Professional Liability Insurance for Contractors Often Overlooked
By Sean C. Gay
Recent catastrophic crane collapses in Seattle, New York City and Miami underscore a type of insurance frequently neglected: professional liability coverage for contractors. This insurance (also known as errors and omissions) generally covers negligent acts, errors and omissions in the performance of professional services. What many owners and contractors fail to realize – and adequately address – is that contractors perform some measure of professional services on nearly every construction project.
When is a contractor's work "professional services"?
Although many construction contracts attempt to draw a bright line between responsibility for the design prepared by the architect (or engineer) and construction work performed by the contractor, many aspects of the contractor's work may be considered professional services.
Perhaps the most obvious example is a design-build project, where the contractor is responsible for both design and construction. Contractors may also perform professional services if they advise their clients during a project's design phase. Value engineering, constructability reviews, and other types of preconstruction services fall into this category.
Less obvious are services performed as part of temporary work like shoring, falsework, dewatering and other types of "means and methods" work. Many contractors fail to recognize that these everyday construction tasks involve design services and that these services frequently are not covered by general liability insurance.
But doesn't general liability insurance provide coverage?
Although it depends on the policy, the answer generally is "no." General liability policies typically include one of three common endorsements that either entirely or partially exclude coverage for professional services. The first type is the broadest. It is known as ISO endorsement CG 2243 and excludes coverage for any professional services performed by a contractor or its consultants.
The second endorsement is CG 2279, which attempts to address the shortcomings of CG 2243 by covering services "within the means, methods, techniques, sequences and procedures" employed by a contractor. The extent of the coverage under this endorsement is not clear, but if the professional services relate to means and methods designs performed by a consultant (such as an engineer) or subcontractor, this endorsement likely excludes coverage.
The third endorsement, CG 2280, generally covers professional services performed by a consultant or subcontractor – design-build projects, for example. However, CG 2280 likely excludes coverage for the same services performed directly by the contractor. Also, the coverage afforded by the CG 2280 endorsement is more limited than that provided by a typical professional liability policy because CG 2280 covers only bodily injury and property damage.
If my engineer or subcontractor has professional liability insurance, isn't that enough?
At a minimum, a contractor that hires consultants or subcontractors to perform professional services on its behalf should require them to maintain adequate professional liability insurance. Contractors also should carefully review their contracts to ensure that they: 1, do not assume any liability for their consultant's or subcontractor's mistakes, and 2, can appropriately shift liability for those mistakes to the consultant or subcontractor. Nevertheless, even under the best circumstances, a contractor may bear some responsibility for its consultant's or subcontractor's professional errors and omissions. And depending on the degree of the contractor's involvement, the contractor's share of responsibility could be significant.
Why not purchase a contractor's professional liability policy?
Unfortunately, many contractors never look into purchasing professional liability insurance, even though it is typically available at reasonable rates. And many owners never require their contractors to carry professional liability insurance because they perceive it to be solely an issue for their architects and engineers.
Contractors and owners would do well to recognize the risk posed by a contractor's performance of professional services and implement appropriate insurance and contracting strategies to adequately address that risk.
Originally published in the Oregon Daily Journal of Commerce, February 2011.