Contractors Professional Liability in a COVID-19 Era
Article by Jeff Slivka
But it's not all good news for an industry that was expected to experience a downturn even before the pandemic. In addition to the 4 percent drop in construction starts predicted by the 2020 Dodge Construction Outlook, other likely challenges surround the industry, including the ongoing shortage of skilled labor as well as the overall rise of contractor's claims within the commercial, habitational real estate, manufacturing, health care, and institutional sectors.
A competitive marketplace with stable premiums, contractor's professional liability (CPrL) policies have subsequently become increasingly popular for their ability to potentially, depending on the facts and circumstances of the loss and the wording of the specific policy, cover the damages arising from acts, errors, and omissions in the professional services performed by or on behalf of any construction firm. In recent months, additional coverage such as faulty workmanship coverage forms has even been added to some policies to protect against the errors and omissions resulting from the workmanship of the insured's self-performed work and/or use of defective materials or products.
But, questions abound in an environment filled with uncertainty. The coronavirus has forced insurers to reevaluate their responsibilities as identified by the terms, conditions, and exclusions written into existing coverages as well as the exposures that may or may not be covered in future policies.
And, unfortunately, this discussion has just begun and is likely to extend well into the next year. For instance, the following are only some of the talking points that any insured must be prepared to contend with when determining if the policy covers viral matter such as the coronavirus, SARS, and influenza. Plus, it's also extremely important to keep in mind that each insurer has the right to interpret and determine their policy language according to their professional and legal guidelines.
CPrL Insuring Agreements
Generally speaking, the CPrL pays for the third-party "damages" arising from the negligent acts, errors, or omissions committed during the performance of the insured's "professional services." The key to understanding the insurer's responsibilities lies not only in the definition of these terms but also the direct connection demonstrated between the "damages" and "professional services."
Depending on how the language is structured and the services listed, "professional services" as defined in CPrL policies commonly pertain to negligence allegations, the failure to maintain work environments or project sites (including site safety), improper sequencing or scheduling, project and/or subcontractor mismanagement, and the typical engineering errors made by contractors or those hired to perform these services. Many, if not all, insuring agreements require that any resulting damages must be directly connected to the act, error, or omission of professional services to ensure the damages fall within the scope of coverage.
In addition, in such an evolving and unprecedented environment, does the standard of care for construction professionals change or even exist to establish negligence? While "guidelines" and "protocols" are being developed by states, industry associations, and other entities, is that enough to establish some type of standard of care? Unfortunately, in this area, there are only questions at this point that must be contended with since, as noted, the insuring agreements typically require "negligent" acts, errors, or omissions as a condition precedent to coverage.
Lastly, there is still some debate in the marketplace when it comes to the definition of "damages." For instance, it's not uncommon to find bodily injury (BI) and property damage (PD) exclusions in the typical miscellaneous professional liability policies for other professions, such as attorneys or accountants that insure against pure financial loss. In fact, BI/PD exclusions can also be found in some (albeit, relatively few) CPrL policies today.
However, if you have ever handled CPrL for construction professionals, such as architects, engineers, or contractors, then you know this can present a major setback because these events may not be covered by other policies. Consequently, brokers and agents should consider advising their insureds to include, if possible, language that would provide that any damages arising from the negligent performance of professional services are included within the coverage. The ability to include such wording will, of course, be dictated by the insurance market.
While it's typically offered under a separate insuring agreement, similar to the liability coverage part, the coverage under these terms is oftentimes tied to the same definition of professional services and predicated on the potential negligent act, error, or omission. In short, rectification or mitigation coverage is applied to those events when the insured and insurer are looking to avoid costlier liability claims. In cases of microbial matter, an argument can be made that the intent is to simply avoid professional liability claims by paying for reasonable and necessary costs incurred in excess of any applicable self-insured retention to disinfect, properly manage, or better control the project site. It may not be that easy, however, unless those costs or damages are the direct result of the insured's negligent acts, errors, or omissions in performing professional services as discussed.
Pollution Conditions (PC) Exclusions
Pollutants are commonly defined as any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, soot, vapors, fumes, acids, alkalis, chemicals, hazardous substances, hazardous materials, and/or waste materials including medical, infectious, and pathological wastes at levels in excess of those that occur naturally. Also, generally included are electromagnetic fields, mold matter, Legionella pneumophila, and, in some cases, microbial matter, specifically viruses or viral matter.
While it's common to see such definitions in a contractors pollution policy (CPL) or the CPL coverage part under a CPrL program, the definition is seldom used under a monoline CPrL unless the insurer intends to exclude such risks or events. If there is an exclusion, the conversation may end there, but, of course, the applicability of any exclusion will depend on the specific wording and facts and circumstances of each potential claim. However, if affirmative coverage is provided, and the definition is present, then one must look closer at the definition to ensure the existence of viral or microbial matter.
Even if viral matter doesn't explicitly exist in the definition, could an argument be made that COVID-19 is an "irritant" dispersed as a virus by workers? Maybe. But there seems to be little doubt that many insurers would likely disagree and ultimately contest the claim.
In addition, considerations exist under the coverage for emergency response costs, which are typically defined as the costs and expenses needed to mitigate a job-site pollution event or pollutant resulting from the work performed by the contractor or insured. To be covered, generally, the insurer must determine whether the "event" is an emergent situation that requires immediate action to avoid the imminent and substantial endangerment of people and the environment. So, depending on the specific policy wording, a connection must be made between the work being done at the job site by the insured and the resulting spread of viral matter. Insurers are likely to contend (and insureds are likely to disagree) that the mere presence of viral matter is not enough to trigger coverage.
Communicable Disease Exclusions
This one seems easy and may not be as uncommon in the future as it is today. It is highly likely that any CPrL policy containing a communicable disease exclusion would outright exclude any claims or losses related to COVID-19 and similar communicable diseases. Most of these exclusions are intended to be all-encompassing, applying to any claims based on or arising out of any exposure to, or contact with, bodily fluids of infected humans. Once again, however, be cautious since wordings can vary, and each potential claim needs to be assessed based on the potentially applicable exclusion and unique facts and circumstances of each situation.
Every Situation Accompanies Its Own Circumstances
It bears repeating that each separate incident will accompany its own set of facts and coverage circumstances. That is especially true in a COVID-19 environment where the rules and details are changing almost daily.
In addition, since the situation is so "new," insurers are currently in the process of assessing and reevaluating their own policy language and the conditions under which a coronavirus claim may or may not be covered.
Several years ago, insurers were unsure about the classification of Stachybotrys/ Aspergillus. Was it a CGL or an environmental claim? For the most part, it ultimately became an environmental claim with the environmental forms modified to include "microbial matter" or "mold" under the definition of pollution conditions. The same could hold true for the coronavirus, although the next steps are likely uncertain for the foreseeable future.
While it's in no one's best interests to inundate insurers with frivolous claims and incidents, it is always prudent to seek expert advice and directions in a time filled with doubt and questions.