WHY DO WE NEED PROFESSIONAL LIABILITY INSURANCE?

The first of three articles by: Roger A.H. Brett

In most of North America, Design Professionals face civil liability for a negligent act, error or omission arising out of the performance of professional services.

Firstly, let us look at the sources of professional liability claims against Design Professionals:

Owners:                     may incur damages as a result of a negligent act, error or omission of the Design Professional.

Contractors:               may incur damages as a result of delays or of additional costs they incur as a result of a Design Professional's negligence.

Third Parties:             may incur damages because of problems that arise during construction or from defects in the project after completion.

Other Consultants:     may incur additional costs as a result of delays or changes, resulting from the Design Professional's negligence.

Secondly, let us look at the most common types of claims:

Physical Damage to the project itself: the cost to rebuild a structure that collapses as a result of a design error;

Physical damage to the property of others: a dam wall is breached and the resultant flood water damages houses downstream;

Deficiency corrections: leaking windows and roofs that necessitate costly remedial measures.

Delay or loss of income claims: the building is declared unfit for its intended purpose and the Owner can not collect rental income;

Cost increases: it is found that lighting fixtures which were specified, do not fit the aperture for which they were designed, necessitating replacement with more expensive electrical fittings of the correct size;

Bodily injury: the Design Professional designs a plant and there is an accident where a worker gets caught up in the process machinery and receives serious injuries resulting in permanent disability.

Thirdly, there are a number of situations which impose legal obligations on the Design Professional. They include contractual liability, tort liability and strict liability.

IN A "BREACH OF CONTRACT" CLAIM:

If two parties enter into a contract there are certain obligations that must be rendered to each party, arising either out of the contract or in tort. The terms and conditions of the contract will define the extent of the obligation or duty owed by the two parties to the contract. A Design Professional entering into a contract with an Owner to provide services and fails to provide the contracted services, the Owner must establish the following to succeed:

That there was a valid contract between the Owner and the Design Professional;
That the Design Professional materially failed to perform the obligations under the contract;
That the Owner suffered damages as a result of the Design Professional's breach;

The Owner need only prove that a material breach occurred and that damages resulted. The courts will attempt to assess damages to restore the Owner to the position he would have been in if the contract had not been breached.

IN A "TORT NEGLIGENCE" CLAIM:

If tort negligence applies (the most common suit), then negligence is generally defined as the lack of ordinary care but on a much more encompassing basis than mere carelessness. The Owner must establish all of the following:

That the Design Professional owed the Owner a duty of care;
That the duty or standard of care was in fact breached;
That measurable damages resulted from the breach;
That there was some causal connection between the breach of duty and the damages that occurred.

In a tort suit, the Court would look to see if the evidence established that the Design Professional departed from local custom and standard practice. Expert witnesses could be used by both the plaintiff and the defence. If the Design Professional is found negligent, the Court would attempt to compensate the Owner for any damages incurred which could reasonably have been foreseen by the Design Professional.

IN A "STRICT LIABILITY" CLAIM:

In this type of liability claim it is held that the producer of a product is strictly liable if the following conditions are met:

That the product malfunctioned or was defective;
That, as a result of the malfunctioning or defective product, the plaintiff suffered injury.

In essence, Strict Liability is liability imposed without the plaintiff having the burden of establishing negligence. Suits are seen in cases of "Design/Build" contracts where the Design Professional also acted in the capacity of a general contractor.

WHAT DOES A PROFESSIONAL LIABILITY POLICY DO FOR YOU?

The insurer is responsible for payment of damages or negotiated settlements up to the limits of the policy, less any applicable deductible. They are also responsible for providing or arranging the defence of the claim and negotiating a settlement. The insurer will have access to experienced claims adjusters and defence counsel with a proven record of success in construction related claims.

Claims handling and defence costs are borne by the insurer subject to any deductible applicable under the policy. In Canada most insurers pay all of these costs without application of any deductible. This is referred to as "first dollar defence" cover. Some insurers will also pay assessable court costs, pre-judgement interest and some other costs which may be incurred as a result of the claim. The Design Professional should review the policy (or proposed policy) wording to ensure that it provides cover for these potentially high costs. Professional Liability policies differ and should be checked in advance for broadness of coverage.

CLAIMS MADE VS. OCCURRENCE PROFESSIONAL LIABILITY INSURANCE.

Since 1968, the "Claims Made" liability policies have replaced traditional "Occurrence" policies for most professional liability coverages.

Under an "Occurrence" policy, coverage is triggered at the time injury or damage occurs. The claim can manifest itself over a period of years and can involve more than one insurer. This might lead to disputes between insurers, the insured may then be required to pay all costs of defence litigation and interest on any costs and settlements, until the Courts decide which policy or policies should respond.

Problems arise as illustrated in cases of environmental hazards. The time between initial exposure and apparent effect can be several years. Prolonged exposure can lead to additional damage, having a cumulative effect. The result is uncertainty as to the date of the occurrence, which can now cause protracted litigation. Another problem with an "Occurrence" policy is that the limits of cover provided, are those applicable to the policy in force at the time of the occurrence. If the occurrence was several years ago much lower limits than are available today may have been purchased. The insured is now faced with yesterday's low policy limits applying to today's awards.
The "Claims Made" policy, while not perfect, overcomes both of these problems. "Claims Made" coverage provides that the policy in effect when the claim is first made for injury or property damage provides the protection. The insured is not involved in disputes between insurers as to who should pay the loss. The professional liability policy in effect when the claim is made, responds to the claim, and today's policy limits apply to today's awards.
Another distinct advantage is the lower cost of a "Claims Made" policy. Underwriters are better able to quantify their risk to a contained period, i.e. the policy period.

One drawback to a "Claims Made" policy is the difficulty in changing back to "Occurrence" cover from "Claims Made". If coverage is no longer available under a "Claims Made" form or if it is more economical to purchase an "Occurrence" form, an insured must be sure to take into consideration that there would be no cover in future years for claims arising out of occurrences during the term of the "Claims Made" policy. It is necessary to renew a "Claims Made" policy each year to ensure continuous protection.

"Claims Made" policies started in the U.S.A. with difficult long tail (that is to say a potentially long period of time between when something happens and when the claim may be made) risks, such as professional liability medical malpractice and products liability. "Claims Made" policies have now spread to other classes of insurance as the advantages have become better understood. Canada has followed the U.S.A. and most of these same difficult classes have changed to "Claims Made" policies.

In summary, the advantages of a "Claims Made" policy do tend to outweigh the disadvantages. The "Claims Made" policy form provides many benefits as economic circumstances impel increasing numbers of insureds to seek innovative ways of combining lower premium dollars with improved insurance protection.

The information contained herein is believed to be accurate, but individual circumstances, local business and insurance practice and the Law can vary extensively and Jardine Lloyd Thompson and its associated and subsidiary companies are not responsible for any errors and omissions or any loss or damage arising from the use of this information. In the event of situations such as are described in this bulletin, the reader should seek legal counsel and specific advice from Jardine Lloyd Thompson or your Insurance Broker.