By Tom Owens
The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with a qualified professional who can provide guidance that considers your unique circumstances.
You really can’t blame your clients for trying to secure optimum financial protection for their building projects in the event something goes wrong. After all, projects are sizeable, long-term investments that can make or break an owner depending on the performance of the design and construction teams involved. If a design consultant or a contractor fails to perform up to prevailing standards, large losses can result.
Insurance plays an important role in providing clients financial protection against such losses. That’s why nearly all experienced clients specify the minimum levels of policy limits for various types of insurance that must be carried by the contractors, designers and other parties to the project.
As most design consultants will agree, however, the breadth and depth of insurance knowledge can vary widely from client to client. Some project owners have full-time risk managers who are well versed in the ins and outs of business insurance relative to design and construction. Other clients have a general understanding of insurance basics but aren’t experts by any means. And others simply don’t have much insurance knowledge at all and have many misconceptions regarding which risks can and can’t be covered by the different types of insurance policies available.
Sometimes, clients who lack insurance expertise will make coverage demands on their design and construction teams — demands these teams may not be able to comply with. One typical such demand is listing the client as an “additional” insured on the design consultant’s professional liability policy.
A Client as an Additional Insured
Some project owners are under the impression that being named an additional insured on a design consultant’s professional liability (PL) policy is a good thing. After all, they reason, their contractor is more than happy to include them as an additional insured on their commercial general liability (CGL) policy. So what’s good for the goose is good for the gander, right?
Not necessarily. In fact, in this case, what’s good for the goose may be very detrimental to the gander. Let’s take a closer look at the ramifications of having a client named as an additional insured on a CGL and a PL policy.
A CGL policy primarily provides protection from losses resulting from property damage and bodily injury arising out of the named insured’s business operations. For instance, should a visitor be injured on the jobsite due to unsafe conditions, he or she will probably have its legal counsel file a claim against all parties involved, including the contractor, the design professional and the project owner. Most likely, since the contractor is primarily responsible for jobsite safety, its CGL policy will be the primary policy that comes into play. Being named an additional insured on the contractor’s CGL policy will provide the project owner a valuable layer of financial protection against legal costs and judgments.
Similarly, the client may ask to be included as an additional insured on the design consultant’s CGL policy. This can often be accomplished by having either a blanket endorsement or a scheduled endorsement attached to the design professional’s CGL policy. Scheduled endorsements will specifically name the client as an additional insured and may require an additional premium.
When it comes to a professional liability policy, however, it’s a whole new ballgame. That’s because being an additional insured on the design professional’s PL policy may actually jeopardize the project owner’s insurance protection, thereby increasing its liabilities.
Consider: The design professional typically purchases a professional liability practice policy that provides financial protection against the named insured’s negligent acts, errors and omissions that occur while providing professional services. For instance, if an architect makes a design error that results in a loss for the project owner or another party, the PL policy currently in effect will likely cover those losses, subject to deductibles, policy limits, and any other coverage limitations and exclusions listed in the policy. Note that the PL policy does not cover losses suffered by the design professional; i.e., the named insured. It covers the losses suffered by others (such as clients, contractors, and third parties) that are caused by the named insured (the design firm).
What could happen if the project owner was named an additional insured on the design professional’s PL policy? Theoretically:
- The PL policy would cover the client to the same extent it covers the design firm. That is, it would cover losses caused by the additional insured’s negligent acts, errors or omissions that occur while providing professional design services. Since the client/project owner is likely not in the business of providing design services to other parties, nor licensed to deliver such services, there is virtually no benefit to the client being a named insured on the design firm’s PL policy.
- If a client happens to have licensed design professionals on staff (not uncommon for large developers or government clients), it’s possible that a design firm could be held liable for these staffers’ actions if the client is an additional insured on the PL policy. Alternately, both the design firm’s PL insurer and the client’s PL insurer may try to refuse coverage for any claim that involves the client’s design staff. The insurance companies may point to each other as being responsible for providing coverage for the named and additional insureds.
