Owners Protective Professional Indemnity Insurance

This article was originally published in the American Bar Association, Tort Trial and Insurance Practice Section, Self-Insurers and Risk Managers Spring 2024 newsletter.

Owners Protective Professional Indemnity (OPPI) insurance is a specialized form of liability insurance designed to protect construction project owners from financial losses stemming from the negligence or errors and omissions of the professionals they hire, such as architects, engineers, and contractors that provide professional services. This type of insurance is particularly relevant in large construction and infrastructure projects where the complexity and scale of the work can lead to significant risks of project delays and cost overruns.

The primary purpose of OPPI is to provide an additional layer of coverage for the project owner in cases where consultants and contractors directly in contract with owner are responsible for errors or omissions and the responsible professional’s or contractor’s own professional liability insurance is insufficient to cover the damages or when their policy does not respond to a claim for various reasons.

OPPI is primarily a “first-party” coverage, meaning it directly benefits the policyholder (the project owner) rather than a third party. However, policies are also structured to protect against an owner’s vicarious liability arising from third-party claims linked to consultants’ services. It is crucial to note that OPPI does not cover the owner’s litigation costs to pursue claims against their consultants and contractors.

OPPI policies are usually tailored to the specific needs of a project. They can vary in terms of coverage limits, self insured retentions, and coverage extensions and exclusions. It is important for owners to work with insurance professionals and legal counsel, with specific expertise in construction related professional liability risk management options to avoid common pitfalls, understand the scope of coverage, and ensure it aligns with the specific risks and complexities of their project.

OPPI offers a unique advantage in that it allows project owners to have direct control over the professional liability coverage on their projects. Unlike entirely relying on the professional’s or contractor’s insurance, which can vary in terms of reliability and coverage limits, or the aggregate limits of which may be impaired or exhausted by other claims, OPPI ensures that the owner has a dedicated policy with known limits and conditions. This direct control can be critical in managing the overall risk profile of a project.

For sake of clarity, while OPPI provides substantial protections it does not replace the need for professionals to maintain their own professional liability insurance. OPPI is intended to complement, not substitute, the professional’s liability coverage.

There are benefits to design consultants as well, as their policy is unaffected by an OPPI policy which is not the case if the owner were to seek coverage under a “full” project professional policy. Also, provided the design consultant maintains the minimum limits required by the contract with the owner, the insurer waives the right to subrogate against the design consultant for losses caused by the design consultant’s negligence.

• Design Flaw in Project: A project owner hires an engineering firm to design a new building. After construction, it is discovered that there is a significant design flaw that compromises the building’s structural integrity.
• Environmental Compliance Issue: During the construction of a new facility, it is found that the environmental consultant failed to identify a protected wetland area, leading to non-compliance with environmental regulations. The project owner faces fines and remediation costs.
• Faulty Surveying: A project owner hires a surveyor for a land development project. The surveyor incorrectly marks the boundaries, resulting in a portion of the construction occurring on neighboring property. The neighbor sues for property encroachment. The project owner can claim under their OPPI policy for legal defense costs and any settlement or judgment.
• Improper Material Specification: An architect specifies a type of cladding that is later found to be non-compliant with fire safety regulations. The project owner needs to replace the cladding on the entire building, incurring substantial costs.
• Geotechnical Misjudgment: A geotechnical engineer fails to identify unstable soil conditions on a construction site, leading to foundational issues after the project’s completion.

These examples illustrate some of the types of costly issues where OPPI insurance can help provide financial protection to project owners.

Today’s insurance marketplace for OPPI offers savvy buyers a high degree of flexibility both in breadth of coverage and pricing. Policies can vary widely in terms of coverage limits, self insured retentions, and coverage extensions and exclusions. It’s important for owners to work with insurance professionals and legal counsel, with specific expertise in construction related professional liability risk management to ensure best results.

