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• Coverage Disputes
• Liability Protection Granted as an Additional insured on Contractor's Policies
• Loss Prevention Advice: Protection From Vicarious Liability

1.  COVERAGE DISPUTES A WIN-WIN SITUATION      

 C. Roy Vince President

When faced with a claim, the last thing an Insured wants to find out is that his insurance policy may not cover the alleged damages. The policy renewal could be in jeopardy if the insured perceives that his insurance carrier appears more interested in protecting its own interests rather than his interests. How do we resolve this dilemma? C. R. Vince applies the following win-win approach to resolve this situation.

What is the win-win objective?

Underwriter: 

 To preserve and protect his rights relative to positions of coverage

Insured:

To perceive that he is receiving the benefits he paid for under the contract.  

What is the win-win approach?

Step 1: Review Coverage with Insured.

Objectives:

To help the Insured view the policy as a fair contract and consistent with his expectations when he purchased it.

To discuss the intent and clarify the provisions of the policy and/or the application.

To answer any questions the Insured might have regarding his policy.

Process:

Upon first contact with the Insured, discuss openly any coverage issues.

Provide ongoing coverage information during the investigative process.

Review the policy provisions with the Insured, including the Insuring Agreements, Exclusions, and/or Conditions, and the Application Form, if appropriate.

Step 2: Issue an Informative Reservation of Rights Letter.

Objective:

Present the required information without offending the Insured.

Process:

Sandwich the potentially "bad" news between "good" information:

"Good News"

Inform the Insured that he is entitled to services under his policy and the company is discharging those services.

Make an affirmative statement that he has coverage for his professional acts and cite the specifics, as appropriate.

"Bad News"

Describe how the allegations create a coverage problem.

Marry the allegations giving rise to the coverage problem to the policy.

"Good News"

Inform the Insured that if the case is in litigation, an attorney has been assigned to defend him as to all of the allegations of the complaint.

Advise the Insured that the assigned counsel has been instructed to get the inappropriate and offensive allegations dismissed (where appropriate).

Step 3: Where Possible Assist the Insured in a Solution.

Very often, when coverage issues arise on a Professional Liability claim, the language may trigger coverage under the Insured’s General Liability policy. Coverage also may be available under a contractor’s policy.

The case history contained in this newsletter is an example of how Mr. Peter J. Gavlin, Senior Vice President of our firm, applied our win-win approach in resolving serious coverage challenges on a Professional Liability Policy.

Insured wins - avoids paying deductible. Even though the loss was covered by the Professional Liability Policy, it also was covered by the insured’s General Liability insurer. The General Liability Policy had no deductible whereas if the claim was covered under the Professional Liability Policy, a substantial deductible would be paid by the Insured.

C. Roy Vince, President

C.R. Vince & Associates recommends that all architects and engineers include in their contract documents or project specifications a requirement that the General Contractor and its subcontractors name the Architect, Engineer and the Owner as additional Insureds on the contractors’ liability policies. This coverage is usually done for an insignificant additional premium, if any, to the contractors. Such coverage should be specified to include defense of the Architect, Engineer and Owner for claims arising out of the work of the contractors, and indemnification of the Architect, Engineer and Owner for claims arising out of the contractors’ negligence.

In many cases, contract documents or project specifications are written such that the contractors are required to hold harmless the design professional the Owner for the negligent acts of the contractor. However, the contractor’s liability carriers avoids a defense obligation by stating that until such time as the negligence of the contractor has been determined, no defense or indemnification of the design professional or Owner will be provided. As most cases of this type end up in settlement, without a determination of responsibility, no defense or indemnification is provided.

In addition, some States prevent a party from contracting away its responsibility for its own negligence, holding that party A cannot seek indemnification from party B for party A’s own negligence even if party B has contractually agreed to do so. The States, however, do not disapprove of one party obtaining Insurance coverage for the other as part of the contract.

