Professional Liability Coverage for Contractors and Construction Managers?

Judy Greenwald wrote an insightful article at Business Insurance entitled, Contractors professional liability demand rises. In most circles, especially among architects, engineers and attorneys, contractors are not typically viewed as professionals. So why are these “non-professionals” purchasing “professional liability insurance?”

As construction delivery methods such as design-build and integrated project delivery (IPD) continue to gain acceptance in the A/E/C industry, contractors are taking on liability for roles that historically required professional licensure. As Greenwald notes:

Observers say there has been a blurring of the once-sharp lines between contractors and architects and designers. Increasingly, contractors are being drawn into the design process, which exposes them to possible liability.

Adding to this risk is the increasing reliance, especially in non-residential construction, for building information modeling (BIM), which replaces traditional 2-dimensional paper-based drawings with computer-based 3-dimensional designs. After the architect and/or engineers have reached a specific point in completing the building model, the file is then “handed off” to the contractor or construction manager for the execution phase. This responsibility for maintaining the BIM files can thus theoretically create a potential liability for contractors for design changes.

Filling The Coverage Void

According to the article:

Contractors professional liability insurance “fills a tremendous void that is becoming increasingly more apparent to contractors and construction management firms in their insurance programs,” said Richard Hartman, vp, architects and engineers professional liability for Arch Insurance Group Inc. in New York.

Contractors’ biggest exposure is for claims filed against them for project delays and cost overruns. But traditional general liability insurance offers coverage only for bodily injury and property damage, and does not cover financial or economic losses, he said.

“The contractors themselves are starting to realize the changes in these project delivery methods is exposing them more and more” to professional liability risks, said Mr. Slivka.

Furthermore, owners are beginning “more and more to require the coverage,” said Michael Davis, Philadelphia-based product management director for construction professional and pollution lines for Zurich North America.

Greenwald reports that as more and more contractors seek professional liability coverage, a snowball effect has come into play. Contractors and construction managers are by nature very competitive anyways, so obtaining these new policies is becoming another differentiator in the market.

Professional Liability Coverage for Residential Construction?

According to the article, residential professional liability coverage for contractors is not so easy to come by:

Meanwhile, any contractor whose work is more than 25% residential is going to find obtaining coverage “pretty challenging,” said Matt Gough, senior vp and partner with Washington-based broker Ames & Gough. “It is not an area that a lot of insurers have healthy appetites for,” because of losses and the large number of dormant residential projects.

While the insurance industry is clearly reluctant to offer additional coverage to home builders, I suspect that this stance will soften over time.

The Impact of the “Green Building” Movement

What the article does not address, is why IPD and BIM are becoming more popular in the A/E/C industry. While there are clear advantages to these methods in certain situations, one of the primary drivers for adoption of both IPD and BIM is within the “green building” movement.

In order to construct buildings that use less energy, water and non-renewable resources, newer methods and materials must be implemented. These higher performing buildings have much lower tolerances, and rely upon much greater sophistication in both design and construction phases. BIM, by nature, creates an opportunity for advanced modeling of building performance characteristics. IPD fosters a much greater opportunity for collaboration between the owner, design team and the construction manager. Thus, sustainable construction requires more professionalism from the contractors and construction managers that participate on these projects.

From Blue Collar to White Collar

Perhaps the time has come for contractors and construction managers to gain wider recognition as true professionals. Within the A/E/C industry, contractors are often looked down upon by the so-called professional engineers and architects.

In the modern world, the business behind the built environment is influenced heavily by the insurance carriers. As is the case in many of the construction defect cases I have investigated, without coverage, there is little opportunity for curing defects. Therefore, recognition by the insurance industry of the increasingly professional role of contractors and construction managers is significant.

Image courtesy seattlemunicipalarchives