Do Trade Contractors Need Errors and Omissions Insurance?

Mark Rabkin Althans InsuranceFor this week’s Guest Post Friday, Musings welcomes, Mark E. Rabkin, a triple-bottom line risk consultant assisting his clients understand and manage the exposures they face daily that threaten their economic, social and ecological performance. Licensed as a property and casualty insurance broker for over 10 years, Mark works with the team at Althans Insurance Agency in Chagrin Falls, Ohio. In addition to traditional property and casualty insurance counseling for clients as diverse as real estate owners, manufacturing companies, non-profit organizations and construction entities, Mark provides unique counsel for anyone involved in the ownership, development, construction, operation and maintenance of sustainable buildings. A frequent presenter of his original program, “The Unique Risks of Sustainable Building,” Mark has assisted numerous construction firms and legal counselors understand the new intricacies and risks being created daily as the building environment shifts to one focused on energy efficiency and natural resource conservation.

In a recent post to the Green Real Estate Law Journal, author Stephen Del Percio addresses a very unique risk to any construction professional that is working on building projects that aspire to either achieve certification by an independent rating system like the US GBC’s LEED TM standard, GBI’s Green Globes or contain some other requirement as to the expected benefits of a sustainable building project. Mr. Del Percio focuses specifically on the design professional’s exposure to legal liability related to the standard of care provision unique to “green” building projects. “…[O]n a green building project, an owner may seek to retain a design professional specifically because of [his/her] sustainable design expertise.” Specifically addressing the heightened responsibilities of a design professional on a sustainable building project should be carefully considered in drafting an enforceable contract between the owner/developer and the architect.

However, are the architects and engineers the only ones that have a professional liability exposure created from the standard of care? Let me rephrase that question: does the fact that a subcontractor that markets their services as being “experienced with LEED” or the fact that they have LEED AP’s on staff hold them to a higher standard of care? Remember, professional liability coverage provides defense and indemnification for losses other than bodily injury or property damage. For example, economic loss can occur when a contractor promises to deliver a project complete, on time and within budget. Failure to detect faulty work performed by a subcontractor can create an exposure to the construction management team.

The unique benefits of a LEED or any other “green” building are used by owners and developers in marketing their spaces. Tenants will enter into leases specifically based on the expected level of certification a building HOPES to achieve. Building owners should be cautious in promoting specific building characteristics and performance prior to occupancy and use. Should a project fail to achieve certification either at all or to the desired level through some negligence of a party to the construction, the owner will make claims of economic loss and injury due to the failure to achieve the expected results.

As more and more public entities including cities, counties, states and the federal government draft policies and mandates pertaining to the incorporation of a third party rating standard for all new construction, contractors applying and winning the opportunity to work on these projects should carefully examine the contractual language specific to their responsibilities related to certification and performance. Sureties that bond public work will quickly identify any new language and will more than likely avoid bonding a contract that provides guarantees of certification and/or building energy performance.

Contractors professional liability is available to trade contractors working on “green” buildings and can address these unique exposures created by the heightened standard of care on such projects.

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17 Responses to Do Trade Contractors Need Errors and Omissions Insurance?
  1. Christopher G. Hill
    May 22, 2009 | 9:01 AM

    Thanks for the great post Mark.

  2. Christopher G. Hill
    August 14, 2009 | 12:16 PM

    This is more and more timely. Check out some of the posts in the next few weeks.

  3. Leigh Monette
    September 9, 2009 | 4:10 PM

    I’ve always counseled my contractor clients to verify that there is a clear exclusion of any design or engineering responsibilities in their contracts. The AIA A-201 (1997 and 2007 editions) address this issue adequately.

    But, of course, “green” building practices and standards could encroach on this clear exclusion, given the changes in the submittal sections of the A201-2007 (3.12) which could be read to implicate contractors further into the design performance approval process. This is especially true in “green” projects.

    Whether that gives rise to an insurable risk remains to be seen – but it is certainly important to encourage discussion on the potentiality.

