ACI Presentation January Owner s Protective Professional Indemnity. Ray Bustamante Managing Director

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Bruce Hall
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1 ACI Presentation January 2014 Owner s Protective Professional Indemnity Ray Bustamante Managing Director

2 I - Financial Risks to Owner from Design Errors on design/bid/build projects Owner implies warranty of adequacy to the contractor for the plans the contractor is engaged to build Design Errors are outside the scope of the contractor s work Contractor submits these to Owner as RFI / Change Order Change order is billed on Time/Expense; Contractor is made whole Project owner must make a negligence claim against separately contracted design team to recover loss Third party claims not of bi/pd nature may result in loss and a/e s insurers are not as accommodating to extending defense to owners Catlin, Inc. 2

Change order is billed on Time/Expense; Contractor is made whole Project owner must make a negligence claim against separately contracted design team to

3 I - Financial Risks to Owner from Design Errors on design/build projects Owner implies warranty of adequacy of design or specialty trade, ie. Soils, feasibility studies, etc to the contractor for the plans the contractor is engaged to build D/B contractor and designers may not have enough professional insurance Project delays due to negligence of contractor are not insured under traditional commercial general liability Project design is also not insured under traditional commercial general liability policy-no occurrence trigger Third party claims not of bi/pd nature may result in loss and a/e s insurers are not as accommodating to extending defense to owners Catlin, Inc. 3

Project delays due to negligence of contractor are not insured under traditional commercial general liability Project design is also not insured under traditional

4 II - What is Owner s Protective E & O coverage? Protective E&O is a first party insurance contract that Indemnifies the owner (insured) for their established or negotiated loss, which was caused by the negligence of a subcontracted design or other professional consultant The loss must be in excess of the construction manager, architects, engineers, and other consultants primary professional liability insurance policies, if any The policy stands the term of construction plus typically five years thereafter for reporting of claims No defense is provided to design and other professional consultants No coverage for cost to prosecute claim by insured is provided by the policy Catlin, Inc. 4

subcontracted design or other professional consultant The loss must be in excess of the construction manager, architects, engineers, and other consultants primary

5 III - Why does a project owner need Protective E & O? A/E/CMs and other consultants purchase professional liability insurance that is claims made therefore their coverage is not guaranteed for the life of the project and is subject to annual market availability Primary policies are defense inclusive and insure all historical work under one aggregate limit of liability A/E/CMs and other consultants typically purchase low limits of professional liability insurance and rarely have the assets to back a significant loss, absent their insurance A/E/CMs negotiate LOL to proceeds of insurance with owner. A/E/CM policies may contain coverage restrictions that may materially affect collectability of claim by project owner A/E/CM carriers may become insolvent Catlin, Inc. 5

market availability Primary policies are defense inclusive and insure all historical work under one aggregate limit of liability A/E/CMs and other consultants typically purchase low limits of

6 IV - How does Protective E&O work? Owner hires consultant but instead of agreeing to provide insurance for them, owner demands that they (A/E/CMs) bring their corporate programs to the table Owner incurs a loss due to perceived negligence of consultants and makes claim against them and reports it to carrier A/E/CM carrier defends claim and carrier investigates validity of claim Settlement is offered by A/E/CM carrier and to extend substantiated loss is greater than available underlying insurance, Owner Insurer pays the balance up to it s limit If A/E/CM maintained insurance in compliance with contractual obligation, owner insurer will not subrogate against them Catlin, Inc. 6

loss due to perceived negligence of consultants and makes claim against them and reports it to carrier A/E/CM carrier defends claim and carrier investigates validity of

7 VII - Protective E & O vs. Project Insurance Owner is named Insured on protective policy. This imposes duty on Insurer to act with utmost of good faith Savings on defense costs are passed through to owner Protective policy makes a/e/cm s responsible for their premiums and deductibles No material variation endorsement on protective policy Better position for owner to recover larger loss as protective e&o is additional as opposed to replacement coverage Protective e&o is substantially less expensive than project insurance Catlin, Inc. 7

makes a/e/cm s responsible for their premiums and deductibles No material variation endorsement on protective policy Better position

8 VII - Protective E & O vs. Project Insurance (continued) Broader insurance approach to professional exposures Owner has exclusive access to protective policy A/E/CM s insurers usually fail to give meaningful credit to their programs even though they benefit from excluding separately insured projects. Pay twice for insurance Easier to administer and underwrite A/E/CMs support protective E & O more than project insurance as it does not interfere or intrude into their established insurance relationships. They are left to manage their business Catlin, Inc. 8

insurers usually fail to give meaningful credit to their programs even though they benefit from excluding separately insured projects.

9 VII - Protective E & O vs. Project Insurance (continued) Owner is not left becoming ultimate insurer for deficiencies in coverage or limits of project insurance policy There is no longer a commercially viable project insurance market but there is a vibrant protective e&o market A/E/CMs undertake project work without project insurance being their safeguard Catlin, Inc. 9

in coverage or limits of project insurance policy There is no longer a commercially viable

10 Project Insurance vs. Owner s Protective Catlin, Inc. 10

Samantha Ip Clark Wilson LLP tel. 604.643.3172 [email protected] D/RJR/682791.1

by Samantha Ip Clark Wilson LLP tel. 604.643.3172 [email protected] D/RJR/682791.1 TABLE OF CONTENTS A. INTRODUCTION...1 B. GENERAL INFORMATION ON THE TYPES OF LIABILITY INSURANCE...1 1. GENERAL LIABILITY