Construction insurance coverage claims often turn on the question as to whether “design” or “construction means and methods” are at issue. It is a particularly confounding question because contractor and construction manager participation in the project design may blur already-difficult-to-discern distinctions between design and construction participants. The confusion is further compounded by developing technologies such as BIM (Building Information Modeling). Early evaluation of the relationship between the project delivery mechanism and available insurance coverage is critical for effective transfer to take place. Commercial General Liability (CGL) insurance is an often overlooked consideration when a claim or lawsuit directly or indirectly implicates construction design.
Typically on construction projects, design related risks are covered by the architect and engineer’s professional liability policies, which many times have low and “wasting” policy limits written on claims-made forms. Professional policies typically contain exclusions for claims arising out of “construction means and methods.” The same holds true for construction manager professional liability insurance which construction managers obtain to cover claims related to or arising out of construction management supervisory services. The CGL insurance policy (in combination with excess and umbrella insurance) in contrast, in many instances, provides the highest available limits of liability and therefore, is critical third-party liability coverage for any construction project.
Whether during the course of construction or after construction operations are completed, subcontractors, trade contractors and construction mangers generally provide CGL insurance to address property damage or bodily injury caused by “occurrences” arising out of their work. Some version of standard ISO (Insurance Services Office) CGL occurrence policy form generally will be used and is generally specified and required in the Contract Documents, whether it is provided by an individual policy or by a project policy, an OCIP (Owner-Controlled Insurance Program) or CCIP (Contractor-Controlled Insurance Program).
The basic ISO CGL occurrence form does not exclude coverage for claims or suits arising out of professional services, particularly in the construction context however, this coverage is excluded by addition of exclusionary endorsements. Several ISO endorsements are used by underwriters to address “professional services” and attendant design risks.
- ISO form CG 22 43: Before 1990 the standard professional services exclusion on contractors CGL policies was provided on ISO form CG 22 43, which excludes from coverage bodily injury or property damage “arising out of the rendering or failure to render any professional services by or for the named insured, including: “1. The preparation or approval of maps, plans, opinions, reports, surveys, designs or specifications and 2. Supervisory, inspection or engineering services.” In Harbor Insurance Co. v. Omni Construction, 912 F.2d 1520 (D.C. Circ. 1990) the issue before the court was the impact of the prime contractor Omni’s subcontracted sheeting and shoring work on an adjacent property owner which claimed that the excavation resulted in settlement to its building. The court, although it was presented with evidence that the sheeting and shoring is an accepted component of a contractor’s “construction means and methods” held that the design of the system constituted a “professional service” and that no coverage would apply because “the loss was caused by the rendition of professional services, viz., the engineering of the sheeting and shoring system.” Harbor, 912 F.2d at 1525.
- CG 22 79. Following the Harbor decision ISO issued a new professional services exclusion, CG 22 79, with the direction that this (as opposed to the CG 22 43) be used for construction contractors. CG 22 79 contains the following clarification in its final section:
“Professional services do not include services within construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as th construction contractor.”
Thus, incidental design services (preparing or reviewing shop drawings for example) are not excluded by CG 22 79 when provided by a covered construction contractor. Note that the ConsensusDOCs 200 series standard agreement and general conditions between owner and contractor at section 3.15 provide that a contractor “may be required to procure professional services in order to carry out its responsibilities for construction means, methods, techniques, sequences and procedures for such services specifically called for by the Contract Documents.” The use of such language would support that incidental professional services needed to carry out construction mean and methods are not excluded by CG 22 79 exclusion.
- CG 22 80. The ISO also issued the CG 22 80 endorsement which is less restrictive than the CG 22 79, because it contains the following concluding caveat:
“This insurance does not apply to “bodily injury,” “property damage,” “personal injury” or “advertising injury” arising out of the rendering of or failure to render any professional services by you, but only with respect to your providing engineering, architectural or surveying services in your capacity as an engineer, architect or surveyor . . ..”
This exclusion does not apply to your operations in connection with construction work performed by you or on your behalf.”
In other words, as long as the insured contractor is performing construction work, the fact that this work includes a design component – whether incidental or broader – the exclusion does not apply. Therefore, the exclusion is the least restrictive form of the ISO professional services exclusion (and typically recommended for use in the design-build context.
- CG 22 34. In addition, ISO endorsement CG 22 34 excludes coverage for, among other things, “[i]nspection, supervision, quality control, architectural or engineering activities done by or for you on a project on which you serve as construction manager.” The exclusion, however, is followed by an exception providing that the construction manager retains coverage for “construction or demolition work” performed by or for the CM, its employees or subcontractors.
Therefore, which ISO endorsement is attached to a CGL policy form can be significant in the event of a “design related” claim. As part of the upfront analysis of potential design risk, careful attention must be paid to the CGL policy form and the selected ISO professional services endorsement, if one is used. In the event the CGL coverage is insufficient, specialty coverage such as Contractor’s Professional Protective Insurance (“CPPI”) or construction manager professional liability insurance may be available to pick up the contractor or construction manager design or other professional risk outside the traditional coverage.
