Professional liability insurance is designed to protect consultants and consulting organisations from financial loss and civil liability for negligent acts, errors or omissions arising out of the performance of professional services.  There are numerous sources of professional liability claims that the consultant must consider, including:

·    owners, where damages from deficiencies in the design or the work incur damages

·        contractors, where, as a result of delays or additional costs, incur damages;

·        third parties, where damages are incurred as a result of problems during construction or from defects  after completion; and

·        other consultants, where additional costs are incurred as a result of delays or changes.

It is important for professionals to understand what is typically covered, and what is not.  In general, professional liability policies provide coverage for the cost of losses associated with situations involving professional liability. These policies also cover the cost to defend an action, which can be substantial even if liability is not found. 

Project Specific Professional Liability Insurance

Another type of professional liability insurance is project insurance, or project specific liability insurance.  This type of insurance is applicable only to the particular project for which it was purchased.

These policies typically provide professional liability coverage to the group of design professionals for claims arising from a specific construction project. Project policies are most appropriate for  larger, more complex projects where the design team is composed of a head consultant firm and other sub consultants.

Practice Insurance – Typical Exclusions

Architects and engineers can purchase a "practice" policy that applies to all of the work in a consultant’s practice, except for the work which is expressly excluded by the particular policy’s wording.  Practice policies cover errors, omissions or negligent acts in the performance of professional services.  Typical exclusions include: fraud; cost estimates; projects in which the consultant has a financial interest; consultant services which are not part of the insured’s profession; fines, penalties and punitive damages; construction activities performed by the consultant; pollution; and express warranties, guarantees and indemnities.

General Liability Insurance Policies

General liability insurance protects against claims arising from non-professional activities and business operations. It will protect an organization in the event the organization or any of its employees cause bodily injury or property damage to others and becomes legally obligated to pay damages.  Most general liability policies issued to consultants contain exclusions for professional liability claims and other contract performance claims.

Wrap-up insurance is a form of project insurance and is a type of general liability policy. It allows owners and contractors the convenience of dealing with one insurer for claims arising from general liability claims associated with one individual project.  Wrap-up insurance usually provides all project participants with high limit insurance.

Design Build Endorsement

Consultants who are involved in design/build projects may seek a design/build endorsement on their practice insurance policy. 

Design/ build policies commonly cover only the design professional team.  The design/ build endorsement usually modifies a number of exclusion clauses found in a standard practice policy and replaces them with clauses more applicable to construction activities.

Conclusion

It is important to remember that an insurance policy is a contract between the insurer and the insured. Technically, the contracting parties can agree to insure anything and everything. The realities of risk, however, have caused insurers to typically not insure certain activities or events. A recent example is the water ingress exclusion applicable to E&O policies. Architects and engineers should also keep in mind that the broader the coverage, the more the insurance will cost at the outset.

The key is to find the right balance: obtaining insurance for foreseeable risk at a reasonable price. Effective risk management means not only getting insurance, but getting the right type of insurance and coverage in the circumstance, with the right insurer, for the right price.

Samantha Ip

A material supplier may file a claim of lien for the unpaid price provided that the following criteria are met:

·        The material is movable property.

·        The material was delivered to the land on which the improvement is located.

·        The material must be intended to become part of the improvement.

Note as well that a material supplier includes companies which rent equipment without an operator.  So, for example, a company that rents equipment (such as jackhammers, propane heaters, etc.) to another company for use at the subject property, will likely have lien rights for the price of equipment rental.

What is a Notice of Interest?

A Notice of Interest is a document which is filed in the Land Title Office by the owner of the land.  The Builders Lien Act provides that if the Notice of Interest is filed before a potential lien claimant provides work or services to the land, then the owner is not liable for liens on its land, except for work or services provided at the owner’s express request.

You will often find a Notice of Interest filed on commercial property.  This will protect the owner from responsibility for lien payments if one of its tenants hires a contractor for tenant improvements, but does not pay the full amount owing.  As an owner, it is a simple, cost efficient way to provide protection from claims of lien in such circumstances.  If you are a contractor hired by a tenant, you should consider adding a title search to your credit inquiries before signing the contract.  If there is a Notice of Interest filed by the owner, you may wish to have alternate credit arrangements made with the tenant.  Conversely, if you are an owner and one of your tenants is undertaking repairs or renovations to the property for which you do not want to be held responsible, you should consider filing a Notice of Interest.

The project has been ongoing for quite a while and there is a lot of money in the holdback account.  Who is entitled to the interest that has accrued to the holdback?

Unless the parties otherwise agree, interest accrued on the holdback during the holdback period belongs to the owner: interest accrued after the holdback period accrues to the contractor to whom the holdback belongs.

Where a contract is relatively small, the amount of interest will be nominal.  However, where the contract is for a substantial amount of money and the construction spans a year or more, the interest can be substantial and much of it will belong to the owner.  As such, parties to a construction contract may want to give some thought as to who should receive the interest where it is expected to be a significant amount of money.  The parties must, however, reach their agreement on the division of interest accruing on the holdback prior to the signing of the construction contract. 

Amy Mortimore

Adam Zasada

For more information on any article contained in this issue of Clark Wilson LLP’s Legal Framework or any construction matter, please contact any member of our Construction Group. Also, if there are any topics which you would like to see addressed in future issues, please contact the Editor of Legal Framework, Stephanie Jackson, and let her know.