The decision of Consolidation Coal Co. v. Liberty Mutual Ins. Co., 406 F. Supp. 1292, indicated that the additional insured was covered "...but only with respect to acts or omissions of the named insured in connection with the named Insured's operation at the applicable location designated." Similarly, in an often cited decision, Harbor Ins. Co. v. Lewis, 562 F. Supp. 800, the Pennsylvania District Court interpreted a clause in the additional Insured endorsement which specifically provided that the policy only covered the additional Insured "...to the extent of liability resulting from occurrences arising out of negligence of (the named insured)." The Court held that this language did not extend coverage to the additional insured for liability resulting from that additional insured’s own negligence.

By requiring contractors to name the design professional and the Owner as additional Insureds on the contractors’ liability policies and to require contractors to provide for the design professional and Owner’s defense of claims arising out of the contractor's work, the design professional may acquire additional coverage and obtain the benefit of defense without significant added costs to the Owner or contractors.

C. R. Vince & Associates, is most adept at enforcing the design professionals’ rights as an additional Insured. Although carriers for the contractors’ liability policies often attempt to avoid their responsibilities, techniques unique to each case are usually available to obtain a defense for the design professional under the contractor’s liability policy, resulting in a savings to the design professional. The deductible under the AEIC policy applies to defense costs, such that obtaining the acceptance of the design professional’s defense under the contractor’s liability policy can offer significant cost savings to the design professional directly. Please feel free to speak with the technical staff at C. R. Vince & Associates to answer any questions on this subject at (847) 205-0444

3.  Loss Prevention Advice: Protection From Vicarious Liability  

When a design firm engages subcontractors, it incurs the risk of responsibility for the acts of the subcontractors. It can be protected against the vicarious liability. In providing its risk management services, C.R. Vince & Associates counsels prime design professionals on sound practices in securing design subcontractors. Following are some suggestions made to Architects and Engineers (A&E). Brokers and underwriters, in examining the qualifications of A&E risks, should be sensitive to the application of loss prevention techniques when hiring subcontractors.

All subcontracting design professionals in the disciplines of architecture, structural engineering, electrical engineering, civil engineering, soil and foundation (geotechnical) engineering, surveyor's and interior architects should be required to carry professional liability insurance. Certain specialists in narrow fields of engineering as a matter of practice do not carry such insurance. Reasons include; insufficient work to justify paying the premium, unavailability of insurance, or they are primarily involved in another profession such as teaching and offer consulting services as a sideline.

Having said that, good practice suggests requesting subcontracting professionals to have professional liability insurance, as a condition of hire, and then exercise judgment when the subcontractor complains of his inability to meet the insurance requirement. One consideration is the fee associated with the service rendered. If the fee is substantial, it may be warranted to insist that the specialist obtain professional liability insurance. It is easier to obtain such agreement if the reward for the assignment is substantial.

Another major consideration is the nature of the risk of the specialty. If the negligence of the specialist could do great harm, taking on the vicarious liability is not wise. Rather, searching for an Insured specialist in the field is advisable. Obviously, if there is a choice between equally qualified sub consultants, one Insured and one without insurance, the insured consultant should be engaged.

One answer to the uninsured specialist is to arrange to have the specialist contract directly with the primary client. This is a suggested practice when engaging engineers for soil studies. In this manner, the design professional may escape vicarious liability for the acts of the specialist. Liability would apply to oversight and direction given the specialist.

Adding an uninsured specialist as an additional named Insured on either a practice or project specific policy is not the preferred route. Since the design professional has liability for subcontractor’s acts vicariously, not adding them as additional insureds gives both the design professional and the design professional’s professional liability insurer options to deal with the uninsured specialist, such as providing a courtesy defense, providing a joint defense, securing cooperation and/or acting on any indemnities that may apply. Since engaging uninsured consultants affects the interests of the professional liability insurer, it is always wise to discuss such engagements with insurers.

The above discussion related to professional liability insurance. Subconsultants should be required to provide evidence of all necessary insurance, such as General Liability, Workers Compensation, automobile, etc. This is accomplished by requesting certificates of insurance for all required coverage. It is necessary, as long as the work continues, to obtain replacement certificates on or before the expiration date. The professional liability insurance certificates should be collected for the period of the statute of limitations that applies to design negligence.

When underwriting a prime professional, examining their practices when engaging subcontractors often is an open window to the firm’s loss prevention awareness.