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/
We are happy to
announce the launch of our twitter account. Please make sure to follow us at @metroforensics
or @metroforensics1
Metropolitan
appreciates your business.
Feel
free to recommend our services to your friends and colleagues.
CONSTRUCTION WRAP-UP INSURANCE CONSULTING Services
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:
- Feasibility studies
- Program design
- Insurance marketing
- Program administration
- Training and product orientation
- Risk control
- Claims administration
- Medical cost containment
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:
- Contractor enrollment and policy issuance
- Loss forecasting and budget modifications
- Cost allocations by contractor or contract
- Contract performance monitoring
- Change order monitoring
- Tracking of actual premiums versus contractor credits
- Contractor certificate and compliance tracking
- Monthly payroll and man-hour reports
- Safety audits
- Goal setting for wrap-up management
- Claims-related employment verifications
- Program-wide status reports and by policy, contractor, and contract
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/
http://metroforensics.blogspot.com/
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.