Part 1 of this series (SparView Vol. 5, No. 16) looked at service-provider issues in assessing liability and insuring for risk in 3D laser scanning. This week’s focus is owner and EPC perspectives on these issues, and a review of professional liability essentials.
What are asset owner organizations doing to apportion liability and manage risk associated with 3D laser scanning? “We handle it two different ways,” one owner executive with extensive laser scanning experience tells us. “If I contract with an external engineering supplier, in their scope of services I dictate that this is a 3D job, I want to use laser scanning, here’s why, and here are the deliverables I need.” The EPC in turn may contract a laser scanning service provider. If the service provider “gives bad information to the EPC, it will cause me pain,” this owner says. “But I don’t have a contractual relationship with that service provider, so I would hold my EPC accountable.”
On the other hand, this owner continues, “when I use my own in-house engineering group, I may contract directly with our in-house laser scanning group. If they were to make a mistake, I would just eat it – we are self-insured for our own engineering work from a liability viewpoint.” In either case, owners’ interests are further protected by “errors-and-omissions and other kinds of insurance – sometimes I [the owner]am self-insured; other times the EPC has to have E & O insurance.”
But industry practice remains far from settled. “If an external service provider were to give me bad data,” an owner tells us, “I’m not sure what I would do – I’ve not yet had an experience where I’ve had to go after a laser scan service provider” for non-performance. “If that happened, I would refer to the contract to determine his liability – he might have to go back and re-scan.” But this would not fully remedy the problem. “We do have warranty and quality provisions in our contracts,” this owner continues, “so I could well elect to exercise my right to withhold payment in the event of non-performance. But still that would not help my schedule.”
Absent settled practice, an important safeguard for owners’ interests is the fact that “service providers are motivated to do good work,” this owner observes. “So it gets down to whether you as an owner understand the issues – how to specify the job, how to check data quality, registration and control,” and the like.
How do EPCs apportion liability and manage risk around laser scanning activity in a project? Much of the answer lies in standard contract terms governing performance and liability. “For us,” one EPC executive reports, “the issues tend to be wrapped up in the contractual liability that exists between EPC and client.” Insuring for this liability is a routine part of doing business for EPCs.
Thus, for EPCs, managing this liability does not require “the same money outlay as laser scanning service providers often have to make up front on a job” for professional liability coverage and any necessary bonding. Can EPCs offer their service providers any help with this? “As subcontractors,” we heard from one EPC, “service providers are expected by EPCs to manage their own liability.” Admittedly “the return on what service providers are doing is not really commensurate with the risk they’re often asked to assume,” he says. On the other hand, “why would they be any different than a tried-and-true traditional surveyor? If laser scanning service providers can get themselves into that category” in the professional-services definitions used by insurers to categorize and define risk, “then it will become a different conversation.”
Better understanding of laser scanning by not only insurers but also more owner organizations is part of the answer, in this EPC’s view. “Terms like ‘laser’ scare people,” he observes, “but there’s no survey job out there that isn’t using a laser instrument already.” Even where the EPC’s owner client perceives risk, “EPCs are not going to cover this risk for service providers,” he says. “To me, part of the answer lies in convincing owners to lighten up on their requirements for laser scanning service providers before EPCs bring them into the plant.”
Professional liability essentials
Essentials of professional liability coverage were reviewed for SPAR 2007 attendees by 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):
What are covered damages/covered losses?
Professional liability policies cover damages/losses for which the insured is legally liable, when such damages result from delivering “professional services,” Dalton and Rayos note. Covered damages/losses are generally of two kinds:
- The costs to investigate and defend a claim against an insured.
- Amounts that result from either a judgment in a court of law or a settlement between the insurer and the claimant.
“It’s important to recognize that indemnity payments are tied in to the overall policy limits,” Dalton says. “So if you have a limit of liability of $1 million, with defense costs of, say arbitrarily $300,000, that only leaves $700,000 in available indemnity payments. The key issue here is always to recognize what you feel are adequate limits of liability.”
Claims Made vs. Occurrence policy form
Professional liability policies are written on a “claims made” form, Dalton notes. Under this form, a claim must both be made (occur) and be reported during the policy term. This differs from the “occurrence” form in which general liability policies are written; with the occurrence form, an incident reported during the coverage term is covered regardless of when it occurred.
