Insurance for Design Professionals vs. General Contractors

August 11, 2015

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When it comes to the world of construction contracts, there is no one-size-fits-all solution regarding insurance. The Design Professional’s insurance policies cannot and should not anticipate the needs and risks of a General Contractor, for example. This comes up all the time at the beginning of contract negotiations. You can sidestep disputes further down the road if you understand the way your insurance policy and carrier will respond in the event of a claim. Here are a few Frequently Asked Questions:

The General Contractor has requested to be named as an “Additional Insured” on my professional liability policy. Can I accommodate this request?

It is not a good idea to name the contractor as an additional insured in the sub-consultants design E&O policy. The principal reason involves the “insured vs insured” exclusion found in virtually all design E&O policies. If the contractor believes he has a cause of action against his sub-consultant design firm, this exclusion will eliminate coverage for both the contractor and the design firm.

How can the General Contractor protect themselves?

The General Contractor may purchase “Contractor’s Professional Liability insurance.” This will protect the General Contractor from vicarious liability claims from third parties and also solves the problem of the “Insured vs.Insured” exclusion that would apply if the contractor would bring an action against the sub-consultant design firm, when named as an additional insured. Another benefit is a separate set of insurance limits. The General Contractor would have their own set of insurance limits that would not be subject to dilution or reduction from other claimants against the design professional’s errors & omissions policy covering their general practice.

Why would the General Contractor need Professional Liability coverage?

The General Contractor has the same “Vicarious Liability” for the negligent acts, errors or omissions of their professional sub-consultants as they do for the non-professional subcontractors. The General Contractor cannot rely solely on the hold harmless indemnity clause in the contract document. The hold harmless may not be enforceable in certain jurisdictions because of the language of the indemnity clause. The Sub-Consultant may not have sufficient insurance or their policy limits may be reduced or exhausted from other claims. The policies may be cancelled by the carrier giving notice or for non-payment of premiums. The General Contractor is then left with a false sense of security if they rely on the general liability insurance of the sub-consultant, which excludes professional design activities and responsibilities.

If you had more questions about this common issue, call your local a/e ProNet broker.

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