Roswell, Ga. (September 24, 2018) – Raymond F.H. Bustamante, executive vice president at Berkley Construction Professional, a division of Berkley Alliance Managers, a Berkley Company, will offer his perspective on best-in-class professional liability risk profiles at the IRMI Construction Risk Conference to be held from November 4 – 7, 2018 at the Marquis Marriott in Houston, Texas.
The construction industry is on the rise again in the U.S. Going into 2018, Dodge Data & Analytics predicted that total U.S. construction starts for the upcoming year would climb 3 percent to $765 billion. This includes a 2 percent increase in commercial building and a 3 percent advance in both the institutional and public works markets.
by Andrew Mendelson FAIA
August 8, 2018
Prime design consultants often have a great deal of project control and leverage. Unfortunately, such responsibilities increase the potential for significant risk. This is especially true if errors or omissions committed by subconsultants cause damage to the client or project. Under such circumstances, the prime will most likely be held liable as if they committed the negligent acts themselves.
By Raymond F.H. Bustamante
Posted on June 26, 2018
The rules of engagement have changed drastically.
In recent years, the construction industry has moved rapidly from what were clearly defined stand-alone roles of design-bid-build project delivery methods to the faster-paced design/build, public-private partnership (P3) and integrated project delivery (IPD) models. Along with this shift came a blurring of responsibilities for design and construction services and similar uncertainty about ensuing liability that occurs when things go wrong.
“Some argue that Protective coverage delays fair and prompt settlement and adds to finger pointing. That’s a flawed argument. In fact, the opposite is true.”
By Raymond F.H. Bustamante
Posted on August 29, 2017
The commercial construction industry entered 2017 building on a steady stream of growth over the past years. Earlier this year, ConstructConnect predicted a 6.3 percent increase in total construction for 2017 with another 7.2 percent increase in spending for 2018.
Most recently, these expectations were amended slightly when ConstructConnect announced U.S. construction starts were expected to grow by 4.5 percent in 2017 and about 6 percent in 2018. In comparison, the AIA Consensus Construction Forecast projected 3.5 to 4.0 percent of growth for the remainder of 2017 and 2018.
These changes were based on several factors ranging from a slowing commercial/industrial marketplace to the shortage of qualified building professionals. Unfortunately, the recent recession had many dire effects including the loss of approximately two million skilled laborers, who left the industry to find work elsewhere and have yet to return. This trend has also combined with an aging workforce and the entry of fewer young tradesmen into the field to replenish the project pool for seasoned workers ranging from electricians, plumbers and welders to masons, roofers and carpenters.
The commercial construction industry entered 2017 building on a steady stream of growth over the past years. Earlier this year, ConstructConnect predicted a 6.3 percent increase in total construction for 2017 with another 7.2 percent increase in spending for 2018.
Most recently, these expectations were amended slightly when ConstructConnect announced U.S. construction starts were expected to grow by 4.5 percent in 2017 and about 6 percent in 2018. In comparison, the AIA Consensus Construction Forecast projected 3.5 to 4.0 percent of growth for the remainder of 2017 and 2018.
These changes were based on several factors ranging from a slowing commercial/industrial marketplace to the shortage of qualified building professionals. Unfortunately, the recent recession had many dire effects including the loss of approximately two million skilled laborers, who left the industry to find work elsewhere and have yet to return. This trend has also combined with an aging workforce and the entry of fewer young tradesmen into the field to replenish the project pool for seasoned workers ranging from electricians, plumbers and welders to masons, roofers and carpenters.
Few general contractors can successfully complete projects on time and within budget without the help of reliable and well-schooled subcontractors. The problem is finding reliable help. Although price is always a consideration, it should never be the main requisite for hiring subcontracting support. Always be wary of the lowest bid. Sometimes cheap means little else, especially when it accompanies subpar skill sets and a lack of precision and timeliness.
Another challenge involves the influence of owners, who have been known to “strongly suggest” the hiring of associates, former colleagues and even friends and relatives. Due diligence should never be forsaken or undetermined to win a bid or gain favor. The ultimate decision for subcontracting help should be left to those with the responsibility for the final outcome unless the contract is otherwise worded. Never dismiss the costliness of errors and omissions. They can make all the difference between profitability and years of delays and litigation.
It is also important to take a good, hard look at the talent and experience of subcontractors before the work begins. This is a highly competitive era, where far too many professionals are bidding on projects beyond their expertise. Before taking on extra help, it is imperative to check references and learn more about the work they perform. Areas of concern should be cited and addressed. The jobsite is no place for surprises.
In addition, subcontracting is a business like any other. Integrity in operations can also say a lot about dependability and loyalty. Are they solvent financially or involved in any form of litigation? Are they positioned to become a future competitor? What is their workload? Will they see a project through to its completion or disappear somewhere before its end? Even if they have worked with a contractor in the past, are they the same organization capable of delivering on the general contractor’s behalf?
