liability limits for their negligence
Your project is set to start. You’ve spent months, maybe years, working diligently to bring this to fruition, and you’re days away from realizing your dream: a $150 million mixed-use project in the heart of the city. Everyone will be at the ribbon-cutting ceremony, including the mayor, aldermen, community leaders and anchor tenants.
Your planning includes ensuring your general contractor has sufficient limits for the project – in this case $50 million. The general contractor has lined up the who’s who of trade contractors, and their limits are in the tens of millions of dollars. Or, you sponsored a wrap-up with $75 million of limits. Yet, with all this due diligence and agonizing work poring over contracts, your architect has provided a limit of $3 million for his/her professional liability. No big deal, right? They always provided this limit; everyone routinely accepts limits like this. Nothing has ever gone wrong. What could go wrong?
This common scenario occurs every day in the world of development and construction of large projects. Professionals routinely provide limits such as these for projects of this size or even larger. What’s more troubling is that most of these professional policies are written with what we in the insurance industry refer to as “defense in.” What this means is the limit now under scrutiny may have been reduced by the costs to defend the past claims without your knowledge. Your crown jewel project is now in the hands of your professionals, their insurance carriers and limits which are not remotely close to being adequate.
But you say, “this is the way it’s always been done; what am I to do?” What you should do is consider a professional protective indemnity product.
Professional protective indemnity protects you when your architects’ and engineers’ policies do not have sufficient liability limits for their negligence. This policy supplements, not replaces, your professionals’ policies. As the named insured you have full control instead of relying on your professionals and their carriers to properly respond to your claim. And, even if they do, you’re protected should the limit prove to be insufficient. A Difference in Conditions (DIC) coverage grant automatically affords you broader protection than your professionals if your policy is broader than theirs.
Here are 3 real-life examples where this coverage was helpful:
- A structural engineer hired for a mixed-use project used the incorrect code, resulting in higher structural steel costs. The owner incurred $5,000,000 in additional costs due to their negligence. A claim was made against the structural engineer for the additional costs; however, the engineer's policy provided $2,000,000 in limits. The OPPI policy sat excess of the engineer’s practice policy to cover the remaining $3,000,000.
- A large hotel project incurred $10,000,000 in additional costs due to the negligence of its soils engineer. The architect's policy had $1,000,000 in limits. The OPPI policy sat excess of the architect’s policy to cover the $9,000,000 in loss.
- A $100,000,000 vacation resort complex project incurred $20,000,000 in delay costs and consequential damages because the design professional failed to provide 100% completed and coordinated construction documents. The professionals settled for their remaining underlying policy limits of $3,400,000 (this policy was eroded by prior claims) and presented a claim under the OPPI policy.
These are just a few examples of claims on projects in which professional protective indemnity was in place and responded. Imagine what would have happened had these owners had the foresight to purchase this added protection. These policies can be implemented at the fraction of a project’s cost or even more cost-effectively over numerous projects on an annual or multi-year basis.
If you’re a general contractor or construction manager, a similar product is available to protect you as well. It affords you similar protection for claims arising out of the negligent performance of professional services for which you’re responsible whether direct, incidental or contingent/vicarious.
What are you waiting for? Find out what are the best ways to protect your project. Contact the ‘A’ Team today.
ABOUT THE AUTHOR