What do service providers, EPCs and asset owners involved in 3D laser scanning need to know about assessing liability and insuring against risk? For service providers, technical challenges are not the only source of project risk. Professional and general liability play as great a role – arguably greater, since an uninsured or underinsured claim could put a company out of business and even bankrupt its principals. Key questions for service providers – what are your liabilities, and what constitutes appropriate and sufficient coverage? Meanwhile, EPC and owner contracts include terms and conditions that address liability, often apportioning some of it to subcontractors – here’s some insight into what service providers face in insuring against this risk.
SPAR 2007 attendees got an in-depth tutorial on liability and insurance issues from two industry professionals – Jim Dalton, senior broker with U.S. Risk Insurance Group, Inc. (Dallas, Houston, TX, and Washington, DC) and Arthur Rayos, president of Rayos Insurance Agency (Houston, TX). They began by examining what constitutes “covered acts.”
First, the distinction between professional and general liability is crucial. Professional liability insurance, often formerly called errors-and-omissions insurance, protects professionals against claims arising from negligent errors, acts or omissions in the performance of their professional services, Dalton notes. General liability insurance, by contrast, covers legal liability to third parties that does not arise from a professional’s professional acts, errors or omissions; this commonly applies to exposure created by the premises or firm’s operations.
So how do professional liability policies define what’s covered? This is based on each policy’s definition of the term “professional services,” Dalton says. “This is the most important part of your coverage, because this defines what is serviced under the policy. Any specific area not included at the beginning will be excluded, so it’s important to address any type of services that your firm will be engaged in at the very outset.” Depending on the specific policy form, “professional services” definitions indicate that coverage applies to the types of services listed in the policy’s declarations page, endorsements to the policy, or those services that the insured organization is licensed to perform. Dalton advises that the insured should make sure that all types of services they offer fit within endorsements or are noted on the declaration page of the policy.
What should service providers disclose to insurers?
Service providers we spoke with agree this is a critical point. Jason Matsumoto, president of Grenland AsIs North America, Inc., Houston, TX, observed that it’s not difficult for a firm to obtain general liability coverage, as opposed to professional liability, for its laser scanning business – by failing to disclose its full scope of services. He notes it is possible for service providers to operate without proper and comprehensive coverage by disclosing only some of their services, generally less risky ones such as office processing. Of course, he says, “The problem pops up when you get sued for something not covered.”
We also heard reports that some service providers choose to forego professional liability coverage under the argument that, in simply providing existing-conditions or as-is data, they are not “design-responsible.” While that may be true, as Matsumoto puts it, “Try arguing the point when you get sued by a major offshore operator because their engineers designed and fabbed a $10 million assembly based off a bad set of scan data they took for granted was correct.”
Additionally, for service providers that operate offshore and/or in plant environments, it’s essential to disclose this fact before purchasing a policy – this will have a major impact on pricing of both general and professional liability coverage. Matsumoto reports this can drive up prices as much as tenfold.
Sticking point – defining “professional services” in the laser scanning industry
The insurance industry defines “professional services” as those services that the insured is legally qualified to perform for others in his/her practice as an engineer, architect, land surveyor, landscape architect, construction manager, or as specifically defined by endorsement to the policy – Dalton of U.S. Risk cites this definition from CNA Insurance Company. We found this can be a source of considerable frustration for laser scanning professionals.
“There is a big disconnect between the insurance industry and the process industry with respect to laser scanning service work,” one service provider told us. As a result, this longtime industry member says he still struggles with questions of what kinds of professional liability coverage are needed, and how much. One difficulty is that land surveying is the only professional service called out by the insurance industry that comes close to what laser scanning service providers offer. “Yet laser scan services, at least in the process industry, have less to do with land survey and more to do with inspection services, which could qualify as engineering services,” he notes – what’s the right coverage?
Owners and EPCs offer little help, in some service providers’ view – sometimes the opposite. “What the process industry has done from a subcontract services point of view is to generalize the task of laser scanning,” this service provider says. This makes it easy for owners and EPCs to make the terms and conditions governing coverage for laser scanning services “comply with any subcontract service to be performed in the field.” The result is high insurance costs for service providers – for some, unjustifiably high. “From a professional services approach,” he continues, “this technology is totally dependent on how well the scope is defined by the EPC and the owner.” When mistakes occur, the cause is often “dependent circumstances – poorly defined scope, bad reference control, site conditions, etc. – which the laser scan service provider could not be fully responsible for.” With current industry practice, “service providers are being overcharged for things they are not really responsible for. The cost of coverage, say for $10 million liability, is ridiculous for a $25,000 job. Service providers should be responsible for no more than the value of their contract.”
He explains his reasoning. Errors resulting from omission “could be a result of poor scope definition from the client, or technology limitation of the laser scan device. Both these are visually self-evident in the deliverable, and would require an individual using this information to be negligent in their responsibility, and to ignore the obvious. Errors resulting from poor execution, poor-quality scan data, or poorly registered scan data are visually self-evident as well, and again would require an individual to be purposely negligent in ignoring the obvious.”
“I think the insurance companies struggle with this as well,” this service provider sums up, “and I think this is a result of not understanding how this technology and these deliverables are used in production. Engineering companies are seeing great cost/benefits from laser scan technology, but that cost/benefit is only realized when the engineering project, construction contractor and laser scan service providers are in tune with one another to realize the benefit.” But absent better understanding by insurers of the laser scanning services industry on the one hand, and better EPC/service provider cooperation on liability allocation on the other, he says, “it is becoming more difficult to stay in the laser scan service business, much less start from scratch, as a result of insurance costs.”
Subcontractor liability issues
When any firm – owner, EPC or service provider – uses a subcontractor for any portion of a project scope, Matsumoto of Grenland AsIs North America advises looking into coverage that includes provisions for this. “Often, contracts between firms govern the use of subcontractors, including insurance requirements,” he says. “However, for maximum protection, we’ve elected to obtain independent coverage for ourselves in the event our subcontractors make a mistake or are otherwise not carrying the proper coverage.” In particular, smaller firms often do not carry the coverage required by large asset owners to perform work on their facilities, he observes. In such cases, this service provider says his firm takes responsibility for making sure that its subcontractors are correctly covered, which they are in almost all cases, “and we insure in the event they are not.”
Part 2: EPC and owner perspectives. Professional liability essentials – covered acts, covered losses, claims-made vs. occurrence forms, self-insurance vs. risk transfer, punitive damages, policy limits, defense-cost coverage, coverage triggers, multiple-claim situations, exclusions, rating factors. Other lines of coverage.