Professional Liability Risks Associated with Construction Projects

Professional liability insurance is often an afterthought for large-scale construction projects. With builders risk, general and excess liability, and workers compensation risks to be addressed, professional liability often does not require the immediate attention of owners and contractors that are responsible for insuring the work on these projects and may not be considered until the process of insuring other risks is well under way.

by Rodney J. Taylor
Aon Risk Solutions' Environmental Services Group

With new project delivery systems including design-build and public private partnerships (also known as 3P projects), the lines between design and construction are becoming blurred, and professional liability risks are becoming more difficult to insure adequately. This article discusses the alternative measures available for insuring claims arising out of the work of design professionals on construction projects and offers comments on the strengths and weaknesses of each approach.

Professional Liability Risks Associated with Construction Projects

Most professional liability claims are made by owners against architects and engineers they have hired to provide professional services related to the design and construction of a building. Claims may arise out of the alleged negligent acts, errors, or omissions of the design professionals in rendering services related to the project where failures of structural components, major building subsystems (i.e., curtain walls, roof assemblies, etc.), or equipment result in losses or damage to the owners and third parties.

Claims by owners may also allege breach of contract where design professionals have failed to meet the terms or conditions of the written contracts for professional services. Breach of contract typically must be resolved in accordance with the provisions of the contract itself and involve principles of contract law and is not addressed by professional liability insurance. Errors and omissions in rendering of professional services may involve bodily injury or property damage, but these are often the subject of general and excess liability insurance rather than professional liability coverage.

Damages other than bodily injury and property damages associated with professional errors and omissions may be economic in nature and may include the cost of redesigning portions of a project that fail to meet professional standards and delay in completion of the structure (and associated loss of anticipated rental or sales income). These economic damages are the most common losses that give rise to professional liability claims against architects and engineers working on construction projects.

Verify That Your Dwelling Limits Are Adequate

One of the painful aftermaths of fires and tornadoes that decimate homes may be the crushing realization that the home is dramatically underinsured. According to one of the largest residential building cost data companies, Marshall & Swift/Boeckh, 64 percent of U.S. homes are undervalued by an average of 19 percent. If this figure is applied to a home with a replacement cost of $400,000, it might be insured for only $324,000, a shortfall of $76,000.

This underinsurance results in a potentially huge coverage gap, particularly if the home is not insured with a guaranteed replacement cost provision. A survey by United Policyholders, a consumer advocacy group, said 75 percent of California home owners affected by the 2007 San Diego wildfires were underinsured by an average of $240,000.

Here are some general tips to consider to reduce the likelihood of your home being underinsured:

• Make sure your home has been physically inspected. This will increase the likelihood that it is insured for its replacement cost value. Ask for periodic reinspections of your home (particularly high-end ones) to ascertain whether the dwelling limits are adequate.
• Consider guaranteed replacement cost (or guaranteed rebuild) coverage; an alternative would be to procure coverage that offers a 30 to 50 percent cushion above the dwelling limit (extended replacement cost coverage).
• Increase the ordinance or law coverage (10 percent of dwelling limit for many homeowners policies) to a higher percentage of coverage. Note that this recommendation is particularly important if you have an older home.
• Keep the insurance company informed about any remodeling at your home, since remodeling can dramatically increase the need for higher dwelling limits. Americans spend more than $170 million annually on home improvement projects, according to the National Association of the Remodeling Industry.
• If building costs are rising rapidly, an inflation guard endorsement is worthy of consideration. This endorsement increases the dwelling limit of insurance (along with other coverages) to reflect increases in values due to inflation.

Get more personal lines insurance and risk management tips and ideas from IRMI.

Copyright 2012 International Risk Management Institute, Inc.

Properly Cover Your HO/Condo Association Loss Exposures

Many people are active in their condominium or home owners' association, serving as directors, officers, and editors of association newsletters. If you are an active member of your association, consider the following risk management tips and recommendations.

• Verify that the association has directors and officers (D&O) coverage in force with reasonably high limits. If the association refuses or chooses not to obtain D&O coverage, seriously reconsider your leadership activities within the group due to your unprotected liability exposure.
• If D&O coverage is in place, verify that this policy provides errors and omissions coverage for the proper purchase of insurance. To do this, verify that the "failure to maintain insurance" exclusion is not attached to the D&O policy.
• Ask your association to hire an independent insurance consultant to audit the association insurance program to uncover any potentially lethal coverage gaps. For example, home owners' associations should have at least the following types of coverages: guaranteed replacement cost property coverage for common areas, commercial umbrella coverage, workers compensation insurance (even if there are no association employees) to cover claims brought by uninsured independent contractors, and D&O liability coverage.
• If you don't already have it, consider adding a personal injury (HO 24 82) or related endorsement to your homeowners policy.

Get more personal lines insurance and risk management tips and ideas from IRMI.

Copyright 2012 International Risk Management Institute, Inc.

Eliminate Your Ice Dams

An ice dam is an accumulation of frozen water in the gutter system and at the roof edge that prevents subsequent drainage of melting snow from leaving the roof/gutter system. Ice dams are common in areas that receive heavy snow buildups.

