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Understanding Protective E&O Terms and Conditions Don’t Wait Until It’s Too Late

With the near demise of project-specific professional liability insurance policies offering dedicated primary coverage for design professionals since the early 2000s, there has been a rise in the use of Owner’s Protective Professional Insurance, also known as Protective E&O.

Protective E&O supplements “practice” or annual professional liability insurance policies of the design professionals and construction managers by providing an excess “umbrella” that sits above all of the “practice” policies on a specific project. And while broader in coverage approach, it is also a less expensive alternative when insuring the project professional construction and design risks as compared to a replacement professional liability insurance policy for design liability.

The policy is a first-party indemnity contract insuring the owner/design-build contractor/developer for damages incurred from the negligent acts, errors and/or omissions in the rendering of professional services by the subcontracted design and construction professional firms. The policy additionally defends the insured from third-party actions and indemnifies for loss resulting from contractor activities that lead to pollution conditions. Resolution of claims is determined by judgments, settlements or as established by law.​

Protective E&O is an essential insurance policy where perceived concerns about the amount and adequacy of the design firm’s professional liability insurance can be questioned in relationship to the complexity and size of the project undertaking.

Brokers and insureds need to be aware of several seemingly innocuous clauses contained in many of these policies. First, make sure there is a clearly-stated “other insurance” clause. If there is not, the policy may never pay a claim until many other insurance policies, even if not pertinent to the underwritten subject, are exhausted.

The absence of this clause has resulted in numerous disputed claims. In these cases, Protective E&O insurers contested the claims made against Protective E&O policies on the grounds that the insured’s other policies, such as the builder’s risk and general liability insurance, should be first to pay these obligations. Because the language in the Protective E&O policy is often not specific enough regarding the excess clause (i.e., just the professional liability insurance policies of the design professionals engaged on the project) insurers can justifiably seek contributions from “other” insurance policies to minimize or eliminate their excess exposure. This approach can significantly prolong any dispute or litigation, causing owners additional project delays and expenses. In addition, because Protective E&O is an excess policy, many courts have supported this position given that it is often viewed as “a policy of last recourse.”

Of equal concern is the claim philosophy of the Protective E&O insurer. More specifically, every Protective E&O policy should have a proactive claims settlement clause where the insurer agrees to settle its substantiated claim even if the underlying professional liability insurers wish to continue to contest the claim. The Protective E&O policy is seriously flawed if it does not contain this language because the disposition of underlying claims against individual design firms can take years of litigation resulting in the exhaustion of the limits of liability of the underlying professional liability insurance policies which results in much larger Protective E&O claims.

Another significant consideration when reviewing a Protective E&O policy is the management of Difference in Conditions (DIC) challenges. This is extremely important given that the Protective E&O policy is an excess policy.

Apparently, some Protective E&O policy forms are written as pure “Follow-Form” excess coverages as opposed to DIC policies. In critical situations, this distinction can pose rather large problems for project owners because there is really no way for them to fully know the coverage terms and limits of all of the design professional’s underlying “practice” professional liability insurance policies.

If some, or all, of the underlying design professional’s professional liability insurance policies contain restrictive terms or endorsements, those coverage limitations can apply to a Protective E&O policy that is “Follow-Form” resulting in potential coverage issues. DIC language is preferred for ensuring that Protective E&O policies will drop down to fill coverage gaps. While other additional terms may apply, a DIC clause will at least make sure coverage will be there when needed.

Lastly, it is also very important to understand how “minimum insurance” requirements apply to claims. A Protective E&O policy that demands contributing payments from the design professional’s other policies, including the insurance of not-at-fault sub-consultants, will often create serious disputes and delay resolutions. An example would be problems related to the work of MEP engineers and the Protective E&O carrier’s insistence that the landscape architect’s or the land surveyor’s policies contribute to settlements in an attempt to lower the Protective E&O policy’s ultimate payout.

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