OPPI pricing is largely driven by the scale, nature and complexity of the project, project delivery method, i.e., design-build, design-bid-build, etc., and by the limits of insurance or liability being provided by the key design consultants and contractors.

The key consultants and contractors typically include:

• Prime contractor
• Prime architect
• Geotechnical engineer
• Structural engineer
• Civil engineer

OPPI pricing will be lower when consultants are carrying higher limits, so it is important to have the best understanding possible of the policy limits carried by the key participants. It is common for consultants to evidence the minimum required limits of insurance even where the actual limits they carry may be multiples of that number. Insurance company underwriters often have much greater knowledge of actual limits available than buyers do, and this contributes to large differences in what pricing underwriters initially offer versus what they will ultimately accept.

It is worth reiterating that the “protective” element of OPPI coverage protects owners only for their direct contracts, and with most larger projects, not all consultants and contractors contract directly with the prime architect or general contractor. It is not uncommon for owners to hire geotechnical engineers, civil engineers, and others in the early feasibility study phases where adequacy of insurance and lower contractual limitations of liability are not primary concerns. Owners frequently learn that the consultant they have invested considerable planning time with may not carry sufficient insurance limits or be willing to remove or increase a contractual limitation of liability needed to procure a seamless OPPI program. Understanding the design consultants’ available insurance limits and avoiding those consultants that do not carry insurance limits sufficient to see the project through to completion can reduce costs and improve the owners’ coverage options.

Some other OPPI coverage areas that should be carefully evaluated and negotiated include:

• Minimum Insurance Requirements (MIRs): MIRs are specified in OPPI policies to establish the minimum insurance limits required of the various consultants and contractors. If conditions are not properly met, then an owner could bear the financial responsibility for the difference between the MIR and the actual (lower) limit actually provided.
• Contractual Limitations of Liability (LoLs): Consultants’ contracts containing LoLs must be explicitly agreed to by OPPI insurers in order to preserve coverage without the owner being responsible for any shortfalls in available limits or forfeiting coverage altogether.
• Definitions of Covered Professional Services: There are many definitions used by insurers and some more advantageous than others.
• Difference in Conditions (DIC): One of the key benefits an owner should realize from purchasing OPPI is the wide availability of DIC coverage which means that the OPPI policy’s coverage terms will govern, even where the underlying consultants’ policy may not provide the same level of coverage.
• Recoverable Insurance Definitions: OPPI policies often stipulate that they are excess of “all recoverable insurance” but can often be negotiated down to “all recoverable professional liability insurance” which can help owners reach more timely settlements.
• Maintenance of Underlying Insurance: It is important to negotiate with OPPI insurers the extent of the owner’s responsibility for ensuring consultants and contractors maintain their own professional liability coverage. Responsibility should ideally end once the owner verifies coverage via certificates of insurance at the time of initial contract signing.

To conclude, it’s imperative for lawyers advising construction project owners to recognize the strategic value of OPPI insurance in mitigating risks associated with professional errors and omissions. OPPI not only supplements the coverage of consultants and contractors but also affords project owners a more direct and controllable insurance solution. This control is particularly significant in complex projects where multiple parties and varying levels of professional liability insurance are involved. By ensuring that OPPI policies are meticulously tailored to the specific needs of a project, and by comprehending the subtleties of coverage terms, lawyers can play a pivotal role in safeguarding their clients’ interests.

Chris A. Brown serves as Chairman and National Construction Practice Leader for Brown & Riding, one of the foremost wholesale insurance brokerage firms in the United States, consistently recognized on local, regional, and national levels. The firm continues to be recognized as one of the Top 10 Largest P/C Wholesalers in the country and serves professional retail brokerages and their clients nationwide. B&R’s construction practice specializes in the design and placement of all types of insurance programs for larger residential, commercial, and public works construction projects, developers, and contractors. Chris’s expertise includes a deep knowledge of the specific business and risk management challenges faced by the construction and real estate industries.