Sweeping technological changes and the adoption of alternative insurance programs during the last decade certainly have affected the way risk is allocated, forcing construction company owners to adapt. The following is a look at the significance, as well as the potential pitfalls and opportunities, of two ongoing changes in the construction industry that affect commercial insurance coverage. BIM and Professional Liability Coverage
Building information modeling (BIM), which promotes the development and use of computer software to simulate the construction and operation of a facility, currently is being used on many major construction projects and likely will be used more frequently in the years ahead.
Done properly, BIM leads to fewer errors, fewer change orders and more efficiency. It also allows non-technical project participants to better understand the link between their work and the final product. It’s a more effective way to identify problems within the construction process.
As with any new technology, potential pitfalls exist. Risk allocation, protocols for sharing digital information and possible liabilities must be addressed. Contractors may be unaware of their potential exposure to a loss and how exclusionary language might impact their insurance coverage.
Many policies contain exclusions for professional liability coverage. Professional services are typically defined as preparing, approving—or failing to prepare or approve—maps, shop drawings, opinions, reports, surveys, field orders, change orders, or drawings and specifications. Services also include supervisory, inspection, architectural or engineering activities.
The Insurance Services Offices (ISO) offers standardized forms to the insurance industry. Here’s an example of the typical ISO exclusions a contractor might find on its policy for professional liability exposures under a standard commercial general liability (CGL) coverage form:
- CG 2243 excludes coverage for liability arising out of the rendering or failure to render any professional services by a contractor or an engineer, architect or surveyor who is either employed by the contractor or performing work on its behalf in that capacity.
This is the most restrictive of the standard exclusions. Two alternative ISO exclusions contain exceptions to this exclusion:
- CG 2279 says professional services do not include services within construction means, methods, techniques, sequences and procedures employed by a contractor in connection with its operations in its capacity (and thus are not excluded). Contractors should request this form as an alternative to the CG 2243.
- CG 2280 for design-build contractors allows an exception for construction work performed by a contractor or on its behalf. In other words, the exclusion will apply to professional services done outside its own construction operations but not to its own construction work. However, contractors should be aware that not all carriers will provide this exception alternative, recommending instead a separate professional liability policy.
It’s also important to note that the professional liability exception under both exclusions is limited to the bodily injury or property damage covered under the CGL, which covers less than a professional liability policy.
Although technology is making project teams more efficient, it also may increase potential liabilities for design errors. What traditionally has been considered means and methods may be changing. Contractors that are uncertain of the extent of their professional services should consider a separate professional liability policy.
Owner or Contractor Controlled Insurance Programs
Also referred to as wrap-ups, the use of owner or contractor controlled insurance programs as an alternative to a traditional insurance approach has increased in recent years. Wrap-ups are designed to provide a single source of coverage to multiple interests brought together for a single project. The insurance program covers the project owner, project manager, contractors and subcontractors. There are many benefits and limitations to this approach, but subcontractors should recognize that work performed under a wrap-up program often is excluded under their insurance programs. Typically, the reason for the exclusion is to avoid duplicating coverage and paying for coverage that already is in place.
The wrap-up programs are usually fairly comprehensive and often extend completed operations coverage for work through any statute of repose. However, that may not always be the case, and a coverage gap could be created.
For commercial wraps-ups, some insurance carriers will include excess coverage for exposures not covered by the wrap-up, provided they are not already excluded under a policy. The most important example is the exposure for work that might only be covered by the wrap-up for a limited time frame, such as three to five years.