Contractual Liability Issues in PL policies
From the Desk of Judy Mendoza
Occasionally, clients ask design professionals to have their professional liability policy endorsed to specifically insure contractual liability. This would provide coverage for the risks a design professional assumes in a professional services agreement.
Clients often ask for contractual liability coverage from design professionals because such coverage is found under a contractor’s CGL policy. Such a request is problematic, however, because a contractor’s CGL policy provides broad form coverage for contractual liability, due to the contractor’s broad risk exposure. Conversely, the professional liability policy provides a limited form of contractual liability coverage because a design professional’s risk exposure is limited to professional negligence.
The Schinnerer and CNA professional liability policy automatically includes a limited form contractual liability coverage that provides coverage to the extent that the liability is predicated on the insured’s negligence in providing professional services. If a request for contractual liability coverage is consistent with the coverage already provided by the policy, a special endorsement is unnecessary. On the other hand, if the contractual promises in the professional services agreement extend beyond what the policy already covers, the design firm may be assuming a business risk that is uninsurable. Examples of uninsurable contractual liabilities include express warranties and guarantees, representations that services will be free from fault and defect, and representations that the project, when finished, will be fit for its intended purpose.
Professional liability coverage is designed to pay on behalf of an insured firm that does not meet the standard of care in fulfilling professional obligations; it is not designed to stand behind all contractual obligations. By law, design professionals are liable for their own negligence as well as for the negligence of those for whom they have assumed vicarious liability (generally, professional consultants). If design professionals agree by contract to accept liability for more than this negligence, they are assuming a business risk that is not covered under the Schinnerer and CNA PL policy.