WAYS OF TRANSFERRING THE PROFESSIONAL OR CONTRACTOR LIABILITY TO THIRD PARTIES
What is a construction defect?
Construction-defect litigation has spread across the U.S. More and more court jurisdictions are finding coverage for defect claims in the completed operations coverage of CGL policies or E&O policies of architects, engineers, or contractors.
A construction defect is generally speaking, a deficiency in the design or construction of a building or structure resulting from a failure to design in accordance with federal, state or local building codes or failure to use applicable environmental safety codes or failure to construct in a reasonably workmanlike manner, or failure to adhere to building plans/design and/or in accordance with a buyer's reasonable expectation or failure of a building component.
The most dangerous defects have the capacity to fail, resulting in physical injury or damage to people or property. However, many defects present no increased risk of injury or damage to other property but nevertheless cause harm to the property owner in the form of loss of use, diminution in value, and extra expenses incurred while defects are corrected. This latter type of defect is often referred to as a passive defect.
Many states have more specifically defined the term "construction defect" for purposes of applying statutes that dictate processes for remedying and litigating construction defect claims. These statutory definitions vary by state. Nevada, for example, uses the term constructional defects and defines it as follows:
“Constructional defect” means a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance and includes, without limitation, the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance:
Which is done in violation of law, including, without limitation, in violation of local codes or ordinances;
Which proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed;
Which is not completed in a good and workmanlike manner in accordance with the generally accepted standard of care in the industry for that type of design, construction, manufacture, repair or landscaping; or
Which presents an unreasonable risk of injury to a person or property.
In California, for any home or condo completed or closed escrow after January 1, 2003, SB 800 (Civil Code Section 895 et seq.) clarified the types of defects that the builders are responsible to fix. This statute takes the guesswork out of defining a defect and clearly identifies by statute all categories of defects for which the developer is responsible.
Prior to 2003, Courts recognized two primary categories of defects for which damages are recoverable by the homeowner or homeowner association.
Defects in design, workmanship and materials: These include, water seepage through roofs windows and sliding glass doors; siding and stucco deficiencies; slab leaks or cracks; faulty drainage; improper landscaping and irrigation; termite infestation; improper materials; structural failure or collapse; defective mechanical and plumbing; faulty electrical wiring; inadequate environmental controls; improper security measures and devices; insufficient insulation and poor sound protection; and inadequate firewall protection.
Landslide and earth settlement problems: Examples are expansive soils; underground water or streams; landslides; settlement; earth movement; improper compaction; inadequate grading; and drainage.
Structural failures and earth movement conditions can be catastrophic in nature and present both personal injury and substantial property damage exposure. Landslide and settlement conditions may result in collapse of buildings; cracks in slabs, walls, foundations, and ceilings; disturbance of public or private utilities; and sometimes a complete undermining of the structures.
For architects and other design professionals, one of the most devastating professional and business risks is from litigation alleging negligence in performing professional services. These alleged negligent acts, errors, or omissions may cause damage to owners, contractors, or other third parties, and the architect’s firm may be found liable for these damages.
WAYS OF TRANSFERRING THE PROFESSIONAL OR CONTRACTOR LIABILITY TO THIRD PARTIES
The most common way of transferring the construction defect liability from the design professional or contractor to a third party is through the purchase of insurance products. Under these contractual agreements, a third party (the insurer) agrees to carry the risk of your malpractice or construction defect and you agree to pay him a certain premium.
While a commercial general liability (CGL) policy provides coverage for liability for bodily injury and property damage caused by an accident, it excludes coverage for liability for professional services. This is an occurrence-based policy.
On the other hand, Errors and Omissions (E&O) insurance, also commonly referred to as “professional liability insurance” or “malpractice insurance,” provides liability coverage, typically including both defense and indemnity protection, for the design professional. Typically engineers and architects are covered by E&O policies, but specialty carriers issue E&O policies for other types and categories of professionals as well.
E&O insurance provides protection to third parties, usually clients of the particular professional insured by the E&O policy (but sometimes also intended third party beneficiaries of the professional’s contracted-for services) resulting from the negligent performance of professional services. Intentional misconduct by the professional typically is excluded from E&O coverage under most policies, and indemnity for willful torts might otherwise be barred as a matter of public policy under California Insurance Code section 533, as well as other state’s statutes. Economic and other intangible losses are covered by typical E&O policies, whereas losses due to property damage or bodily injury usually are excluded from coverage—as the latter categories of losses are insured under comprehensive general liability (CGL) policies.
E&O insurance almost always is “claims made” or “claims made and reported” coverage, which means that the insurance carrier is obligated (under typical E&O policies) to defend and indemnify the insured from liability only for covered claims made—and (in the case of claims made and reported coverage) actually reported—during the applicable policy period. See Slater v. Lawyers’ Mut. Ins. Co. (1991) 227 Cal.App.3d 1415, 1423 (claims made and reported policy); Chamberlin v. Smith (1977) 72 Cal.App.3d 835, 845 (claims made policy).
