Some contractual insurance requirements reflect a lack of understanding about the nature and scope of professional liability (PL) insurance. In many cases, the requirements either make no sense or are impossible to accommodate within available PL coverage options.
Professional liability insurance exists to defend the design firm against allegations of substandard performance of the firm’s professional duties and to pay on behalf of the firm the amount (above the firm’s deductible obligation, but within its available limit of liability under the policy) to correct damage or compensate for personal injury caused by the design firm’s negligence. The CNA PL policy refers to coverage for “a wrongful act” that is defined as “an error, omission or other act that causes liability in the performance of professional services.”
As with all PL insurance policies, the CNA PL policy pays on the design firm’s behalf only to correct damage or to indemnify for injuries, costs, and losses. Such coverage is to the extent that payment is necessary to adjudicate the firm’s substandard performance of its professional services or of the subconsultants for whom the design firm is vicariously liable. Professional liability insurance is not equivalent to that of a construction contractor or vendor of goods.
As the client, you might request PL insurance requirements or endorsements without realizing that they are inappropriate. Such requirements may include:
Additional insured status
Sometimes, clients mistakenly think a design firm can name them as an “additional insured” on the firm’s PL policy. That is not possible. The policy only covers the performance of professional services, and the client does not perform the services. The policy only pays on behalf of the insured and never to an insured. If the policy named the client as an additional insured, the client would neither have any coverage nor be able to make a claim against the design firm since the policy excludes any “insured versus insured” claims.
Certificate and notice requirements
Because of their concern that insurance coverage continues in force, clients sometimes attempt to impose notice requirements as holders of a certificate of insurance. Insurers cannot give notice to a client of “changes” or “reductions” in the policy or the coverage since there are no adequate definitions of changes and reductions to allow such a notice. In fact, it could be argued that a reduction occurs whenever a claim reserve is established, a claim expense occurs, or a claim payment is made since both defense and indemnity payments are within the agreed-upon aggregated limit of the policy. Any payment effectively reduces coverage. Insurers can give notice of cancellation or nonrenewal of a policy because such an action can activate an automatic notice. Such a notice requirement is usually limited to 30 days because of practical considerations.
Claims-made versus occurrence coverage
All PL insurance is on a “claims-made” policy form and therefore covers claims and not occurrences. While referring to coverage as being “per-occurrence” does not modify the fundamental coverage of a PL insurance policy, the use of the term can cause confusion.
Contractual liability coverage
Some clients may ask to have the design firm’s PL policy endorsed to insure contractual liability—that is, the risks the design firm assumes under the professional services agreement. Clients often ask for contractual liability coverage from a design firm because such coverage is normal under a contractor’s CGL policy. Such a request is problematic, however, because CGL contractual liability is broad-form coverage due to the contractor’s broad-risk exposure. Conversely, the PL policy has a limited-form contractual liability because PL coverage limits the design firm’s risk exposure to professional negligence.
The CNA policy automatically includes a limited-form contractual liability coverage to the extent that the liability stems from the policyholder’s negligence in the rendering of professional services. If the client’s request for contractual liability coverage is consistent with the coverage already provided by the policy, a special endorsement is unnecessary; if the demand is that the policy stretch to cover a contractual obligation that otherwise would not exist, no endorsement is possible.
Insuring an indemnity provision
A broad-form indemnity provision is another form of uninsurable contractual liability that goes beyond the coverage of a PL policy. Examples of this include the design firm agreeing contractually to indemnify the client for claims, damages, and losses not caused by the design firm’s negligence, and agreeing to indemnify the client for the client’s negligence or that of any party other than the design firm’s subconsultants.
The CNA policy, without any special endorsement, provides limited-form indemnity coverage. Such coverage applies when the policyholder caused damages by its negligence in performing or furnishing professional services. There is no coverage for anything broader than this normal liability in the performance of professional services. Clients should understand that there is no need to “insure an indemnification provision” since if it is based on the design firm’s normal legal duty, it is covered. If the provision extends beyond the design firm’s obligation to rectify harm to the extent caused by the design firm’s negligently performed professional services—its “liability in the performance of professional services”—the policy coverage will never apply.
Per-claim and aggregate limits
Every professional liability insurance policy has two limits: 1) a firm selects a limit of coverage for a claim that is above the firm’s deductible obligation, and 2) the policy has a selected aggregate limit for all claims from all projects made against the firm during the policy term.
Project policy and practice policy
Design firms carry practice policies that apply to all claims made during the policy term for projects covered by the insurance. The limits—both per-claim and aggregate—apply to all claims from all projects and sources. When a client wants the policy to apply separately to the specific project, a project policy might be available and, if so, the client usually reimburses the cost. However, project policies are rare and only written for specific types of projects in specific ranges of construction values. Some firms can secure an endorsement to the normal practice policy that is a “specific additional limits endorsement.” This endorsement applies to a named project but is underwritten separately for specific types of projects and has a separate charge that the client requiring the coverage typically reimburses since the cost is not part of the design firm’s normal overhead costs.
Waiver of subrogation rights
One requirement that the CNA policy can automatically meet is a contractual request that the insurer waive subrogation rights. Those rights allow the insurer to act on behalf of the insured in bringing a claim to recover payments made by the insurer. A waiver is common in property insurance—no one wants to pay for coverage only to have an insurance company sue everyone possible to cover its losses. Under the CNA PL policy, if the policyholder agrees by contract to waive subrogation rights, CNA agrees that it no longer has the option to recover on behalf of the policyholder. Subrogation actions against clients of policyholders are extremely rare so waiving that right does not change the firm’s risk profile.