What is professional liability insurance and what it covers are common questions by many within the construction, design and engineering communities.
Construction professionals such as architects, engineers, land surveyors and quantity surveyors typically carry professional liability insurance (also known as errors and omissions liability insurance). These policies insure the professional from their liability arising out of actual or alleged errors or negligence in the performance of their services to others. This policy is often referred to as the professional’s ‘practice policy’ and is normally renewed annually.
A notable fact about these policies is that it must be in place at the time a claim is made in order for it to respond and pay the claim. This is important when hiring an architect or engineer who does not normally carry professional liability insurance and agrees to obtain it while working on a project really does not provide owners or their projects with much protection if they decide to not maintain the policy after the first year. Policies also normally have an aggregate limit that caps the amount available in any one policy period.
How do owners address this potentially major exposure to their project’s profitability?
The most robust and efficient option is to arrange a project specific professional liability policy which insures all professionals for the work on a specific project during and after it’s completed for a given time period. These are not commonplace and the details are outside the scope of this article.
So that leaves us with addressing the expectations of the owner and professionals in the early stages of the project.
Properly drafted insurance provisions in an RFP or contract make everyone’s life easier. While the owner has the right to require whatever types of insurance of the consultants, it should be noted that requiring higher than normal limits that don’t make sense for the project may limit the number of firms interested in the project or in turn may increase their fees as they are looking to recover the additional cost of the insurance requirements.
Another area that causes a lot of concern is omnibus language in the indemnity agreement that makes reference to “any and all claims or demands” that is not tied to an error, omission or negligent act in the rendering of professional services and goes beyond the legal liability that is covered under the professional liability insurance. Such broadly worded indemnity clauses may create uninsured business risks for the consultant. All of these items can negatively impact the project and in turn the owner’s reputation, resulting in consultants pricing this unknown risk into their proposals.
Examples of specific provisions include a requirement in the contract with professionals outlining the insurance the owner requires them to carry and how long the owner requires it to be maintained. This can be worded in various ways but owners need to consult an insurance broker who has specific knowledge of professional liability so they can have confidence that they are asking their consultants to provide what makes sense. We often see requests for what is known as Additional Insured status, however most professional liability insurers will not grant this type of coverage. Notice to the project owner of the cancellation of the professional’s policy (from their insurer) is a suitable option but not totally reliable depending on the insurer. Another option is asking for notice of material change, which we often see but most insurance companies are not prepared to provide this because the term “material change” is too nebulous and vague.
Not all provinces require architects or engineers to obtain professional liability insurance. For example in the province of B.C. there is currently no requirement for architects or engineers to maintain professional liability insurance, only a requirement for them to advise clients if they have insurance or not. This comes as a surprise to many people and is one of the main reasons owners need to ask the question to their consultants.
Jeff McLellan is vice president, professional services, architects & engineers practice leader – Western Region at BFL Canada Insurance Services Inc.