Contractual Liability coverage
Property Casualty

Design Professionals — Do You Understand Your Contractual Liability Coverage?

Nick Maletta
Nick Maletta
Client Executive, Property Casualty

Lately, in the contracts I’ve been reviewing, I’ve noticed two alarming trends:

  • The explicit request for a firm’s Professional Liability coverage to include Contractual Liability coverage, and
  • The request for the firm to “defend” the owners in the indemnification clause.

What do these two requests have in common? The Contractual Liability coverage or exclusion.

Let’s break this down a bit. Often, confused with Contractual Liability coverage typically included in a standard General Liability policy, the Contractual Liability exclusion of a standard Professional Liability policy is quite different. It explicitly excludes any coverage for anything that’s assumed via a contract that you wouldn’t otherwise be responsible for in common law. The ability to add this coverage to your Professional Liability policy isn’t commercially available at this time, so it’s important to keep that in mind when discussing contracts with your clients.

What is the Contractual Liability exclusion common to Professional Liability policies?

This is what you’ll often see in policies:

That part of any CLAIM(S) based upon or arising from liability of the INSURED assumed under any contract or agreement. This exclusion does not apply to liability for DAMAGES arising from a WRONGFUL ACT(S), POLUTTION CONDITIONS, or NETWORK SECURITY COMPROMISE for which the INSURED would have been liable for in the absence of such contract agreement.

That’s a mouthful. To break this down and make it digestible, if you agree to something in a contract you wouldn’t have been responsible for without that contract, you’ve heightened your own liability, and the carriers aren’t too keen on providing coverage for that.

Where do we see this in the design professional world?

The answer is “contracts,” specifically indemnification.

  • Client-drafted indemnities frequently ask you to “defend” the client. If the indemnity language and defense obligation aren’t tied directly and exclusively to your actual negligence, the provision could be interpreted as an obligation on your part to retain an attorney for your client and pay for your client’s defense — before your legal liability for actual negligence (if any) has been established. This occurs even if you’re cleared of any negligence. In addition, your Professional Liability policy likely wouldn’t cover the cost of the client’s defense because, without the indemnity clause, you wouldn’t have been responsible for paying the client’s legal fees. Remember, Professional Liability policies cover only those liabilities you would have, absent the indemnity clause.
  • For some, the news is even worse. Some jurisdictions hold that any indemnity clause may give rise to an obligation to defend your client, regardless of the degree of your negligence or the use of wording that appears to limit liability to faults. This obligation may even be triggered by nothing more than an allegation of partial or sole negligence on your part. And again, there is unlikely to be insurance coverage for these costs because you wouldn’t have had to pay them in the absence of the indemnity clause.
  • In most instances, your Professional Liability insurer will reimburse client defense costs after the fact — if they are part of your client’s damages and if your actual negligence has been proven and the degree of your liability caused by that negligence has been established. There’s a big difference between agreeing to defend your client unconditionally, however, and agreeing to defend claims arising from your professional services. Be aware, too, that in some states if you agree to defend the client for any claims, you may have to defend them for all

So, what should you do?

Our biggest suggestion is using great caution when reviewing contracts. But, maybe more importantly, know that you can also reach out to us. We have several team members on hand who are very knowledgeable with Contractual Liability dos and don’ts. I’ve seen a lot of issues recently, and I want to ensure you don’t end up in the same boat. Again, please feel free to reach out if you have any questions on this!

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