Project owners run for their own cover

Owners of construction projects increasingly have concerns separate from those of their contractors or design architects and engineers when it comes to liability insurance.

Jacobus (Jaap) Vrolijk, vice president within Zurich Insurance’s construction business unit, has heard about these concerns as he oversees professional liability for owners, general contractors and large architectural and engineering firms.

According to Vrolijk, owners have concerns about the claims-made nature of A&E policies, given today’s construction defect environment.

They also have concerns that the A&E firm’s limits may be insufficient. A&E firms may only bring $1 million or $2 million to the table when the designs are for $50 million or $100 million projects. If the coverage is retroactive or defense is inside the policy limits, owners may be even more uncomfortable.

Also, they are concerned about the non-conformity of A&E forms from one carrier to another. “[W]e sort of see this in the construction side of the world as well, where the certificate that you might get is not the whole story in many cases. You don’t know what sort of exclusions and other things lie under the surface so, so you’ve got that issue to deal with,” Vrolijk said in a discussion of design liability at the Professional Liability Underwriting Society’s 2007 Errors & Omissions Symposium.

Owners, however, do have insurance options to address their concerns, Vrolijk pointed out.

If there is project insurance in place of the type sold by Lexington Insurance Co., the owner might ask for an indemnification.

An owner could also require the A&E to buy initial limits for the specific project. But this option is not always available and when it is can be expensive, according to Vrolijk.

Or the owner could hire only A&Es that carry $50 million a year in limits. This, however, narrows the pool of A&Es since there are a limited number that carry those limits, Vrolijk cautioned.

Further, the owner could hire a contractor on a design/build basis where this is legal. “The owner has some protection for design issues because now he has pushed it down to the general contractor. So, that serves as another owner option possibly for this,” according to Vrolijk.

Those who feel that the policies that protect designers or contractors still leave them exposed as owners can opt for the Owner Protective Professional Indemnity or OPPI policy that Zurich pioneered in 1995. This is a first party policy for an owner that Vrolijk said tries to “solve the owner’s concerns and still gets the A&E to go along with some skin in the game.”

OPPI reimburses the owner for damages that exceed the available insurance proceeds from the contracted A&E firm. It’s an excess first-party cover that goes directly to an owner.

For the OPPI, Zurich underwriters look closely at the owner’s history. “As opposed to focusing in on the design team and their contract and maybe their experience, we’re very interested in the owner’s history of construction and who they’ve brought litigation against. What has been there? How do they play with their partners in the construction process? I think that tells a lot about what to expect in the future,” Vrolijk explained.

Vrolijk advises brokers to understand the other insurance coverages in place on projects and stressed that they track the length of all related policies. “[C]ertainly you don’t want to go and be out there longer than they are because, guess what, when there’s a defect, you’ll be the only person available. So, paying attention to what’s going on with the other insurance products is certainly important.”

Design liability is not an easy market to enter, especially with the size and types of projects that require large capacity. “Certain reinsurers, many of them, remember their experiences from the ’90s and early 2000s and it’s a very small handful that have interest in providing support,” Vrolijk noted. In the near future, he anticipates that “coverage should be available for good project teams on good project classes with participants.”