- If the client files a claim against a PL policy in which it is listed as an additional insured, it is essentially filing a claim against itself. And, likely, the policy includes an “insured vs. insured” exclusion that prohibits one named insured from filing a claim against another. So, as an additional insured, the client may be prohibited from submitting a legitimate claim against the design firm’s policy.
- If a third party files a professional liability claim against the design firm, the client, as a named insured, may be held jointly liable for the alleged negligent acts, errors and omissions. The client may face defense costs and possibly judgments as a result of the design firm’s negligent actions.
- If a design firm’s PL insurer did cover the additional insured’s legal expenses or paid out for a judgment against the client, the design firm’s policy limits would likely be eroded.
We call all of the examples above “theoretical” situations because, unless insurers have a serious change of heart, you will very likely be unable to find an insurance company willing to add a client as a named insured on your design professional PL policy. Historically, PL insurers have simply refused to issue such endorsements.
Handling a Request
So, how do you handle a request from a client to be named an additional insured on your PL policy? Typically such a request would be included in your client contract in a clause that reads something like this:
“Acme Architects shall carry professional liability insurance with aggregate and per-claim limits acceptable to the Client, and Acme Architects shall make the Client an additional insured under said policy.”
First, check with your insurance agent or broker and determine whether the insurer would indeed consider granting such a request. Chances are, no, they won’t. Now you can report back to your client stating that their request was denied.
But don’t stop there. Explain to your client why the insurer — indeed, the vast majority of insurers — would refuse such a request. And, more important, explain that being named an additional insured on your PL policy would likely weaken, not strengthen, the client’s protection against losses due to errors or omissions by a design firm working on its project. Spell out the potential perils of uninsured losses, liabilities for other companies’ negligence, eroded limits, and insured vs. insured exclusions — with no real benefit from being named an additional insured.
It’s also advisable to provide a written notice to your client confirming that its request to be an additional insured on your PL policy was denied. Inform your client that you have no obligation to provide them or any design professionals on their staff with PL coverage. Be sure to eliminate any contract language that obligates you to add your client to your PL policy as an additional insured.
Important warning: Suppose during contract negotiations you tentatively agree to name your client as an additional insured on your PL policy and then you later discover that your PL insurance company prohibits it. Again, advise your client in writing that their coverage request has been denied and strike any language from your contract that calls for additional insured status on your PL policy. Otherwise, you may be found in breach of contract. Alert your claims representative of any contract negotiations that may lead to a claim due to this additional-insured issue with your client.
What if a client claims that other design firms they have worked with had no objection to including them as an additional insured on their PL policies? Suggest that the client check with the PL insurer in question to determine whether such coverage was indeed in effect. It could be that the insurer never agreed to this contract provision and that such coverage would be denied should a professional liability claim occur.
What About A/Es as Additional Insureds on Contractor’s CGL?
One final note on the subject of additional insured status: Design professionals can benefit from being named an additional insured on a contractor’s CGL policy. This is particularly true regarding bodily injury claims involving construction workers but also applies to bodily injury and property damage claims filed by third parties.
Agreements published by the AIA, the EJCDC and the Insurance Services Office (ISO) offer relevant language to get the appropriate additional insured status. The ISO provides endorsements for design professionals seeking additional insured status on contractor’s general liability policies. Endorsement CG 2032, “Additional Insured—Engineers, Architects or Surveyors Not Engaged by the Named Insured” addresses the bodily injury and property damage exposures design professionals commonly face when working with contractors. To trigger coverage on this ISO form, a contract requiring the contractor to provide additional insured status to the design professional should be in place. Consult your agent or broker to make sure you get the most appropriate forms and language to fit your situation.
Finally, when seeking additional insured status on a contractor’s CGL policy, make sure the language in the endorsement does not require you to perform services for the contractor in order to trigger coverage. The design professional named as additional insured on the contractor’s CGL policy will almost always be providing professional services to the project owner, not the contractor.
Can We Be of Assistance?
We may be able to help you by providing referrals to consultants, and by providing guidance relative to insurance issues, and even to certain preventives, from construction observation through the development and application of sound human resources management policies and procedures. Please call on us for assistance. We’re a member of the Professional Liability Agents Network (PLAN). We’re here to help.