An insured may still be covered under a “claims made” policy despite giving tardy notice of the claim to the insurer, unless the insurer can show that it was substantially prejudiced due to the late notice (Pacific Employers Insurance Co. v. Superior Court (1990) 221 Cal.App.3d 1348, 1359). On the other hand, the so-called “notice-prejudice rule” is inapplicable in the case of “claims made and reported” policies because the timely reporting requirement is an express policy condition to coverage. The California Insurance Code requires special warnings in “claims made” policies so that professionals are made aware of that limitation. See California Insurance Code § 11580.01(b).
Most E&O policies have so-called “burning” limits, meaning that defense costs, including attorneys’ fees, reduce the policy limits and, accordingly, the amount of money available for indemnity payments for settlement or to satisfy a judgment. By a “rider” or “endorsement,” however, a professional may be able to purchase defense coverage that is separate from and in addition to the applicable policy limit for indemnity coverage.
To be covered by a typical E&O policy, the claim against the professional must arise out of the professional service provided by the professional to others, typically the professional’s client. See Blumberg v. Guarantee Ins. Co. (1987) 192 Cal. App. 3d 1286, 1290. Most E&O policies issued today, however, contain specific policy definitions and exclusions that contain the scope of activities that constitute “professional services” within the policy’s scope of coverage.
Most E&O policies issued today, like most Director’s and Officer’s (D&O) liability policies issued today, contain various conduct exclusions and claim exclusion that preclude coverage for intentional torts and claims arising from fraud or criminal acts, illicit personal profits, to recover attorneys’ fees paid by the client, for copyright or trademark infringement, for securities violations, or for illegal discrimination. Most E&O policies also contain “insured v. insured” exclusions precluding coverage for claims between two or more insureds under the same E&O policy, as well as excluding coverage for breach of contract claims (apart from breach of the applicable professional services contract used by the insured).
Particular professions also generate policy exclusions in E&O policies designed specifically for that profession. An architect professional liability policy typically will have exclusions tailored to the architectural profession that are not contained in attorney, engineer, or physician professional liability insurance policies.
There is a fundamental difference between a claims made and reported policy and an occurrence policy. Under a claims-made and reported policy, only claims made to an insured and reported to the insured's insurance carrier during the policy period and any extended reporting period has liability coverage. In addition, the allegedly wrongful act must have taken place during the policy period or during the "prior acts" coverage period provided for in the policy. Under a CGL or other occurrence policy, there is liability coverage for bodily injury or property damage caused by an accident that results in harm to the claimant during the policy period, regardless of when the claim is made against the insured, reported to the carrier or when the allegedly wrongful act took place. (Helfand v. National Union Fire Ins. Co., 10 Cal.App.4th 869, 888 (1992).)
The important characteristic of a claims-made-and-reported policy is that the insurance carrier's exposure ends when the policy term and any extended reporting period end, thereby providing certainty as to the insurance carrier's potential liability. If a claim is reported to an insurance carrier after the policy has expired and after any extended reporting period, the carrier can deny coverage whether or not it is prejudiced.
There are two ways insureds can protect themselves in advance: First, they can and should purchase prior acts coverage to be protected in case of a claim from work done before the policy goes into effect. Second, they can obtain coverage permitting them to report claims after the policy has expired, called an extended reporting period (ERP). Some policies include a 30 or 60 day ERP as part of the basic coverage. For an additional premium, an insured usually can purchase optional coverage allowing an ERP for up to a few years.
Also, if a professional retires, he or she has no future coverage unless the professional purchases "tail coverage." Because retirement does not end one's exposure to malpractice claims, a professional should consider such coverage, especially if the business closes with the professional's retirement.
Many policies require that the insured consent to settle. But the carriers protect themselves with a "hammer clause." If the insured has an opportunity to settle but refuses, the carrier's liability, including defense expenses, is capped at the settlement amount.
A significant recent change in the professional market has evolved the insurance coverage to extend beyond purely third-party liability. Previously, first-party protective coverage was not readily available in the market. Over the past few years, the market has significantly expanded to the point where now almost all the major carriers offer it, either through new products or updates of their existing liability forms.
Whereas basic professional liability coverage responds only after a claim has been made by a third party, the addition of protective coverage provides the contractor with first-party coverage excess to professional liability insurance carried by subcontractors. For example, if design errors lead to additional costs incurred to bring a project to completion on time and the limits of the design professional's policy are not high enough to cover the increase, protective coverage will pay the contractor for the difference.
Closely related to the expansion of protective coverage is the growth of rectification or mitigation coverage, which provides primary insurance subject to a self-insured retention. As the name implies, rectification or mitigation coverage covers costs to remedy design errors discovered during construction that would lead to a liability claim if left uncorrected.
Metropolitan Engineering, Consulting & Forensics (MECF)
Providing Competent, Expert and Objective Investigative Engineering and Consulting Services
P.O. Box 520
Tenafly, NJ 07670-0520
Tel.: (973) 897-8162
Fax: (973) 810-0440
E-mail: metroforensics@gmail.com
Web pages: https://sites.google.com/site/metropolitanforensics/
https://sites.google.com/site/metropolitanenvironmental/
https://sites.google.com/site/metroforensics3/
http://metroforensics.blogspot.com/
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CONSTRUCTION WRAP-UP INSURANCE CONSULTING Services
http://metroforensics.blogspot.com/2014/10/construction-wrap-up-insurance.html
Wrap-Up insurance programs are an increasingly popular risk management technique used by owners and general contractors of large construction projects to exert greater control over total construction costs while enhancing overall project safety.
