Design and engineering risk transfer: Should general contractors be required to carry design-related errors and omissions insurance?

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By Clive Thurston

Special to Ontario Construction News

We are all aware that over the years there has been a tremendous appetite by owners to transmit all risk down to the general contractor. For some reason, there is a belief that that risk is best handled by the general contractor and not by any other group, including the owners themselves.

While there are times when we can price and assume certain risks, not all risk can be priced and not all risk belongs strictly with the general contractor.

Of late, coming out of the COVID–19 pandemic, there has been a disturbing attempt by a minority of owners to assign all the risk that is associated with the pandemic to the general contractor, including any and all delays that occurred and any and all additional costs that are now necessary because of new safety measures. We all know that this is not fair, and the Ontario General Contractors Association (OGCA) has been standing up for your rights with owners who have tried to bring this about, and we will continue to do so.

The latest attempt to make general contractors responsible for risk that is not theirs are efforts by a small number of owners to impose the requirement that we provide errors and omissions insurance (known as professional liability) for the design and engineering of projects where contractors are hired to build from specifications. This is totally absurd and we are taking steps to oppose this wherever we can, but the fact of the matter is, there are some owners who believe that, because they have a problem with their engineering and design teams, the risk should be downloaded on to those of us that are building the projects.

Under a CCDC-2 contract we are not in any way responsible for the overall project design, and more importantly, we, as general contractors, do carry Contractor Professional liability for our work. The responsibility to carry professional insurance for design and engineering belongs to the architects and engineers, not to us.

It appears that owners feel that while what they are asking is for is not meant to replace the design professionals coverage, they are looking to us to make up whatever the shortfall might lie in the design professionals coverage.

Organizations like the OGCA take exception to such clauses and discussions with other industry associations show that they, and their members, also take exception to this practice.

This is not our responsibility. If owners do not feel that the consultants are carrying sufficient insurance, then they need to deal with the associations that represent those professions to correct that, not download it on to the general contractor.

Attempts by an owner to have general contractors procure professional liability insurance shows a lack of knowledge as to how the industry works and how liability is applied. There are some contracts and instances whereby the general contractor might be wise to include such insurance, such as a CCDC-14 contract, a 5A or 5B contract for the construction management services, or P3 projects where there are teams put together and the Contractor is seen as the lead.

I have spoken to a number of major insurance representatives here in the province of Ontario. Many of them have told me that the market for this type of E&O insurance is drying up and is not readily available in many cases.

If a general contractor has no insurable interest in the design, then that general contractor should not have to place it. In fact, it makes no sense for contractors trying to do this as the costs are huge. Responses to our inquiries indicate that, for instance on a simple project, we are seeing owners require a minimum of $5 million in insurance. The low end cost of that is an additional $50,000  that comes out of the taxpayer pocket and adds tremendous cost to a project for little value.

CCDC-2 contracts are pure construction contracts and owners need to realize that they do not contemplate the contractor providing engineering or other ‘professional services.’ The contractor in a CCDC-2 must build in accordance with the design and specifications provided by the Owner’s consultant(s) and as a consequence, requiring professional liability insurance from the general contractor under this contract form is not appropriate or warranted.

As mentioned previously, some general contractors engage in CM contracts (5As and 5Bs) and CCDC-14 Design Build contracts. It may very well be that for this type of activity some general contractor’s exposure might warrant that they carry professional liability insurance as they would be in a position to provide evidence that they carry such coverage to an owner on a bid-to-spec contract.

In a CCDC-2 contract this type of insurance coverage would be misleading, since the coverage would serve essentially no purpose and provide no benefit to the contractor (and hence none to the owner) thus providing no real coverage, just additional expense.

These policies are meant to provide coverage for errors and omissions arising from ‘professional services’, which are specifically defined in the policy itself. ‘Professionals’ are persons or businesses that provide consulting or advisory services, such as insurance brokers, doctors, engineers, and lawyers.

In the context of the construction business, the description of professional services includes design services (as in CCDC-14 contracts) and construction management services (CCDC-5s). Bid-to-Spec General Contracting – or the fulfillment of a contract to build a project to an owner’s specified design and specification – is not considered a professional service, and is not defined as a professional service under professional liability policy, and so no errors and omissions coverage is available for such undertakings.

To summarize I am unsure what risk the owner is looking to cover off by way of asking for professional liability insurance from their GC, but asking for this insurance is barking up the wrong tree. Performance bonds guarantee the execution of the CCDC-2 construction contract and the contractor’s obligations within – and the bonds may provide some of the comfort and reassurance and benefit the owner is looking for.

If owners are having an issue and are looking for more coverage, then they should be addressing those concerns with the Ontario Association of Architects and to the engineers associations, both the Ontario Society of Professional Engineers and the Consulting Engineers of Ontario, and not trying to download this on to general contractors.

It is my opinion that contractors should not accept these types of clauses and should qualify their bids accordingly if necessary, should an owner not wish to be reasonable.

I want to thank the members of our APP (Associate Partner Program) who stepped up very quickly to provide me with information and professional advice in addressing this particular issue. In particular, I would like to thank Gregory Petrela of Petrela Winter & Associates, Kelly Parker of BFL Canada, Steven Gava of Marsh, and Sean Hoare of AON.

clive thurston
Clive Thurston

Members who find these clauses appearing in tender documents should immediately consult with their insurance representatives, as well as the OGCA. This is not your risk and should not be downloaded to you.

Clive Thurston is the OGCA’s former president.


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