As the construction industry heads toward the next century, professional liability increasingly will become a significant source of exposure. The subsequent liability will require contractors to diligently address this source of exposure in their risk management portfolios. Many construction industry projections estimate that by the year 2000, the use of design/build delivery systems will account for more than 50 percent of construction contracting. In light of this estimate, the typical contract delivery system of design-bid-build, which has been prevalent in the construction industry for many years, will continue to decrease into the next century. As a result of current economic conditions within the construction industry, which include corporate downsizing and outsourcing of various services, the advent of new, complex contract delivery systems will continue. These new delivery systems will include design/build and beyond, as well as the utilization of construction management. The new contract delivery systems bring with them complex risk management issues as well.

New Systems, New Risks

In these new delivery systems, the general contractors and construction managers will face exposures that historically were not imposed on them in the traditional design-bid-build, but rather on design firms such as architects and engineers. Within the new system, however, the contractor will be perceived as a "professional" and will be subject to a standard of care historically imposed upon other professionals.

As the construction industry evolves, the real or perceived exposures will increase the liability imposed upon general contractors and construction managers. To protect contractors from the liability associated with these exposures, prudent risk management techniques will continue to evolve. The risk management techniques used by contractors will require continuing diversification and sophistication to protect their financial well-being while protecting their company from the liabilities associated with new construction delivery methods.

The Role Of Insurance

Historically, insurance products have played a significant role in such protection. Products such as workers’ compensation, general liability and other property and casualty coverages are an everyday part of the contractor's cost of doing business. As with any insurance product, specific exclusions of the various coverages available to a contractor stimulate the need for hybrid and specialty insurance products to "fill the gaps" created by evolving business needs.

In the early to mid 1990s, the insurance industry saw a significant increase in the purchase of specialty coverage lines, such as General Contractor's Pollution Legal Liability (GCPL), as a viable and necessary risk management tool for general and specialty trade contractors due to an increase in litigation and exposure to environmental and pollution liability. As we move toward the 21st century, insurance products are further developing to address the contractor's professional liability exposures as well.

Past And Present Practices; Future Trends

In the past, a business owner interested in economic growth for their company would look to the construction industry for expansion and/or renovation of structures and facilities. The owner used his own resources -- an engineering and/or construction department -- for project management and oversight. Today, however, corporate restructuring has increased outsourcing of such services to contractors. In addition, the complexity of today's construction with respect to budgeting, scheduling and specialized needs (such as those indicative of the high tech and research/development industries) warrants the outsourcing of such services. These complexities as well as the contract delivery system chosen by the owner are now handled by design engineers, construction managers and general contractors.

These new complex delivery systems also provide contractors with a stimulus for the future. As the traditional design-bid-build system continues to struggle with lower profit margins, design-build represents a "breath of fresh air" for contractors who are frustrated with the typical lowest bidder syndrome. Design/build also provides the contractor with the opportunity to become intimately involved in the design phase and to strengthen relationships through a team approach with various design firms. These industry groups typically have been in adversarial roles.

Professional Liability Exposures

The professional liability exposures -- whether real or perceived -- associated with design/build will impact the general contractor and construction manager. These new delivery systems expose the general contractor/construction manager to an array of professional liability exposures:

• Design errors such as means and methods, field changes to construction drawings, etc.
• Contractual/vicarious/contingent liability from a subcontracted design entity
• Environmental or geotechnical damages
• Quality control/quality assurance and construction inspection
• Supervisory issues
• Site health and safety
• Scheduling and coordination

In many cases, the general contractor and/or construction manager is perceived as a consultant, expert and professional. Previously, the insurance marketplace did not have specialized products and policies to address the professional liability exposures of general contractors and construction managers. Historically, insurance products that addressed such exposure and risk were available only to architects, engineers and consulting companies. It is a common perception that the general liability policy of a contractor affords limited coverage via endorsement for design issues under the products/completed operations section of the policy. However, the reality is that many general contractors and construction managers have an “errors and omissions exclusion” attached to their general liability policy which ultimately excludes coverage for bodily injury and property damage resulting from design activities. Clarification to these exclusionary endorsements affords limited coverage. But if property damage and bodily injury do not occur, a "gap" still exists for financial damages as a result of errors and omissions.

In addition, while general contractors and construction managers historically have not been viewed as an industry subject to professional liability, the increase in new contract delivery systems will change the structure of their general liability policy, potentially excluding coverage for professional liability. Due to these "gray" areas associated with the general liability policy, a variety of insurance companies are addressing the professional liability exposures of the general contractor and construction manager with new specialty products. Underwriting of these insurance products is quite specialized and provided by some of the major insurance markets.

Risk Management Controls

The key to such a specialized market lies in availability and utilization of experienced underwriters familiar with a contractor’s exposures. The risk controls implemented by a general contractor and/or construction manager can provide positive perception and comfort for underwriters. The prudent risk management controls should include:

• Requiring a subcontracted design entity and/or other engineering/consulting firm to carry professional liability insurance coverage at limits acceptable to the company
• Implementing a professional liability insurance product for the general contractor/construction manager to provide coverage for contingent or direct professional liability
• Developing risk management procedures to address scheduling, health and safety, and quality control/quality assurance for every project.

New Insurance Products

Clearly, the increase in the design/build and construction management delivery systems as we progress into the 21st century will require the need for professional liability insurance coverages for specialized primary contractors. Fortunately, risk management products that address these exposures are evolving as well. A variety of insurance companies currently offer professional liability insurance policies for general contractors and construction managers. As with any product, flexibility and coverage enhancements vary from one insurance company to the next. Some of the products limit coverage to specifically address vicarious/contingent liability imposed by a subcontractor, others limit coverage to those contracts executed as a design/build delivery system, and still others further extend coverage for the real as well as contingent professional exposure.

In response to the professional liability needs of the construction industry, XL Enviornmental has developed a General Contractor’s Contingent Professional and Environmental Liability (CPE) policy. This policy provides contingent professional liability and also addresses the pollution/environmental exposures incidental to the general construction industry. The policy includes flexibility and enhancements not readily available in the current insurance marketplace, including modification of the professional liability coverage to respond to errors and omissions of the general contractor or construction manager. Further, the policy can broaden coverage for pollution/environmental liability to extend to exposures such as owned or leased premises, automobile liability and Superfund liability. The development of this hybrid product enables the general contractor/construction manager to combine professional and pollution liability insurance into one specialized policy.

These new insurance products continue to strengthen the insurability of a contractor's many business risks. By using diligent risk management and risk control techniques as well as purchasing hybrid insurance products, the general contractor and construction manager will be well equipped to evolve with the changing contract delivery systems of the industry, thereby protecting their bottom line and profitably building into the 21st century.