A wrap-up policy consolidates (or “wraps up”) insurance coverage for multiple general and subcontractors working on a project into one program negotiated, purchased and managed by a single sponsor. That sponsor can be either the owner (owner-controlled insurance program) or the general contractor (contractor-controlled insurance program). Relying on the individual policies of the hundreds of contractors that will be on the site injects a great deal of risk into a project. The basic concept of a wrap up fends off gaps in coverage such as lapsed policies and inadequate limits. The singular insurance carrier streamlines the claims process allowing injured workers to get the help they need in a more simple and efficient manner. Furthermore, wrap ups typically include site safety programs which strive to avoid those accidents in the first place.
METROPOLITAN provides consulting services for Owner or Contractors, helping them navigate the complicated world of Controlled Insurance Programs (OCIP or CCIP), as the wrap-ups are formally known. METROPOLITAN provides on-site safety professionals who evaluate large construction programs on behalf of carriers, owners or construction managers. METROPOLITAN's intent is to minimize project losses involving workers, equipment and product.
A CIP is a centralized insurance program under which one party procures insurance on behalf of all (or most) parties performing work on a construction project or on a specific site. Also referred to as "wrap-ups," CIPs are most commonly used on single projects, but other uses include contract maintenance on a large plant (maintenance wrap-up) or facility or on an ongoing basis for multiple construction projects (rolling wrap-up). Typically, the coverages provided under a CIP include builder’s risk (for construction wrap-ups), commercial general liability (CGL), workers compensation, and excess/umbrella liability. CIPs offer a number of benefits, including greater control of the scope of coverage, potentially lower project insurance costs, and reduced litigation. CIPs can be purchased by the owner (OCIP) or contractor (CCIP) or a combination of participating parties. They are often used in government contracts such as highways, bridges, airports, prisons and military bases, and commercial projects such as hotel-shopping-office complexes, mixed-use developments and sports and entertainment venues.
METROPOLITAN offers services specifically tailored for wrap-ups, including:
METROPOLITAN also offers industry-leading software systems to help oversee large construction products, including METROWRAPUP, a fully integrated Risk Management Information System (RMIS) that provides all the storage, retrieval, and data dissemination resources crucial to the effective administration of wrap-up insurance programs.
METROWRAPUP handles all aspects of wrap-up program administration and processing, including:
METROPOLITAN Services include but are not limited to developing cost containing OCIP safety programs, pre-bid safety specifications, contractor-training programs, coordinating with emergency care facilities, site security, public access and conducting accident investigations.
METROPOLITAN OCIP consultants provide more than just "inspector services". Working closely with partners on bid deduction status, medical claims, third party exposures, etc., METROPOLITAN contributes an invaluable service to the entire controlled insurance plan. We protect the owner’s or contractor’s bottom line profits from bid errors, experience modification mistakes, coverage gaps, and audit overpayments. Our nationwide network of consultants and project portfolio covers a large spectrum of industry types. Some examples of project types are public programs (school boards, county and city government), entertainment complexes, power plants and high rise buildings. METROPOLITAN also has a reputable history in rolling OCIPs involving multiple projects.
Over the years, our expertise in contractor safety management and OCIP loss control oversight has been refined into a process driven to manage risk and losses to positively affect the bottom line for Owners. Our project loss management services have provided value to projects ranging from a few million to over one billion dollars in value. We have worked on several large OCIP’s throughout the Country providing third party safety oversight for both Owners and Contractors. These partnerships have provided minimal losses as well as developed a positive safety cultural for the contractors and craftsperson’s alike.
METROPOLITAN ensures client interests are served by providing supervision, monitoring and corporate support to our field consultants. METROPOLITAN OCIP consultants are proficient in the field and are accustomed to a team concept. Because we have extensive experience in loss control and working with insurance carriers, we understand what a company needs to do to satisfy insurance companies and lower the costs. Project histories prove that excellent insurance coverage, accurate bid deductions and loss control share equally with quality and schedule in the success of a controlled insurance project.
Metropolitan Engineering, Consulting & Forensics (MECF)
Providing Competent, Expert and Objective Investigative Engineering and Consulting Services
P.O. Box 520
Tenafly, NJ 07670-0520
Tel.: (973) 897-8162
Fax: (973) 810-0440
E-mail: metroforensics@gmail.com
Web pages: https://sites.google.com/site/metropolitanforensics/
https://sites.google.com/site/metropolitanenvironmental/
https://sites.google.com/site/metroforensics3/
We are happy to announce the launch of our twitter account. Please make sure to follow us at @MetropForensics or @metroforensics1
Metropolitan appreciates your business.
Feel free to recommend our services to your friends and colleagues.