By Donald S. Malecki, CPCU

It is probably safe to say that most construction contractors do not have much, if any, involvement in professional liability exposures unlike, say, a contracting firm that also does its own design work, or retains the services of a professional designer to handle that special task.

However, producers whose contracting clients fall within the latter two categories, i.e., they do their own designing or retain the services of others to perform design and kindred services, need to be careful that the commercial general liability policy is modified to take those exposures into account.

Until 1996, there were no standard endorsements available to tailor the exposures of contractors involved in professional exposures. As a matter of routine, underwriters commonly added the endorsement titled: Exclusion--Engineers, Architects or Surveyors Professional Liability, CG 22 43, to the policy of the contractor.

During this same period (i.e., prior to 1996), it was a secret, to almost everyone barring only apparently some underwriters, that design and kindred professional services performed by contractors for their own jobs, or performed on their behalf, were meant to be outside the scope of the above standard endorsement, CG 22 43.

What let the secret out of the bag is the seminal case of Harbor Insurance Co. v. Omni Construction Co., 912 F.2d 1520 (US Ct.App D.C.1990). The court held here that liability coverage for a general contractor was excluded when an endorsement similar to CG 22 43 was attached to the contractor's umbrella liability policy.

After shoring designed by a subcontractor on the project caused a partial collapse of an adjacent building, the general contractor, who also maintained professional liability insurance, sought coverage under its umbrella policy. (Since the primary liability policy did not have a professional liability exclusion attached, the insurer paid its limits.)

The contractor maintained that the design work of sheeting and shoring--which allegedly caused the damage--was not a professional service but rather the means and methods of construction, or to say it another way, an operation "incidental" to the construction work.

While the court agreed with the contractor, the court did not reject the contractor's arguments out of hand in finding that the services performed on its behalf were professional in nature and therefore excluded. Rather, the court went through a careful analysis. Its findings of fact indicated that in preparing shop drawings, the contractor admitted that subcontractors applied engineering and design skills.

The court also noted that it was unlawful in that district for a registered engineer to affix his or her seal to plans or drawings without assuming full responsibility for their accuracy. The court also felt that the exclusion was intended to remit this professional liability exposure to the contractor's professional liability insurer.

Impact of case

As a result of this case, ISO took steps to revise this exclusionary endorsement so as to limit its application solely to named insureds in the business of providing professional services to others such as an engineer, architect, or surveyor.

Thus, when the classification "Engineers or Architects--consulting--not engaged in actual construction" is applicable, the ISO Commercial Lines Manual (CLM) recommends that Exclusion--Engineers, Architects or Surveyors Endorsement CG 22 43 be used to exclude coverage for liability arising out of the insured's professional services. The manual goes on to recommend that CG 22 43 not be used if the insured also is engaged in actual construction and can be assigned to an additional classification relating to contracting.

Two new endorsements also have been introduced and are referred to under Rule 28E, Division Six--General Liability of the manual. They are Exclusion--Contractors--Professional Liability, CG 22 79; and Limited Exclusion--Contractors Professional Liability, CG 22 80.

It is the purpose of Endorsement CG 22 79 to preclude coverage for those contractors who (1) provide professional services of architectural, engineering or surveying to others, (2) subcontract the design work to others, or (3) both design and build a project. What is necessary here for these exposures is a professional liability policy.

However, this exclusionary endorsement explains that professional services, as excluded, do not include services within construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as a construction contractor. Thus, the contractor who also performs professional services for its own jobs would have coverage under its policy by exception to this exclusionary endorsement.

In the words of ISO when it introduced this endorsement: "It has never been the intent to provide coverage for the professional liability of a construction contractor when such contractor is acting in the capacity as an architect, engineer or surveyor or has provided an architect, engineer or surveyor with professional services in connection with the work performed. It has also never been the intent to exclude any of the basic and normal functions of a construction contractor performed in their capacity as such."

It is important to note, however, that if--as in the Omni case--a construction contractor retains an outside professional to perform professional services in connection with construction work to be performed by the contractor or on its behalf, it is necessary to attach Endorsement CG 22 80. This exclusionary endorsement clearly precludes liability stemming from the professional services the named insured provides for others, as well as where the contractor or others provide services on their behalf in cases where they do not also perform the actual construction work.

Again in the words of ISO, Endorsement CG 22 80 broadens the scope of coverage otherwise available under Endorsement CG 22 79 "by not excluding coverage for the liability of a contractor who both designs and builds the same project for others, regardless of whether or not the design portion of the project is subcontracted."

Summary--Conclusion

Some producers and underwriters have voiced complaints over these latest developments because there is an additional step in the process of identifying the needs of prospective insureds. Like it or not, however, it is essential that contractors be queried about their possible professional liability exposures so as to avoid a repeat of the Omni case.

There are, of course, other ways to "skin the cat" so-to-speak by manuscripting the usual exclusionary Endorsement CG 22 43; but that likely will be a practice of those producers whose clients are heavily involved in design-build projects.

In any event, the following points need to be kept in mind:

* When an architectural, engineering or surveying firm is the named insured on a CGL policy, the appropriate exclusionary endorsement is Exclusion--Engineers, Architects or Surveyors Professional Liability, CG 22 43.

* The above endorsement should not be attached to a contracting firm that also performs its own engineering, architectural or surveying services, or it could be interpreted, as in the Omni case, against the contracting firm. The appropriate endorsement is Exclusion--Contractors--Professional Liability CG 22 80.

* When Exclusion--Contractors--Professional Liability Endorsement, CG 22 79, is attached to a CGL policy, coverage is not excluded for professional services within the construction means, methods, techniques, sequences or procedures employed by a construction contractor.

* Exclusion--Contractors--Professional Liability, CG 22 80, precludes coverage for the rendering or failure to render professional services by the named insured for others where the named insured also does not perform the construction work. Conversely, this exclusion excepts and therefore covers professional services performed by the insured or on its behalf in connection with construction if the work is performed by or on behalf of the contractor. *