An article by Noelle McCall, CIC, CRM, CCIP, ACRA, CCIP

Understanding Professional Liability Insurance

Professional liability (also known as Errors & Omissions insurance) protects against errors, omissions, negligence, and breach of duty in the rendering of, or failure to render, professional products or professional services that occur at, or in connection with, a project. It is especially important for those who retain third-party design and building consultants, such as surveyors, architects, engineers, technical subcontractors, other design specialists, and consultants.

Professional liability can cover bodily injury or property damage losses as well as other financial harm that arise from the rendering or failure to render professional services. Some examples include the following.

• Providing improper advice or designs,
• Use of wrong materials,
• Failure to follow plans,
• Making a mistake,
• Quality control failures, and
• Failure to perform services, provide advice, request change orders to correct plans, and point out other subcontractors' substandard work.

When managing a construction project, ensuring proper insurance coverage offers crucial protection against potential risks.

One common question that arises is whether contractor should add the project owner or general contractor as an additional insured to the contractor's professional liability (PL) policy. The short answer is no—and here are 13 reasons why you should not.

1. Insurers Do Not Design Professional Liability Policies for Additional Insureds

Professional liability insurers tailor coverage for the specific professional risks of the named insured (the contractor). Carriers underwrite these policies based on the contractor's professional experience and history. Insurers calculate premiums accordingly and are generally unwilling to extend coverage to other parties without thoroughly assessing their risks and charging additional premiums.

2. Insurers Won't Cover Unrelated Professional Risks

Adding project owners or general contractors to the contractor's professional liability policy would mean covering risks not evaluated or priced by the insurers. Insurers are reluctant to assume liability for another party's professional actions or mistakes, which could significantly increase their exposure.

3. Control Matters

Professional liability insurers usually require that all insured parties be under the direct control of the named insured. Since project owners and general contractors operate independently, insurers typically reject requests to add them as additional insureds.

4. Restrictions from Reinsurers

Many professional liability insurers rely on reinsurers to help manage risk, and these reinsurers often prohibit adding non-professionals to a professional liability policy. This restriction limits the insurer's ability to extend coverage.

5. Increased Risk Exposure

Adding project owners or general contractors could significantly increase the insurer's risk exposure. For example, if the project owner employs other professionals such as architects or engineers, the insurer could become responsible for a much broader range of potential claims.

6. Coverage Is Not Designed for Non-Professional Negligence

Professional liability policies are meant to cover errors and omissions related to professional services, not the general negligence of non-professionals. Project owners and general contractors typically have their own general liability policies to cover such risks.

7. General Liability Policies Provide Coverage for Vicarious Liability

Project owners and general contractors are often covered under their own general liability insurance for claims arising from the actions of the contractors they hire. If claimants sue a project owner due to a contractor's mistake, their general liability policy typically provides coverage.

8. Policy Limitations and Endorsement Challenges

Most professional liability policies do not offer coverage for the vicarious liability of non-professional parties. Additionally, insurers are usually unwilling to draft custom endorsements to provide such coverage.

9. Contractual Liability Exclusions

Professional liability policies often exclude claims arising from contractual agreements, meaning coverage may not apply if a dispute arises between the insured contractor and an additional insured.

10. Policy Limits Are Eroded by Defense Costs

Insurers usually offer professional liability policies on a "claims-made" basis, meaning defense costs reduce the available policy limits. The more parties added to the policy, the higher the defense costs, leaving less coverage available for actual claims.

11. Claim Reporting Complexities

Project owners and general contractors may be unfamiliar with the specific claim reporting requirements of a professional liability policy, potentially jeopardizing coverage if these parties do not properly report claims.

12. Limited Additional Insured Coverage

Even if an insurer agrees to add additional insureds, the coverage would be very narrow. It would typically only protect the additional insured if the additional insured is dragged into a lawsuit solely because of the contractor's negligence or mistakes in providing professional products or services —not for the additional insured’s  negligence or mistakes.

13. Existing Remedies for Project Owners

If a project owner is held liable for the contractor's professional errors, they usually have legal remedies available against the contractor. The contractor's professional liability insurance would respond to cover damages, making additional insured status unnecessary.

Conclusion

Instead of requiring additional insured status on a contractor's professional liability policy, project owners and general contractors should focus on ensuring proper contractual risk transfer, requiring adequate insurance limits from contractors and maintaining their own liability coverage to protect against potential claims.

By understanding the limitations of professional liability policies, construction professionals can better manage their risk and avoid unnecessary complications in their insurance requirements.