A Cure for the Common Insurability Objection
The common cold is indeed common. On average, most of us deal with it using preventive measures like rest, proper hydration, and chicken soup.
Another common malady—at least for design professionals who negotiate contracts—is clients’ objections to insurable contract terms. Some of these never change; we hear the exact same arguments again and again. While there may be no “cure” for the common objections, let’s diagnose the source of some common insurability problems and prescribe some talking points you can use to negotiate healthier contract terms.
Diagnosing the Cause of Uninsurability
To cure an ailment, we need first to identify it and understand where it comes from—and this is true for insurability problems, too. Knowing why a contract clause is uninsurable is an essential first step toward negotiating better language.
Many insurability issues arise from the “contractual liability” exclusion found in all design professionals’ liability policies. This exclusion bars coverage for liability that the insured firm assumes by contract, unless the firm would have been liable in the absence of that contract.
That bit of insurance gobbledygook is best understood by way of example. Consider the professional standard of care. This requires design professionals to perform their services using the same skill, care, and knowledge that would ordinarily be exercised by a reasonable, similarly situated design professional. This is the standard even if a design professional’s contract is silent regarding the standard for performance or if (heaven forbid!) there’s no written contract at all.
If, however, a design professional signs a contract calling for “the highest standard of care” or “defect-free design,” they are taking on a liability they wouldn’t otherwise have. The normal legal standard of care doesn’t require perfection. Accordingly, these elevated standards of care aren’t insurable.
The common insurability problems with client-drafted indemnity clauses also stem from the contractual liability exclusion. These clauses often require the design professional to “defend” the client in the event of a claim. This means that the design professional must pay the client’s legal fees and costs—perhaps even if it turns out that they weren’t negligent. Without this contractual promise, the design professional wouldn’t be obligated to pay for their client’s defense, so this term is uninsurable.
Another insurability problem with client-drafted indemnity clauses arises when the design professional is required to indemnify the client for damages caused by the design professional’s nonnegligent acts, or by parties the design professional doesn’t control. These aren’t obligations the design professional would have in the absence of this contract, so the contractual liability exclusion bars coverage.
Many an insurability kerfuffle stems from the contractual liability exclusion, so it’s fair to ask whether it can be deleted from the policy. The answer, however, is no. Insurers see this exclusion as a necessary bulwark against uncontrollable, unforeseeable loss.
Responding to the Common Objections
Like the common cold, these objections to insurable contract language recur with some frequency. Here are some talking points to help you respond to the next outbreak.
“Why don’t you just buy better coverage?”
“The insurability problems we’re bringing to your attention aren’t unique to our firm’s policy. Despite the fact that there is no ‘standard’ form of professional liability insurance, the exclusion that bars coverage for these terms is common to all design professionals’ professional liability policies.”
“No one else is complaining about this clause.”
“Perhaps they’re not aware of the coverage problems that this language creates. We are, though, and we believe the best policy is to be transparent with you about the potential issues and work with you to draft contract terms that fairly apportion risk and don’t impair the insurance coverage that we purchase as financial security for our valued clients.”
“Someone else will sign it if you don’t.”
“That may very well be true, but the contract terms we’re discussing aren’t covered by their professional liability insurance, either. If there is a claim, they will need to settle or pay a judgment with their own funds, and there’s no guarantee that they will be able to do that.”
“I don’t care if it’s uninsurable—that’s your problem.”
“We don’t want it to be a problem for either of us. Our firm buys professional liability insurance because we need to have the financial resources to make things right for our clients in the unlikely event that they suffer damages through our professional negligence. Your contract requires us to carry professional liability insurance with $X limits for Y years after substantial completion. That coverage won’t help either of us if our contract is uninsurable.”
In the same way we manage the common cold with practical remedies, understanding and addressing these insurability issues can help design professionals and their clients draft healthier, more effective contracts.
The material in this article is provided for informational purposes only and is not to be regarded as a substitute for technical, legal, or other professional advice. The reader seeking such advice is encouraged to confer with an appropriate professional consultant or attorney. ACEC and its officers, directors, agents, volunteers, and employees are not responsible for, and expressly disclaim, liability for any and all losses, damages, claims, and causes of action of any sort, whether direct, indirect, or consequential, arising out of or resulting from any use, reference to, or reliance on information contained in this article.