In most cases, ice dams begin inside the house, when heated air leaks up into the unheated attic. In the winter, the roof above the unheated attic is cold. When warm air leaks into the attic, it creates warm areas on the roof, which cause the snow on the exterior of the roof to melt. The melting snow moves down the roof slope until it reaches the cold overhang, where it refreezes. The process continues, causing ice to build up along the eaves and form a dam. Eventually, this dam forces the water to back up under the shingles and sometimes into the ceiling or wall inside the home. This phenomenon may cause structural framing members to decay, metal fasteners to corrode, and mold to form in the attic and the wall surfaces. Few homeowners policies pay for ice dam removal. Interior or exterior damage, however, caused by an ice dam on the roof is typically covered under a special perils homeowners form.

There are measures that home owners in colder climates can take to reduce the chance of ice dams, including the following.

• The services of a professional should be employed to remove heavy snow from your roof. This eliminates one of the ingredients necessary for the formation of an ice dam. Professionals are also able to address emergency situations in which water is flowing into the house structure. This is accomplished by making channels through the ice dam to allow the water behind the dam to drain off your roof. However, the channel becomes ineffective within days and is only a temporary solution to ice dam damage.
• Your ceiling/roof insulation should be increased to reduce heat loss by conduction. Some state codes require an R-value of 38 above the ceiling for new homes. In narrow spaces, insulation products with high R-value (6–7) per inch are recommended. It is imperative that the ceiling be made airtight to prevent warm air within your home from flowing into the attic space.
• Verify that there are sufficient soffit and gable end vents in your attic. These help to quickly vent any of the warm air that does get into the attic out into the atmosphere.

Get more personal lines insurance and risk management tips and ideas from IRMI. Copyright 2012
International Risk Management Institute, Inc.

Party Host Not Covered for Drunken Guest's Auto Accident

A Massachusetts appellate court ruled that a home owner has no coverage under a homeowners policy for negligently serving alcohol to an underage guest who subsequently drove drunk and caused a car accident resulting in a serious injury. The court ruled that the policy exclusion for bodily injury arising out of the use of a motor vehicle by any person excluded coverage for this incident. The case is Massachusetts Prop. Ins. Underwriting Ass'n v. Berry, 80 Mass. App. Ct. 598, 954 N.E.2d 584 (2011).

The Massachusetts Property Insurance Underwriting Association (MPIUA) issued the homeowners policy. It was alleged that the home owners negligently served, supplied, or permitted a nonresident minor to consume alcohol, who then became intoxicated on their insured premises. While intoxicated, the minor drove a vehicle he owned and struck another vehicle operated by Berry, who suffered serious injuries. Berry sued the home owners on a theory that they were negligent social hosts. The insurer denied coverage, relying upon the motor vehicle exclusion.

In reaching its decision, the court first considered the case of Worcester Mut. Ins. Co. v. Marnell, 398 Mass. 240, 496 N.E.2d 158 (1986). In this case, the Massachusetts Supreme Court ruled that a separation of insureds clause required a similar exclusion in a homeowners policy to apply separately to each insured, ultimately resulting in coverage for the home owners for a similar host liability claim. In this case, the term "insured" as used in the motor vehicle exclusion referred only to the person claiming coverage under the policy. Since the named insured did not own or operate the vehicle that struck the deceased, the motor vehicle exclusion did not apply.

In Berry, however, the insurer had modified the policy exclusion in response to Marnell, such that the exclusion effectively was triggered for any bodily injury claim arising out of use of a motor vehicle by any person. The language, according to the court, established a type of "personal injury" that the policy categorically excluded: that arising out of the use of a motor vehicle. The court, as a result, ruled in favor of the insurer in denying coverage. The exclusionary language in the MPIUA policy thus creates a coverage gap for home owners for this category of potential liability. Coverage gaps such as this should be pointed out to clients who entertain guests in their home and resolved via a broadening endorsement.

Patrick B. Omilian of Goldberg Segalla LLP, Buffalo, New York, wrote the case of the month summary.

Holiday Party Etiquette: A Good Host Is a Responsible Host When It Comes to Serving Alcohol

Homeowners Can Be Subject to Social Host Liability Laws When Serving Liquor
November 21, 2011
INSURANCE INFORMATION INSTITUTE
New York Press Office: (212) 346-5500; media@iii.org

NEW YORK, November 22, 2011 — Thanksgiving marks the beginning of holiday season and for many that means party time. But hosts who serve alcohol should take steps to limit their liquor liability and make sure they have the proper insurance, according to the Insurance Information Institute (I.I.I.).
 
Social host liability, the legal term for the criminal and civil responsibility of a person who furnishes liquor to a guest, can have a serious impact on party throwers. Social host liability, also known as “Dram Shop Liability” laws vary widely from state to state, but 43 states have them on the books. Most of these laws also offer an injured person, such as the victim of a drunk driver, a method to sue the person who served the alcohol. There are circumstances under these laws where criminal charges may also apply.
 
“Because you can be held legally responsible for your guests’ actions after they leave your party, hosts need to be particularly careful,” said Loretta Worters, vice president of the I.I.I. “While a social host is not liable for injuries sustained by the drunken guest (as they are also negligent), the host can be held liable for third parties, and may even be liable for passengers of the guest who have been injured in their car.” 
 
