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Relying on the CGL Policy to Protect You from Professional Risk is a Recipe for Disaster

BY KEVIN KING AND GREGORY PODOLAK

The complex world of construction risk transfer is a hotbed of emerging and evolving issues, with critical issues constantly being shaped by case law and the practical realities of day-to-day business transactions. Among the numerous issues that we see, there’s been a noticeable increase in discussion about the need for professional liability insurance and the proper methods for covering this risk. The following is a discussion of some of the key considerations and strategies.

WHY DOES MY CONTRACT REQUIRE PROFESSIONAL INSURANCE LIABILITY?
Because you’re a professional, duh! That’s a tongue-in-check response, sure, but it’s not far from the truth. The contractor engaging you as a subcontractor has assessed that your role in the project may have a “professional” component due to, for example, some design element or performance specification being passed down to you. That is, some aspect of your work is likely to involve specialized knowledge or skill, the type of which is predominantly technical or intellectual in nature, and rises above the level of routine construction work. Work, if improperly performed, could lead to a professional negligence claim by the owner or other third party.

Sound vague? Hard to apply? That’s because it can be. The law in this area recognizes that a one-size-fits-all approach won’t always work and has developed to allow flexibility of outcome depending on the specific facts of a particular case. So, one court in one jurisdiction looking at one particular case might reach a certain conclusion; another court looking at the same situation could disagree. And many common aspects of today’s construction projects include responsibilities that fall within a nebulous “gray area” between typical contracting work and “professional” services; courts have taken conflicting positions on such work as construction management services, bid preparation, or even safety recommendations.

And separating those responsibilities will only become more complicated as construction technology evolves. Consider the increasingly regular use of shared digital modeling (i.e., building information modeling or BIM). Historically the responsibility of the designer, certain versions of BIM require ongoing, direct input from various project participants throughout the duration of the project. A mechanical engineer, for example, may have to incorporate mechanical, electrical, and plumbing objects into the model. As a result, designers and contractors may collaborate closely on modeling design, resulting in an overlap of otherwise unique project responsibilities.

Because that professional exposure exists, the contractor hiring you wants to make sure you and it are sufficiently protected in the event of a loss. Think about it: the contractor would much rather know your indemnity owed to them is backstopped by an insurance policy to cover the risk you agreed to take in your contract. To not have the coverage leaves you exposed.

BUT ISN’T MY CGL POLICY ENOUGH? THE “G” DOES STAND FOR “GENERAL” AFTER ALL
No. Commercial general liability (“CGL”) insurance is designed differently from professional liability (“PL”) insurance. CGL insurance requires some form of bodily injury or property damage to trigger coverage (or Part B personal and advertising injury, though it’s less common in construction). “Professional” type losses usually don’t involve those key elements and, as a result, PL insurance is written more broadly. So, for example, loss of income due to design errors (but no property damage or bodily injury) would potentially be covered under a PL policy, but not under a CGL.
CGL insurance also requires an “occurrence,” which, under New York law and certain other states, does not include defective construction. PL coverage entails a different standard, typically a breach of “professional services.”

BUT WAIT, I HAVE AN ENDORSEMENT ON MY CGL POLICY THAT MENTIONS PROFESSIONAL LIABILITY, DOESN’T THAT GIVE ME PROFESSIONAL LIABILITY COVERAGE?
Probably not. In fact, the endorsement you’re looking at is most likely an exclusion that takes away coverage – which is the exact opposite of the goal – and the main reason your contract requires PL insurance in the first place. This is a common misconception. The typical “professional” endorsements found on CGL policies are exclusions, which eliminate coverage; they do not provide coverage.

The most common PL exclusions from the Insurance Services Office (“ISO”) are, by form number:
• CG 22 43 (“Exclusion – Engineers, Architect or Surveyors Professional Liability”)
• CG 22 79 (“Exclusion – Contractors – Professional Liability”)
• CG 22 80 (“Limited Exclusion – Contractors – Professional Liability”)

These different versions share many common characteristics, but the first (22 43) is the broadest of the three. Meaning, it is more likely to apply to – and to eliminate coverage for – a wider range of losses. The 22 43 stands apart because it applies even if you (the named insured on the policy) hire someone else to perform the “professional” services at issue and do none of that work yourself. There are no exceptions.

While still available, the 22 43 is generally no longer intended to be used in construction operations. The 22 79 and 22 80 versions are more common, with the 22 80 version, depending on the risk transfer goals of the policyholder, usually preferred.

Like the 22 43, the 22 79 applies to work performed by others on your behalf but, unlike the 22 43, it includes an important exception for construction “means and methods.” So, damages related to your typical construction work should be excepted from the exclusion (and still covered!).

The 22 80, in contrast to the 22 43 and 22 79, is narrower because it only applies to professional services performed by you (the named insured); it does not apply when someone else performs professional services on your behalf. It also has an exception, similar to the 22 79, which applies to operations in connection with construction work.

Most importantly, none of these exclusions provide PL coverage! Occasionally, some policyholders view the exceptions in 22 79 and 22 80 as creating PL coverage. This is false. They only narrow the scope of the exclusion to maintain coverage for certain routine construction activities.

Rather, these exclusions should be viewed as a guide – a guide to the type of PL insurance you should obtain. In addition to the requirements of the trade contract, your PL policy terms should be at least as broad as any PL exclusion in your CGL policy. Otherwise, you could be faced with a scenario where both policies deny coverage.

OK, SO I HAVE THE WRONG ENDORSEMENT. SO WHAT?
Well, for one, it frustrates the intended risk transfer – the arrangement you and the contractor agreed on to absorb the cost of any losses and protect each other’s bottom line. More importantly, there won’t be PL insurance to protect you in the event of a “professional” loss. If CGL insurance denies coverage based on a PL exclusion to an upstream party seeking additional insured coverage, the upstream party may be forced to focus its risk transfer efforts directly on you via contractual indemnity and breach of contract or other similar theories. In that scenario, you want PL insurance to cover the exposure, lest it become an out-of-pocket expense that can substantially undermine, if not entirely exceed, your profit margin on the job.

WHAT DO I DO?
Look at your trade contract and know what it requires. Talk to the contractor hiring you so that you understand why there is a PL insurance requirement. Look at your CGL policy and know what’s in there. Don’t fall into the trap of assuming a PL exclusion provides PL coverage. Make sure any standalone PL insurance terms match (or, better yet, exceed) any PL exclusion on your CGL policy. Engage your insurance broker, agent, and/or consultant on these issues and make sure everything aligns.


Kevin R. King is vice president, claims and legal services at Turner Construction, a member of multiple AGC chapters. He has over 20 years of insurance, risk management and claims experience, including the last 10 years focused on construction-related risks. He is responsible for designing and implementing Turner’s overall claims and legal strategy. In addition, he works within the Risk Management Department helping to review, negotiate, and manage all of Turner’s insurance placements worldwide, including over 20 coverage lines and 60 policies, as well as the largest rolling wrap-up Insurance program in the nation.

Gregory D. Podolak is a partner at Saxe Doernberger & Vita P.C. where he represents policyholders in insurance coverage disputes. He serves a diverse client-base, ranging from major general contractors to national real estate investment firms, and has successfully negotiated and tried disputes through all phases of litigation in both state and federal court. He frequently collaborates with national insurance brokerage firms, and regularly lectures and authors articles on a variety of insurance coverage topics.