  4. Christopher G. Hill
    September 9, 2009 | 5:11 PM

    Good thoughts Leigh. I always enjoy your input. I agree, contractors are not design professionals, though BIM and “green” building practices sometimes seem to make them so.

  5. Tim Hughes
    September 9, 2009 | 5:32 PM

    Interesting post Mark. I would probably frame the question a little differently — it may not be a heightened standard of care, but rather whether a “standard of care” analysis really applies at all.

    As you certainly know, if you are a contractor, it is very difficult to obtain economic loss coverage. These PL policies offer a path to arguable coverage based on a standard of care performance style claim that are generally not covered events under a CGL policy. I think there is likely a great insurance market there, but watch out when all the contractor start framing everything into green coverage claims. Probably an underwriting nightmare ….

  6. Christopher G. Hill
    September 9, 2009 | 5:49 PM

    Another good “risk management” point Tim. I appreciate your consistent comments here at Musings.

  7. Tim Hughes
    September 9, 2009 | 5:50 PM

    My pleasure Chris — I am looking forward to you doing the same on our blog real soon (we are hopefully live tomorrow)!

  8. Christopher G. Hill
    September 9, 2009 | 5:53 PM

    Look forward to it Tim. Make sure to use “Commentluv” below to link to posts there when you comment here and let me know the link so I can get it out there.
    .-= Christopher G. Hill´s last blog post ..Why Build2Sustain? =-.

  9. Zach: Construction Equipment Dealer
    November 11, 2009 | 10:04 AM

    I enjoyed your brief review and I hope to learn more in the coming months. While we do not directly serve as a contractor, we do serve the industry and we attempt to develop knowledge that our clients would find valuable. With a greater number of jobs using the LEED standard, it is good to have a basic understanding on whether contractors should obtain E & O insurance.


  10. Christopher G. Hill
    November 11, 2009 | 11:23 AM

    Thanks for the comment Zach. Always good to keep up with the latest and Mark is a great resource.
    .-= Christopher G. Hill´s last blog post ..Urban Retrofits, Tall Buildings, and Sustainability =-.

  11. ClaimAttorney
    November 19, 2009 | 5:12 PM

    How could you be so good in writing law stuff. Rich content and great article quality.
    .-= ClaimAttorney´s last blog post ..Find Property Loss Attorneys in your state! =-.

  12. Las Vegas Contractor
    January 8, 2010 | 8:52 AM

    This is very timely information for me and my firm as we get into green building. We are a general contracting firm mainly specializing in insurance restoration and have found that some of our clients have been asking us about these certifications.

  13. Christopher G. Hill
    January 8, 2010 | 8:57 AM

    Thanks for the comment. I appreciate it and am glad that you find this information interesting and relevant.
    .-= Christopher G. Hill´s last blog post ..Musings Nominated for Best Construction Blog =-.

  14. autoinsuranceguy
    January 22, 2010 | 11:16 AM

    Hi , I recently came across your blog and found very valuble information.I don’t know about green building.Is it are designed, constructed, and operated to enhance the well-being of their occupants and support a healthy community and natural environment? Thanks for sharing

  15. Mike Elman
    May 17, 2010 | 4:15 PM

    Green buildings are a great idea, but you are right to caution. It can be a lot more work than most people are prepared for. The end result is pretty amazing, and in the long run, ends up costing less, if done right.

  16. Christopher G. Hill
    May 17, 2010 | 5:02 PM

    Thanks for checking in.
    .-= Christopher G. Hill´s last blog post ..Another Reminder to Read Your Construction Contracts =-.

  17. […] Do Trade Contractors Need Errors and Omissions Insurance … – A great guest post from Mark Rabkin regarding the need for construction trade contractors to have errors and omissions insurance. […]

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About Musings

I am a construction lawyer in Richmond, Virginia, a LEED AP, and have been nominated by my peers to Virginia's Legal Elite in Construction Law on multiple occasions. I provide advice and assistance with mechanic's liens, contract review and consulting, occupational safety issues (VOSH and OSHA), and risk management for construction professionals.

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