For every project that an architectural firm undertakes, the greatest probability of an unfavorable outcome is that the firm will not be properly compensated for the services performed and the value it added to the project for the client. On international projects, there is also the risk that the firm will not be able to comply with the government-mandated insurance requirements to meet contractual responsibilities. Another risk is that even an insurance policy that does meet contractual requirements might not pay on the firm’s behalf in the way the firm anticipates.
Whenever a firm is providing services in a non-U.S. jurisdiction, the firm—with the help of its insurance broker and legal advisor—has to review a “decision tree” of questions about its insurance coverage. This is especially critical with its professional liability coverage.
Whether or not existing professional liability coverage will be effective is highly dependent on the legal system used in the applicable jurisdiction and the statutory requirements of the specific country. In addition, the laws of the jurisdiction often dictate what services can be provided and how the provider can be identified in the jurisdiction.
At times, firms are confused by differences between the law of the U.S. and other systems of jurisprudence that could apply to their services. It is critical that firms understand how the applicable legal system treats every aspect of practice, including:
- how a firm can be referenced (a firm might not be able to state that it is an architecture firm because of national licensing laws),
- how funds can be transferred out of the jurisdiction,
- what recourse the firm will have to enforce the contractual obligations, and
- how some of the firm’s exposure can be transferred by insurance.
So for firms providing architectural services, the “decision tree” begins with determining whether the contract for the services and the services provided are to be governed by U.S. law or the law of the foreign jurisdiction. Here are the questions to consider:
Will your policy provide coverage because U.S. law applies?
If the governing law is of a U.S. jurisdiction—which could be the case when an international project is undertaken for a developer or a U.S. government entity—it is highly likely that professional liability insurance requirements and policies applicable to the U.S. will be adequate. But the firm has to determine whether its coverage will actually defend and pay on behalf of the firm when a problem generates a claim on an international project.
Does the existing policy provide “worldwide” coverage?
For instance, the standard CNA policy clearly states that coverage for services is for “a claim anywhere in the world.” Similar language may be in the policies of a firm’s sub-consultants, but some policies might only respond if the claim is brought in the U.S. In addition to determining if the professional liability insurance policies of the prime architect and any subs applies to services provided in or for foreign jurisdictions, the policy should be analyzed to determine if it provides a defense in foreign adjudications or will only indemnify the policyholder once defense costs are incurred in the defense of a claim outside of the U.S. Many policies might cover the liability of the policyholder in foreign jurisdictions, but not provide the defense on a worldwide basis.
Does the policy have a broad description of the services covered?
Many policies in the U.S. are limited to professional services that the policyholder is “licensed to provide” as an architect and thus could exclude from coverage many of the services a firm provides in the international market.
Does the policy cover collateral warranties?
Depending on the jurisdiction and whether the applicable law makes firms responsible only to clients or to a broader group of entities harmed by the design deficiencies, some contracts make it clear that coverage must extend to any party with an insurable interest. This insurable interest is often established through collateral warranties that assign the rights of the client (often a developer, investor, or government agency) to a subsequent purchaser or tenant. If a U.S. policy can meet the other requirements of the contract, in many cases collateral warranties are covered if they do not extend the exposure beyond what is common under U.S. law. Other U.S. policies, however, treat collateral warranties as any other contractual commitment and exclude coverage.
If the governing law is foreign, are there specific requirements in the foreign law related to insurance?
Whether the foreign law mandates specific insurance coverage is as much a legal question as an insurance one. It is vital that firms practicing internationally have legal counsel who understands the statutory law and rulings in the applicable jurisdiction.
Does the policy only recognize “negligent professional acts,” or does it recognize that in some jurisdictions there is no reliance on the British/U.S. concept of negligence?
The CNA policy, like all professional liability insurance policies, excludes coverage for contractually assumed liabilities that exceed the normal liability of the firm to perform its professional services in a non-negligent manner. But the CNA policy states that the exclusion does not apply “in a foreign jurisdiction where your liability to a client is predicated only on contractual liability.” This allows the CNA policy to respond even if the basis of a claim does not include an allegation of negligent performance. Many professional liability insurance policies—including those of a prime firm’s sub-consultants—might not provide coverage based on statutory liability.
Is there a requirement for decennial liability coverage?
Decennial liability coverage is insurance to back an absolute responsibility for any “collapse” that occurs within ten years from completion of the project. True decennial liability coverage is not fault-based. In some jurisdictions, the definition of “collapse” has been broadened to include any deficiency in the operation of the facility that could affect public safety or health. In others, the requirement has been narrowed to only apply to those who are actively involved during the construction stage of a project. The coverage is project-specific, so while some U.S. policies could cover the same exposures, they do not meet the statutory requirements because they are not project-specific and time-guaranteed. In most jurisdictions requiring decennial liability insurance coverage, the obligation cannot be waived or modified by the client in a contract for professional services or construction.
Is there a requirement that insurance coverage be provided by/through a local company?
In many foreign jurisdictions, only an in-country insurance provider can issue a policy. Most insurance companies that insure U.S. firms are based in the U.S. or the United Kingdom, and therefore are not licensed or domiciled in every country and do not meet a “registered and operating” requirement that allows the local judicial system to have control over the company providing the coverage. If such a requirement is in place, a special policy issued through a local company has to be obtained.
Does the insurance requirement refer to professional indemnity coverage?
British policies are called professional indemnity, rather than professional liability, policies, but there often is more than just a difference in titles. Many professional indemnity policies provide coverage for “each and every claim,” unlike professional liability policies common in the U.S. that provide coverage for each claim, but with a policy aggregate limit on the liability of the insurer. Often, a U.S. insurance company can arrange a policy through a London insurer that meets the specific requirements. U.S. policies that are actually backed by London-based insurance syndicates do not automatically meet such requirements.
Does the coverage have to be on a project-specific basis?
As an alternative to the system of absolute liability backed by a decennial liability insurance policy, some foreign jurisdictions require a project-specific coverage that has many of the same elements as decennial liability insurance. Foreign contracts that require project-specific coverage mandate limits that only apply to the project and coverage that is guaranteed for a specific period of time. Even a U.S. project policy or specific additional limit endorsement on a regular practice policy in the U.S. might not meet the statutory or contractual obligation.
Insurance requirements in contracts for international projects vary extensively. From absolute coverage for anything defined by local law as a sole or shared liability, to coverage mandated only to correct harm to the architectural firm’s client to the extent caused by the firm’s defective design, there is an entire spectrum of how insurance coverage can respond to legal liability. No architectural firm should assume a project for an international client—private or governmental—or a project outside the U.S. for a U.S. entity can be completed without the recognition of conditions that differ from those domestically and without the advice of insurance brokers and legal counsel familiar with the laws and interpretations of the laws in the foreign jurisdiction.
Victor O. Schinnerer & Company, Inc. and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability Insurance Program and Business Owners Program to address the challenges that architects face today and in the future. Detailed information about both these programs may be found on the AIA Trust website, www.TheAIATrust.com.