Presenting a live 90-minute webinar with interactive Q&A Construction Design Professional Insurance and Indemnity: Reconciling Coverage With Contractual Risks Assessing Indemnification, Additional Insured and Other Service Provider Agreement Terms to Ensure Adequate Coverage TUESDAY, FEBRUARY 4, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: John D. Broghammer, Partner, Greve Clifford Wengel & Paras, Sacramento, Calif. William E. Kelley, Attorney, Drewry Simmons Vornehm, Carmel, Ind. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. 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FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: • Click on the ^ symbol next to “Conference Materials” in the middle of the left- hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon. Construction Design Professional Insurance and Indemnity: Reconciling Coverage With Contractual Risks WILLIAM E. KELLEY, JR. DREWRY SIMMONS VORNEHM, LLP CARMEL/INDIANAPOLIS/MERRILLVILLE, INDIANA WWW.DSVLAW.COM E - MAIL: [email protected] T W I T T E R : @ WILLKELLEYJR FEBRUARY 4, 2014 Overview Overview of Professional Liability Insurance Intended Coverage Common Exclusions Overview of CGL Insurance Intended Coverage Common Exclusions Overlap in Coverage The Professional Liability Exclusion Professional Liability Insurance Professional Liability 1. Commonly referred to as “errors and omissions”, “E&O” or “E/O” insurance policies 2. Provide coverage for claims arising from negligent acts, errors or omissions during the performance of a design professional’s services Professional Liability 3. An E&O policy is intended to insure against liability arising out of the mistakes inherent in the practice of that particular profession or business. National Ben Franklin Ins. Co. of Illinois v. Calumet Testing Services, Inc., 60 F.Supp.2d 837 (N.D. Ind. 1998). 4. An E&O insurer does not have the duty to indemnify for the malicious and intentional, rather than careless and negligent, acts of the insured. Stevenson v. Hamilton Mut. Ins. Co., 672 N.E.2d 467 (Ind. Ct. App. 1996) 9 Professional Liability 5. Typically “claims-made” policies 6. Under “claims-made” policy, coverage is provided for alleged acts, errors or omissions, so long as the claim is made within the applicable policy period 10 Professional Liability 7. Typically include “defense within limits” or “expenses within limits” provision 8. A “defense within limits” provision provides that every dollar spent on defense costs and litigation expenses “erodes” or diminishes the amount available under the insurance policy to satisfy settlements or judgments 11 Professional Liability 9. When the policy limits are exhausted, the insurer’s obligation to provide coverage and a defense terminates, and the insured is exposed to any additional liability for both defense costs and any resulting settlement or judgment 12 Professional Liability 10. E&O policies are commonly referred to as “cannibalizing,” “self-consuming,” or “self- liquidating” policies, or as policies with “wasting,” “eroding,” or “exhausting” limits 13 Professional Liability Common Exclusions 1. Claims arising from dishonest, intentional fraudulent, malicious, willful or knowingly wrong acts 2. Express warranties 3. Consulting in the area of asbestos abatement or hazardous waste 14 Professional Liability Common Exclusions 4. Claims made against the design professional by an entity partly owned by the design professional 5. Claims that arise from actual construction services (i.e., construction, assembly, fabrication, installation, demolition, excavation) performed by the design professional 15 Professional Liability Common Exclusions 6. Wrongful acts that occurred prior to the effective date of the policy—unless there is a prior acts endorsement 16 Commercial General Liability (CGL) Insurance 17 CGL Insurance 1. Provides coverage for damages relating to tort liability, as opposed to contractual liability or professional liability for defective work or services 2. Intended for tort liability for physical damages to others, and not for contractual liability of the insured for economic loss suffered because the completed work is not what the damaged person bargained for 18 CGL Insurance 3. Covers “accidents” or “an unexpected happening without an intention or design.” 4. CGL insurance does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident R.N. Thompson & Associates, Inc. v. Monroe Guar. Ins. Co., 686 N.E.2d 160 (Ind. Ct. App. 1997) 19 CGL Insurance 5. Typically an “occurrence-based” policy 6. Under “occurrence-based” policies, there may be coverage for alleged acts, errors or omissions that occurred during the applicable policy period, so long as the act, error, or omission giving rise to the claim actually took place during the applicable policy period 20 CGL Insurance 7. Typical CGL policy has two separate and distinct protections: a. Agreement to indemnify the insured in amount not to exceed policy limits; and b. Agreement to provide unrestricted defense against claims 21 CGL Insurance 8. This means that the policy limits are independent and separate from the defense costs incurred—no eroding policy limits relative to defense costs 22 CGL Insurance Common Exclusions 1. Expected or intended damages 2. Contract liability 3. Worker’s Compensation 4. Pollution 23 CGL Insurance Common Exclusions 5. Property damage to “your work” 6. Express warranties 7. Professional services 24 Overlap in Coverage: The Professional Services Exclusion 25 CGL Insurance Professional Services Exclusion 1. CGL policy will not cover damages arising from the performance of professional services, which include (a) preparation of drawings; (b) preparation of specifications; (c) supervisory activities; (d) inspection services; (e) architectural services; and (f) engineering services 26 CGL Insurance Professional Services Exclusion 2. The Policy: A general liability policy is not a substitute for a professional “errors and omission” or malpractice policy. Erie Ins. Group v. Alliance Environmental, Inc., 921 F.Supp. 537 (S.D. Ind. 1996) 27 CGL Insurance Professional Services Exclusion 3. Professional Services Defined: “A professional act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or skill, and the skill involved is predominantly mental or intellectual, rather than physical or manual. Terre Haute First Nat’l Bank v. Pacific Employers Ins. Co., 634 N.E.2d 1336 (Ind. Ct. App. 1993) 28 CGL Insurance Professional Services Exclusion 4. Professional Services Further Defined: “any business activity conducted by the insured, which involves specialized knowledge, labor or skill, and is predominantly mental or intellectual as opposed to physical or manual in nature.” Hurst-Rosche Engineers, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336 (7th Cir. 1994) 29 CGL Insurance Professional Services Exclusion 5. Another Definition: “Acts which could be done by an unskilled or untrained employee are not subject to a professional services exclusion. Professional services involve discretion acquired by special training and the exercise of special judgment.” Thermo Terratech v. GDC Enviro-Solutions, Inc., 265 F.3d 329 (5th Cir. 2001) 30 CGL Insurance Professional Services Exclusion 6. The Erie Definition: When the professional draws upon (or at least should draw upon) his or her professional knowledge, experience and training in taking some action, that is a professional service for insurance purposes. Erie Ins. Group v. Alliance Environmental, Inc., 921 F.Supp. 537 (S.D. Ind. 1996) 31 CGL Insurance