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Insurance Issues

No discussion regarding protecting yourself from third-party claims is complete without a discussion regarding professional liability insurance policies. The AIA Trust recently published a summary report of the 2014 professional liability insurance carrier interviews.[1] According to the report, there is a trend amongst owners requesting higher limits for insurance coverage. The insurance carriers which reported on this trend noted: “These requests for higher limits are not necessarily tied to the value of the project or increased exposure from the design professional, but rather are an attempt to increase the overall insurance proceeds available to the owner to respond to claims. As a result, carriers are seeing an increased use of project specific policies to respond to these requests.”[2] Further, the total claim cost amounts have increased while the total number of claims has reduced.[3] However, the general expectation amongst carriers is that the frequency of claims will increase over the next year based upon increased in work activity for their insureds.[4]

With respect to claims based upon project type, the insurance carriers reported that claims involving multifamily residential, condominiums, and schools/universities were reported to be approximately 25% of total claims.[5] As many architects are aware, many developers are making the decision to convert rental apartments to condominiums. By doing so, architects and others involved in the design and construction of multifamily residential projects are increasingly faced with the prospect of a new pool of potential third-party claimants, including individual homeowners and homeowners’ associations. “Add that to the scope and quality variations caused by contractor and owner value engineering substitutions, and the fact that the ultimate third-party condo owners are not always happy with the finished product. The result has been increased claims by the condominium owners against developers, contractors and design professionals.”[6] For those architects whom regularly or are considering providing design services for condominium projects, consider the following: “Several insurers interviewed indicated that they take a more detailed look at firms that provide condominium design when they quote policy rates. Over 40% of the insurers interviewed reported that they have policy restrictions on condominium work, and almost 60% interviewed stated that condominiums may lead to higher rate increases in the coming years.”[7]

The client developer should be required to obtain WRAP or OCIP insurance to cover general liability claims of the contractor and subcontractors. Such policies should be in place from commencement of construction through completion and be “occurrence based.”  It is one thing to require that a WRAP or OCIP be obtained in the contract but it is vitally important to make sure one of these policies is actually obtained. The failure to obtain should be a material breach of the design professional agreement, and grounds for termination. There have been too many cases where the design professional becomes the main target in litigation due to the fact that a WRAP or OCIP—although contractually required—was not obtained and the design professional is the only party with insurance.

You would think that there would be a specific insurance product for design professionals performing condominium projects. There currently is not. The availability of project specific professional liability insurance to cover the design team is rare if non-existent for such projects. Therefore, it is the design professional’s practice policy of professional liability that remains at risk. It is important to ensure that there are no exclusives in your policy regarding condominium projects. Many policies prohibit more than a certain percentage of your annual revenue to be generated from services on such projects. You may also want to look at project specific excess insurance to cover the risks associated with specific condominium projects, and the design professional should seek the cost of the same as a reimbursable cost from the client developer.

Lastly, an OPPIpolicy should be discussed as offering the client developer some protection as opposed to requiring the design professional to raise its overall practice policy to higher limits at increased premium cost. The OPPI does not directly offer any insurance protection for the design team. It generally sits in an excess or secondary position to the design professional(s)’ practice policies. In other words, the OPPI protects the Owner for the design professional errors and omissions once the design professional’s practice policies have been exhausted.

[1] Available at

[2] Id. The Beacon Case

[3] Id

[4] Id.

[5] Id.

[6] Id. The Beacon Case

[7] Id. The Beacon Case

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