However, the claims-made form should not be viewed as a negative feature, Dalton says. The “claims made” vs. “occurrence” debate centers on general liability policies that are typically written with retroactive dates. Unless the risk is viewed as a tough or undesirable account, professional liability accounts do not have retroactive dates or prior-acts exclusions. In other words, the underwriter is not proposing any form of prior-acts exclusion; the policy could respond to insurable claims that were made even if the wrongful act(s) was alleged to have occurred prior to the inception date of the policy.
Self-insurance versus risk transfer
Increasingly, corporations have assumed or self-insured all or a portion of their insurance risks, Dalton and Rayos observe. Programs of self insurance, which are often combined with commercial insurance, are frequently used for group health, products liability, property or other coverages. More recently, professional liability insurance has been included in such programs.
Unlike commercial insurance premiums, payments to self insurance are generally not deductible as an ordinary business expense. Another problem with self insurance is that it may not be insurance, but instead may be merely a form of indemnification and, therefore, subject to statutory and public-policy limitations concerning indemnification.
Coverage for punitive damages
The majority of insurers exclude coverage for punitive damages by means of “covered damages” or “uncovered loss” definitions, according to Dalton. Other policies preclude coverage of punitive damages by means of a punitive-damages exclusion. Equally, other insurers will provide an affirmative grant of coverage in jurisdictions where the application of punitive damages coverage either is not prohibited or is required.
“In certain states in the U.S., it is permissible to insure against punitive damages,” he explains. “In other states it is not. What is frequently happening here in Texas is that there is an element of forum-shopping, where a litigant can demand that the loss be heard in another state where punitive damages are considered to be an insurable item. So a key issue to be mindful of when looking at your liability policy is to be certain that the definition of loss will include punitive damages.”
How are policy limits applied?
“Limits of liability typically start in increments of $1 million, typically ranging up to perhaps $25 million,” Dalton says. Available professional liability policies use several methods in providing policy limits. One method is for the policy to provide a single, annual aggregate limit, also known as a “combined single aggregate.” These limits state the maximum amount that will be available on the insured’s behalf during the policy year. The aggregate can be applied to both the indemnity payments and defense costs, in any proportion. A second approach is for a policy to contain a per-claim limit of liability and an annual aggregate, with the aggregate typically at two or three times the per-claim limit.
What is meant by the “prior and pending litigation” exclusion?
All professional liability policies contain, either within the basic policy form or added as an endorsement, an exclusion for claims based on or arising out of the facts or circumstances underlying litigation that either has occurred or is pending as of the inception date of the policy, according to Dalton.
How is coverage provided for defense costs?
Typically defense costs are included within the limit of liability. A number of insurers offer the insured the ability to select “defense cost” coverage in addition to the policy limit. This has the effect of avoiding the “shrinking limit problem,” Dalton explains. “One thing I always caution our clients is that, with their professional liability policy, there is a provision built into the form to advance the defense costs on an interim basis, rather than waiting until the claim is finally resolved – typically that can take two to three years.” For this reason “it’s always a prudent policy requirement to have your defense costs advanced on an interim basis.”
A professional liability policy allows an insurer’s defense counsel a better opportunity to contest questionable claims, Dalton continues. Plaintiffs’ attorneys generally work on contingency, he notes, and therefore are not eager to invest time or money in a meritless claim that will be vigorously contested.
When does notice of potential claim trigger coverage?
Most claims-made policies contain provisions that permit an insured to trigger the policy by reporting circumstances that ultimately may give rise to a claim but may not technically constitute a claim, Dalton explains. These provisions are referred to as “notices of potential claim” or “awareness provisions.” This is useful in cases where the insured reasonably suspects that certain events will result in a claim, but may not have the detailed information necessary to trigger coverage. In such cases, the insured should attempt to articulate a description of the claim. The description, if at all possible, should include the potential claimants and any other pertinent information reasonably available to the insured at the time of the notice. If so little information is available that an insured cannot reasonably comply with the discovery provision, then it follows that there is no basis for an insured to assert a potential claim.
How will the policy respond to multiple claim situations?
