Today it is standard practice for building owners and developers to require evidence of commercial general liability insurance from contractors that are doing construction work for them. This insurance coverage provides protection for bodily injury claims arising out of injuries at a job site, says Philip Glick, a senior vice president at ECBM Insurance Brokers & Consultants.
“It also covers claims due to physical damage to the construction site or adjacent property that may occur as a result of a negligent act by a contractor or subcontractor,” says Glick.
Smart Business spoke with Glick about how the right insurance can protect you against contractors’ errors and omissions.
Why isn’t general liability insurance coverage enough?
We are seeing an increasing number of claims arising out of negligent work by contractors that are not insured under their general liability policy. Examples include a pure economic loss the owner suffers as a result of negligent acts by the contractor but where the claim does not arise out of bodily injury or property damage liability. Such economic loss could include cost overruns as a result of the general contractor’s or construction manager’s failure to properly bid subcontracted work, or to manage the overall project costs, especially if the project is on a cost-plus basis.
Another example would be a loss suffered by a business owner or tenant as a result of construction delays, or a loss incurred by a retailer that was counting on occupancy prior to the Christmas shopping season but the space is not completed until January.
Almost all contractor’s and construction manager’s general liability policies contain an exclusion of bodily injury and property damage claims arising out of the rendering or failure to render professional services. Examples are negligence in the hiring or supervising of architects or engineers, or preparing or approving maps, shop drawings, surveys or drawings but where the loss is not directly caused by the contractor’s construction work.
How can a building owner or developer cover against these uninsured risks?
The solution is for the building owner to require the general contractor or construction manager to purchase contractor’s/construction manager’s professional liability insurance as a part of the contractor’s insurance. This is specifically designed to provide protection for economic losses incurred by an owner or another third party due to negligent scheduling, purchasing, cost overruns and delay costs described before caused by the construction manager’s or general contractor’s negligent acts. This coverage can also insure property damage and bodily injury liability claims arising out of a contractor’s professional errors.
What major exclusions or coverage gaps may be included in professional liability coverage?
Contractor’s professional liability insurance is not intended to cover contractual guarantees or warrantees made by the general contractor or the construction manager. If a contractor guarantees a project will be completed by a specific date, that the cost of the project will be no more than a specific amount, or that a project will perfectly meet the needs of the owner or tenants and then fails to meet those guarantees, these events will not be covered under the contractor’s professional liability policy. However, if these events were caused by the negligent acts or omissions of the contractor, the insurance would apply.
Contractor’s professional liability insurance typically does not include coverage for claims arising out of professional negligence of employees of the contractor or construction manager who are performing architectural or engineering work. Separate architect’s or engineer’s professional liability insurance is typically needed to cover these professional services. Some contractor’s professional liability policies can, however, be endorsed to cover these additional professional services.
Contractor’s professional liability insurance almost always excludes claims brought by one insured person or entity against another insured person or entity under the policy. An owner may, as an example, request they be added to the contractor’s professional liability policy as an additional insured similar to the requirement to be added to the contractor’s general liability policy. Unfortunately, if the owner is added as an additional insured, there is no coverage for a claim brought against the general contractor or construction manager. A solution may be to amend the insured versus insured exclusion so it does not apply to the owner or developer as an additional insured.
What else does this insurance not cover?
Contractor’s professional liability insurance also does not cover claims arising out of faulty workmanship. This includes the cost to replace faulty materials that have been used.Coverage for faulty workmanship or warranty repairs can be covered under a separate contractor’s performance bond.
General contractor’s and construction manager’s professional liability policies are almost always written on a ‘claims-made’ basis in contrast to the contractor’s general liability policies, which are typically written on an occurrence bases. Under a claims-made professional liability policy, there is only coverage for a lawsuit or claim filed by the owner against a contractor for negligent work if the contractor or construction manager has a policy still in force when the claim is brought, as opposed to when the negligent work was performed or when bodily injury or property damage took place.
One solution is for the owner to require the contractor to continue to renew its professional liability policy for a minimum period in the future after the work is completed, typically two to three years. Another requirement could be to specify that the contractor must purchase a ‘tail’ or extended reporting option that provides a 12- to 24-month extended reporting period for a claim to be filed arising from prior work, if the contractor should nonrenew his policy in the future.
Philip Glick is a senior vice president with ECBM Insurance Brokers & Consultants. Reach him at (610) 668-7100, ext. 1310, or firstname.lastname@example.org.
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