Before planning a party in your home, it is important to speak with your insurance agent or company representative about your homeowners coverage and any exclusions, conditions or limitations your policy might have for this kind of risk. Homeowners insurance usually provides some liquor liability coverage, but it is typically limited to $100,000 to $300,000, depending on the policy, which might not be enough.
 
Whether you are hanging out with a small group of friends for cocktails or throwing a big family bash, remember that a good host is a responsible host, and needs to take steps to ensure guests get home safely if they have been drinking.
How to Protect Yourself and Your Guests
If you plan to serve alcohol at a holiday party the I.I.I. offers the following tips to promote safe alcohol consumption and reduce your social host liability exposure:

• Make sure you understand your state laws. Before sending out party invitations, familiarize yourself with your state’s social host liability laws. These laws vary widely from state to state. Some states do not impose any liability on social hosts. Others limit liability to injuries that occur on the host’s premises. Some extend the host’s liability to injuries that occur anywhere a guest who has consumed alcohol goes. Many states have laws that pertain specifically to furnishing alcohol to minors.
• Consider venues other than your home for the party. Hosting your party at a restaurant or bar with a liquor license, rather than at your home, will help minimize liquor liability risks. 
• Hire a professional bartender. Most bartenders are trained to recognize signs of intoxication and are better able to limit consumption by partygoers. 
• Encourage guests to pick a designated driver who will refrain from drinking alcoholic beverages so that he or she can drive other guests home. 
• Be a responsible host/hostess. Limit your own alcohol intake so that you will be better able to judge your guests’ sobriety. 
• Offer non-alcoholic beverages and always serve food. Eating and drinking plenty of water, or other non-alcoholic beverages, can help counter the effects of alcohol. 
• Do not pressure guests to drink or rush to refill their glasses when empty. And never serve alcohol to guests who are visibly intoxicated. 
• Stop serving liquor toward the end of the evening. Switch to coffee, tea and soft drinks. 
• If guests drink too much or seem too tired to drive home, call a cab, arrange a ride with a sober guest or have them sleep at your home. 
• Encourage all your guests to wear seatbelts as they drive home. Studies show that seatbelts save lives. 

 
 
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Insurance Information Institute, 110 William Street, New York, NY 10038, (212) 346-5500

Don't Forget Your Carbon Monoxide Alarms

More than 400 people are killed each year in the United States from carbon monoxide poisoning, according to the Centers for Disease Control and Prevention (CDC). The American Medical Association reports that carbon monoxide poisoning is the leading cause of accidental poisoning deaths in the United States.

Other CDC studies indicate that more than 20,000 people are hospitalized each year from this gas, and these poisonings are on the rise due in part to economic reasons. With a stressed economy and high unemployment, more families face utility shutoffs. As a result, they employ other sources of heat, such as kerosene heaters, gas generators, and improperly maintained wood stoves and fireplaces. Such heat sources carry a heavy risk of carbon monoxide poisoning.

Carbon monoxide alarms are essential protective devices in homes with gas appliances, gas heaters, and fireplaces. Here are some tips to consider concerning these important alarms.

• To ensure a high-quality alarm, look for the Underwriters Laboratories certificate on any detector you purchase.
• Connect these alarms to the smoke alarm system so that any alarm in the house becomes activated if a problem arises.
• Periodically test these devices according to the manufacturer's instructions. Batteries should be replaced at least once per year. Replacement of the alarm itself is often necessary after a few years since the average life span of carbon monoxide alarms is relatively short.
• Verify that you have alarms in bedrooms and other locations where people may sleep since people who are sleeping can die from carbon monoxide poisoning without experiencing any symptoms.

Copyright 2011 International Risk Management Institute, Inc.

Shun Those Cell Phones While Driving

More than 20 percent of injury crashes in the United States involve reports of distracted driving, according to the National Highway Traffic Safety Administration (NHTSA). Of those killed in distracted-driving related accidents, 18 percent involved the usage of a cell phone. Another study indicates that using a cell phone while driving, whether it is a hand-held or hands-free device, delays a driver's reactions as much as having a blood alcohol concentration at the legal limit of .08 percent.

Cell phones, and particularly smart phones, are considered one of the leading driver distractions. As a result, more and more communities are placing restrictions on drivers' use of cell phones. The following tips are offered to motorists with regard to cell phone use in vehicles.

• You should wait until the car trip is complete before placing a call. Your cell phone's voicemail feature should answer a call while you are driving.
• Absolutely essential calls should only be performed while stopped. However, it is not wise to pull over on the side of the road where a rear-end collision is possible. Instead, you should pull into a parking lot to perform this task.
• The phone should be placed where it is easy to see and reach.
• You should take advantage of speed-dialing capabilities.
• You should never drive and talk on the cell phone during stressful, emotional, or complex discussions since the risk of an accident is heightened.
• You should consider using a hands-free cellular phone since some studies indicated that these are safer to use.
• You should never text message while driving.

Copyright 2011 International Risk Management Institute, Inc.