It is common for a single wrongful act to produce a number of claims, Dalton notes. Without a policy provision to the contrary, this may cause deductibles to stack on top of one another. Courts have held that if one interrelated cause is found to have resulted in all of the injuries or damages claimed, there is only one loss for the purposes of determining the application of deductibles, he says, giving a sample, representative anti-stacking provision: “Claims arising out of the same act or interrelated acts of one or more of the insured shall be considered a single loss, and only one retention shall be deducted from each single loss.”
The exclusions section of a professional policy is perhaps the most important part of the policy, Dalton cautions. The presence of exclusion exerts a substantial effect upon the scope of coverage that a policy provides. In addition, there is often considerable variation between the scopes of the same exclusion from one insurer to another; therefore the exclusions warrant careful analysis.
Products liability exclusion: Claims resulting from products sold by insured are excluded from professional liability policies. The rationale for such action is that commercial general liability policy forms provide coverage for this exposure. Dalton gives a ample, representative products liability exclusion: “The company will not pay damages or claims expenses for& any claim arising out of an actual or alleged deficiency or malfunction of any product, process, technique or equipment sold, manufactured or furnished by or on behalf of the insured” (source: SAFECO Insurance).
Faulty workmanship exclusion: The policy excludes coverage for claims that result from allegations of faulty workmanship. The rationale is that professional liability policies are intended to cover design exposures, as opposed to exposures resulting from actual construction work. To the extent that faulty workmanship or faulty construction causes either bodily injury or property damage (e.g., an archway collapses, damaging property and injuring people), coverage for such exposure exists under a general liability policy. To the extent that negligently constructed structures must be rebuilt, such exposures are generally uninsurable, since they are business risks over which an insured has control. Dalton gives a sample, representative faulty workmanship exclusion: “This policy does not provide coverage and the company will not pay claims expenses or damages for any claim based upon or arising out of a project for which the assembly, construction, erection, fabrication, installation or supplying of materials was provided in whole or in part by: (1) the Insured, or (2) a subcontractor of the Insured, or (3) any enterprise and/or any subsidiary of any enterprise that any insured controls, manages, operates or holds ownership in, or by any enterprise that controls, manages, operates or holds ownership in the Named Insured.”
Rating factors in professional liability coverage
Key factors considered by the insurer when rating a policy include:
- Design discipline (structural, electrical)
- Services performed (feasibility, design-build)
- Project size
- Contractual liability
- Administrative cost (contract signing authority, technical procedures)
- Qualifications and experience
Other lines of coverage
Lines of coverage that are generally not part of professional liability, but are nonetheless important to professionals in capital asset industries, include:
- Auto Liability: Provides coverage for losses caused by injuries to persons and legal liability imposed on the insured for such injury or damage to property.
- Builder’s Risk: Normally maintained by a contractor or owner. Also termed “All Risk” or “Course of Construction.” Intended to cover both labor and materials necessary to rebuild in the event of destruction in mid-construction.
- Project Insurance: Provides project-specific professional liability coverage for all members of a design team on a given project.
- General Liability: Provides coverage for legal liability to third parties that are not as a result of a design professional’s professional acts, errors or omissions. Commonly applies to exposure created by the premises and firm’s operations.
- Non-Owned Auto Insurance: Provides coverage for liability and property damage claims caused by automobiles not owned or hired by the firm.
- Workers’ Compensation: Required by state law for all employers. Provides benefits for medical loss and lost wages caused by work-connected illness or injury.
- Valuable Papers: Covers the cost of replacing or redrawing documents lost due to fire, water damage or other specified perils.
- Hacker Liability: Coverage for claims arising from unauthorized access to the named insured’s electronic communications systems, including costs incurred for system restoration.
- Internet Liability: Coverage for claims against the insured alleging libel, slander or other forms of defamation or disparagement; infringement of copyright, title, trade dress, slogan, service mark, service name or trademark, trade name or domain name; unfair competition; plagiarism, piracy or misappropriation of ideas; all arising out of the insured’s web site.
Dalton notes that the last two are new insurance products that have been available for only two or three years. Insurers now routinely offer these coverages as options on professional liability policies; the alternative is to purchase them as standalone polices. But, Dalton cautions, “Keep in mind that, once you buy these coverages as part of your overall package, it does have the effect of diminishing the overall policy limits.”