On the contractual side, are they willing to live up to the contractual undertakings agreed to by the firm? Few situations are worse than the special dispensation of services that do not match obligations.
Furthermore, make sure the proper insurance is in place and adequately worded to meet the needs of the job. Risk management is not a luxury. It is a necessity. Contractors Professional Liability (CPrL) can be written with a broadened and/or clarified definition of covered professional services to insure against the errors or omissions of subcontractors. This includes Contractors Protective Indemnity (CPI) coverage terms, which is designed to protect general contractors from the damages caused by subcontracted design and construction professionals as well as the damages that sit in excess of the design professional’s own liability insurance policy limits.
The same holds true for owners who would like to expand their coverages with Protective Professional Indemnity, Protective Contractor’s Pollution and Third-Party Claim Defense and Indemnity terms to cover the challenges caused by vendors hired by the contracted general contractor.
Going forward, never underestimate the potential harm and disruptions posed by under-skilled, unreliable and under-insured subcontracting help. A general contractor’s reputation and bottom line can be at risk with each job. Owners have the right to expect quality and diligence along with the service clearly outlined in mutually agreed upon contracts. So, always remember that reputation and profit margin are on the line with each new hiring decision.
Raymond F.H. Bustamante is Executive Vice President of Berkley Construction Professional, a Berkley Company. W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States. Bustamante can be reached at 973-600-0926.
This article was originally published online in Construction Executive Risk Management.
By Raymond F.H. Bustamante
Contractors’ professional liability (CPL) and pollution policies continue to grow in popularity as differing project delivery methods blur the lines between design and professional services in the changing construction industry.
While the majority of the insurance forms most commonly purchased by contractors — commercial general liability or workers’ compensation — have been “standardized” by the Insurance Services Office Inc. (ISO), it’s important to note that all CPL policies are custom drafted and self-regulated with varying terms, conditions and approaches to claims handling.
CPL coverage is ideal for insuring against the economic damages associated with what may be perceived as a mental error in the capacity of a professional, not the actual physical activities resulting in a bodily injury or property damage claim. This involves the damages arising out of the acts, errors and omissions of professional services performed by or on behalf of any construction firm; be it a general contractor, design-builder, construction manager (at-risk or agency) or specialty subcontractor. In addition, pollution cover is also often included to overcome commercial general liability policy exclusions.
Written on a “claims made and reported” basis, meaning a claim must be made against the insured and reported to the insurance company in the same policy period, CPL policies clearly state that the “insured” must not have had knowledge of the claim prior to the beginning of the policy period. Some CPL policies are further delineated with references that specify those individuals required to have claim knowledge, while others are even more restrictive through “should have known” language. Both distinctions, if not seriously and carefully considered at the time the claims are filed could have a major impact on coverage, possibly even resulting in its declination.
The definition of “professional services” also varies greatly among CPL policies. There are services that a contractor performs that can be considered “professional services,” but are not performed by licensed professionals. For instance, the coverage could then be limited under the policy if these stipulated “professional services” are bound exclusively to the performance of “licensed or legally qualified” individuals. Some policies may even be further restricted by construction management definitions cited within the contract, or worse, when the actual construction work is not undertaken or not performed according to specific means and methods, even if the professionals are not insured elsewhere.Other policies have even been known to restrict the coverage for protective claims to entities either directly contracted for the work or professionally licensed to perform architectural, engineering and land surveying services.
Pollution’s coverage gaps
In addition, pollution coverage is another important component of CPL policies. Unfortunately, many professionals only focus on the definition of “pollutants,” while not paying proper attention to “covered activities” definitions. Consequently, there could be significant coverage gaps if the “covered activities” do not encompass all the contractor’s work or the pollution liability connected with the performance of these “professional services.”
As a result, protective coverage should be a standard in every CPL policy. It is a first-party indemnity insurance, which is essential for insuring against the design/build damages incurred from the negligent acts, errors and/or omissions of the subcontracted design and construction firms providing delegated professional services in excess of their individual insurance policies.
For example, in design/build projects, contractors are most likely to internalize liabilities and use the protective coverage to seek first-party damages. With the protective, the claims handling approach is also important because some insurance companies will take the position that all underlying policies, even unrelated to professional liability, must be exhausted. Another key is the need to include some form of “proactive approach” to the claims resolution process. With this condition, the carrier is forced to affect a settlement once a claim is validated and advance the funds needed to correct flaws and advance the project work. This is essential when project delays create overrun costs if not immediately remedied or the underlying carrier contests the claim without merit.
Equally important, a CPL policy should have some kind of mitigation of damage or rectification coverage. If the carrier internally validates portions or all of the claim during the course of construction or litigation, money can be advanced on an ongoing basis to help the contractor bring the project, as best possible, to completion on time and within budget. Ultimately, this amount would be recovered from the responsible parties, but the primary goal is to make sure the work continues.
