Planning a project takes work. A lot of work. With the multitude of tasks to be completed and deadlines to be met, design and build (D&B) contractors could be overlooking a crucial form of insurance from their supply chain. And they could pay a hefty price if they don’t stipulate this cover when engaging them.
D&B contractors will recognize the following scenario:
A supplier designs a product to meet your specification. They manufacture this product at a sizeable cost, but due to a design error, isn’t fit for purpose. You claim against the supplier for the cost of replacement, plus the value of any consequential losses. It’s a ‘Deal or No Deal’ situation; your ability to recover from them could rest on the insurance protection they have in place.
If your supplier holds the ‘right’ sort of cover, your claim has better chances of success. There’s your deal.
But if they have the ‘wrong’ insurance, you might be relying on a costly court case and the supplier’s financial strength to recoup your loss. Sorry but this could mean no deal.
The ‘right’ approach is to make sure your supplier has professional liability insurance. Your ability to successfully recover from a third party for their negligence is made much easier when they have professional liability insurance with the appropriate level of coverage.
However, some contractors think they can rely on a supplier’s general liability (GL) insurance. There are significant risks to this approach; not only does it reduce the likelihood of recovery against the supplier’s insurance policy, it also introduces the danger of default in the event of a claim being pursued directly against them.
GL insurance provides much more limited (and in some cases zero) financial loss protection. If the claim is not covered, you’ll be saddled with the expense (and effort) of replacing the product, plus any other rectification costs and delay damages you incur. While D&B contractor’s may have an appropriate insurance policy in place to claim against, without the opportunity to recover from a supplier any rectification costs and consequential losses will end up impacting your claims record.
What is professional liability insurance and why is it so important?
Professional liability insurance provides protection for claims which result from carrying out of professional services.
It does not cover criminal behaviour, or non-professional services such as workmanship, manufacture and/or installation.
Many small construction firms and/or suppliers of goods firms don’t carry professional liability insurance.
And it’s not uncommon for suppliers to inform a D&B contractor that most of their customers accept GL coverage as an alternative to professional liability insurance. But failing to insist on professional liability insurance could be a costly oversight, as there are key differences in GL and professional liability coverage.
What are the differences?
The policies are very different in both the way they operate and the risks they insure.
A general liability policy (also known as third party liability) provides protection for third party injury or property damage claims. It excludes claims for the cost of replacing/repairing the product that has been supplied. And generally it excludes claims arising out of any breach of professional services.
A professional liability policy provides protection for claims made during the period of insurance which are the result of a breach of professional duties, contract and/or statutory duties. Such claims might be for pure economic loss, or they may involve actual damage to, or defects in, the products or goods supplied.
Should all my suppliers have professional liability insurance?
Professional liability insurance for suppliers is generally only required if the contract stipulates it. The rules of some regulators and professional bodies mean it’s also compulsory for certain professions, including architects and engineers.
D&B contractors are obligated, under contract, to purchase a minimum level of professional liability coverage (specified by the owner/employer). If you engage a specialist supplier to deliver the project then it’s important you ensure they too have appropriate levels of professional liability coverage. In other words, you should seek to appoint the parties in your supply chain on terms that are back-to-back to the contract with the owner.
There are other reasons why a D&B contractor might consider asking for professional liability coverage from their suppliers:
- The contractor is relying on the supplier to advise them on how to use the product
- The supplier is designing its product or work in some way to meet your requirements.
It is not unusual for D&B contractors to lack specific knowledge about what cover to stipulate in their contracts with suppliers. And suppliers can be reluctant to buy professional liability insurance due to both the cost and a lack of information or understanding about its benefits.
If it’s not compulsory, all too often, professional liability coverage is the missing link in a supply chain, and the impact can be enormous for a contractor.
In reality you may not have full control over the performance of professional services undertaken on your behalf. Without a contractual requirement for suppliers to have professional liability insurance you could be exposing your balance sheet, and your insurance policy, to their potential negligence.
What should I do if I’m concerned?
If you would like further advice, please talk to a specialist construction broker about your exposure and risk profile.
They can advise you on all forms of risk management and mitigation, including what level of professional liability coverage you should seek from your suppliers.
For more information about professional liability insurance for your suppliers, please contact ClientFirst@jltcanada.com.