In the fourth installment of our construction insurance series, we take a brief look at Design Professionals’ Liability Insurance. This form of insurance policy for design professionals covers their negligent acts and is sometimes referred to as “errors and omissions” insurance (E&O). Most design professionals (i.e., architects and engineers) carry professional liability insurance that covers their own practice, commonly known as “practice policies”. Yet on larger projects, owners may wish to have higher limits of liability than what is generally offered and may place or require a policy that covers all design professionals working on the project at a higher level of liability coverage.
In general, in order for an E&O policy to provide coverage, the mistake or error must be in respect of the performance of a professional service. Normally, this means that the service requires intellectual skill within a recognized discipline and an application of specialized skill, knowledge, and training. If, therefore, the task undertaken by the professional is one that could have been undertaken by a non-professional, E&O coverage may not be available. In addition, E&O policies do not cover intentional actions (such as dishonesty or fraud), nor do they cover extraordinary risks, including express contractual warranties (such as a stipulated cost).
In contrast to CGL policies, which are occurrence-based, professional liability policies are claims-based. This distinction leads to a number of practical effects. First, under CGL, the policy in effect at the time the damage occurs applies, no matter when the claim is made. Under professional liability policies, the policy in effect at the time of the claim is the policy that is triggered, provided the damage occurred within the retroactive date of the policy. Moreover, in this kind of policy, there is no duty to defend or indemnify by the insurer once the policy expires. Therefore, in a construction project policy, the owner should purchase coverage beyond the completion date of the project in case a claim is made after project completion.
Generally, claims in professional negligence require proof of the professional’s failure to meet “the standard of care of a reasonable and prudent professional” then practising in the location of the project. However, this does not require a standard of perfection so liability will not necessarily be concluded in all cases if a professional makes an error of judgment. Typical professional liability policies also generally exclude coverage for claims pursuant to a warranty or guarantee. As always, if you could use some advice pertaining to insurance coverage on your construction project, please feel free to reach out.
Next week, we will be looking at “Wrap-Up Liability Insurance.”
Written by Jeremy Power, a lawyer in Cotney Construction Law’s Toronto office.