Another element to consider when purchasing a CPL policy are the exclusions. Some policies contain “cost overruns” and “project delays” exclusions — including the failure to provide services on time — which are primary drivers for business losses and can have a material effect on coverage. In addition, cyber, patent or copyright infringement exclusions also impact coverage as technology continues to proliferate in the construction industry.
Given the wide differences in approach to drafting coverage provided by CPL policies in the current marketplace, a contractor needs to be extremely cautious when choosing the insurance carrier best-suited to protect their company from liability and catastrophic losses. Subsequently, it is always prudent to carefully discuss the appropriate options with brokers and reach out to knowledgeable, experienced sources when questions arise.
Raymond F.H. Bustamante is executive vice president of Berkley Construction Professional Underwriters, a W. R. Berkley Company. Bustamante can be reached at 973-600-0926 or [email protected]. This article was originally published in Property Casualty 360.
By Raymond F.H. Bustamante
With the near demise of project-specific professional liability insurance policies offering dedicated primary coverage for design professionals since the early 2000s, there has been a rise in the use of Owner’s Protective Professional Insurance, also known as Protective E&O.
Protective E&O supplements “practice” or annual professional liability insurance policies of the design professionals and construction managers by providing an excess “umbrella” that sits above all of the “practice” policies on a specific project. And while broader in coverage approach, it is also a less expensive alternative when insuring the project professional construction and design risks as compared to a replacement professional liability insurance policy for design liability.
The policy is a first
-party indemnity contract insuring the owner/design-build contractor/developer for damages incurred from the negligent acts, errors and/or omissions in the rendering of professional services by the subcontracted design and construction professional firms. The policy additionally defends the insured from third-party actions and indemnifies for loss resulting from contractor activities that lead to pollution conditions. Resolution of claims is determined by judgments, settlements or as established by law.
Protective E&O is an essential insurance policy where perceived concerns about the amount and adequacy of the design firm’s professional liability insurance can be questioned in relationship to the complexity and size of the project undertaking.
Brokers and insureds need to be aware of several seemingly innocuous clauses contained in many of these policies. First, make sure there is a clearly-stated “other insurance” clause. If there is not, the policy may never pay a claim until many other insurance policies, even if not pertinent to the underwritten subject, are exhausted.
The absence of this clause has resulted in numerous disputed claims. In these cases, Protective E&O insurers contested the claims made against Protective E&O policies on the grounds that the insured’s other policies, such as the builder’s risk and general liability insurance, should be first to pay these obligations. Because the language in the Protective E&O policy is often not specific enough regarding the excess clause (i.e., just the professional liability insurance policies of the design professionals engaged on the project) insurers can justifiably seek contributions from “other” insurance policies to minimize or eliminate their excess exposure. This approach can significantly prolong any dispute or litigation, causing owners additional project delays and expenses. In addition, because Protective E&O is an excess policy, many courts have supported this position given that it is often viewed as “a policy of last recourse.”
Of equal concern is the claim philosophy of the Protective E&O insurer. More specifically, every Protective E&O policy should have a proactive claims settlement clause where the insurer agrees to settle its substantiated claim even if the underlying professional liability insurers wish to continue to contest the claim. The Protective E&O policy is seriously flawed if it does not contain this language because the disposition of underlying claims against individual design firms can take years of litigation resulting in the exhaustion of the limits of liability of the underlying professional liability insurance policies which results in much larger Protective E&O claims.
Another significant consideration when reviewing a Protective E&O policy is the management of Difference in Conditions (DIC) challenges. This is extremely important given that the Protective E&O policy is an excess policy.
Apparently, some Protective E&O policy forms are written as pure “Follow-Form” excess coverages as opposed to DIC policies. In critical situations, this distinction can pose rather large problems for project owners because there is really no way for them to fully know the coverage terms and limits of all of the design professional’s underlying “practice” professional liability insurance policies.
If some, or all, of the underlying design professional’s professional liability insurance policies contain restrictive terms or endorsements, those coverage limitations can apply to a Protective E&O policy that is “Follow-Form” resulting in potential coverage issues. DIC language is preferred for ensuring that Protective E&O policies will drop down to fill coverage gaps. While other additional terms may apply, a DIC clause will at least make sure coverage will be there when needed.
Lastly, it is also very important to understand how “minimum insurance” requirements apply to claims. A Protective E&O policy that demands contributing payments from the design professional’s other policies, including the insurance of not-at-fault sub-consultants, will often create serious disputes and delay resolutions. An example would be problems related to the work of MEP engineers and the Protective E&O carrier’s insistence that the landscape architect’s or the land surveyor’s policies contribute to settlements in an attempt to lower the Protective E&O policy’s ultimate payout.
The original copy of this article can be found here.