Solution

Owner’s Protective Professional Indemnity (OPPI) insurance

Providing project owners with additional, cost-effective PI protection for losses arising from professional negligence on construction projects.

Owner’s protective professional indemnity (OPPI) insurance is a contingent policy that can provide project owners with professional indemnity (PI) protection for construction projects.

Project owners typically purchase OPPI insurance if they are concerned that the level of PI cover carried by the design firms, consultants, subconsultants, construction managers, and other professional services providers working directly for the owner engaged on a particular project may be inadequate.

Although most design and construction professionals — such as architects, engineers, and contractors — purchase annual PI policies to protect themselves from bodily injury, property damage, and economic loss claims from third parties, they often only purchase minimal limits due to the cost of PI.

These annual policies are written on a claims-made basis, and the policy currently in effect would cover any of the design professional’s previously performed services.

PI polices also are written with defense inside the limits. As such, a given design or construction professional’s limits of coverage could easily be eroded or even exhausted by legal expenses.

That means that the amount awarded in successful PI claims can significantly exceed the limit of coverage carried by design and construction professionals — leaving the owner at risk of absorbing the difference.

Further, the PI cover of the at-fault design or construction professional(s) could have lapsed prior to the PI claim being made, leaving the owner at risk of being entirely responsible.

With our deep construction industry expertise, Marsh can help you determine if adding an OPPI policy to your risk management program aligns with your strategic objectives and budget.

Recovered costs

A soils engineer working on a mid-rise apartment complex made a costly mistake with regard to the water level. Instead of the water level being 90 feet below ground — as the soils engineer had stated — it was merely 15 feet below ground.

This became known when the contractor began excavation, and the site continuously flooded with water. Solving this issue left the project owner with US$60 million in additional costs.

The project owner was able to recover US$15 million of these costs — through the soil engineer’s US$10 million PI limit and its own OPPI policy with a US$5 million limit.

Expenditure recouped

A project owner with OPPI cover of US$10 million hired a structural engineer with PI cover of US$2 million to determine the steel required for a mixed-use project.

The engineer used an incorrect code for this project, resulting in higher structural steel costs than necessary.

The project owner incurred US$5 million in additional steel costs due to the negligence of the structural engineer and asserted a professional liability claim against this consultant to recoup this expenditure.

As the engineer’s PI policy only covered the first US$2 million of the claim, the project owner was able to use its OPPI policy for the remaining US$3 million.

Settled in full

A project owner took out US$10 million in OPPI protection for the construction of a new office building. Due to its designer’s negligence, the building collapsed during construction, causing US$6 million in damages to a neighboring residential building.

The damaged building owner made a successful claim against the project owner and was awarded US$6 million. The project owner used its OPPI policy to settle the claim in full. The OPPI policy insurer was then able to pursue a claim against the designer’s PI cover to recoup some if not all of this sum.

FAQs

OPPI policies provide coverage for a project owner’s losses arising from the professional negligence of a design or construction professional engaged on a project when the coverage maintained by the design or construction professional is inadequate to cover the owner’s claim.

This includes direct damages — the cost to the owner to repair or rectify design or specification defects — plus any economic loss suffered by the owner arising from the professional service provider’s negligence.

The OPPI policy typically indemnifies the owner on a first-party basis in circumstances when:

A successful professional liability claim has been made against one or more design or construction professionals with whom the owner was directly contracted.
The value of the claim exceeds the design or construction professional’s annual PI insurance.

OPPI may be structured to offer difference-in–conditions coverage above the underlying professional liability policy. In that instance, if the underlying policy is deficient in coverage in relation to the OPPI coverage, the OPPI policy will “drop down” and provide primary coverage subject to its self-insured retention. Some examples of deficiencies include mold, construction management, and habitational exclusions.

OPPI typically also covers defense costs for third-party claims made against the owner alleging an error in the performance of professional services performed on their behalf by a the design or construction professional or team.

As its name suggests, OPPI coverage only protects the project owner, and does not protect design or construction professionals at all. The policy is generally subject to the same exclusions found in most standard PI insurance policies, including defective workmanship, materials, and manufacturing.

OPPI also does not cover the owner for its own negligence, if the owner performs some of its own professional services.

Depending on the situation, OPPI may be available on both an individual project and rolling program basis.

Project-specific OPPI polices are written for the term of the project and include an extended reporting period (the duration of time after project completion where a claim can still be made against the policy). The extended reporting period varies, but coverage may be available for up to 10 years.

Rolling programs are written for one owner or developer with homogeneous project types and additional projects are added as they come online. Typically, the initial policy term would match the first project’s term, but it would be extended if the second and subsequent projects required additional time. Ordinarily, each project would have its own retro date and extended reporting period. Many owners and developers opt for this route, and may have multiple rolling OPPI programs to avoid including too many projects under one set of policy limits.

Limits of more than US$25 million are typically available for most project types. As an excess policy, OPPI insurance coverage is contingent on the engaged design and construction professionals carrying a minimum amount of PI cover during the policy term while under contract to the project owner. This policy feature is known as the minimum insurance requirement (MIR).

The MIR will vary depending on the insurer, the project, and the design or construction professional. For projects between US$50 million and US$100 million in hard costs, typical MIRs are between US$2 million and US$5 million for the lead design professional and construction manager. Insurers may require other design and construction professionals to carry at least US$1 million in coverage. If owners are able to obtain higher professional liability limits from their design and construction professionals, it should reduce the OPPI policy premium. So, owners should push for higher limits, when appropriate.

In most cases, OPPI policies also have self-insured retentions (SIRs) that apply to third-party claims made against the owner. There is not usually an SIR imposed on the owner for protective claims as long as the design professional satisfied the MIR under the policy.

OPPI insurance helps project owners bridge the gap in coverage between the amount of the owner’s claim and the limits remaining on their design and construction teams’ policies.

Given the potential drawbacks of relying on design and construction professionals’ individual PI policies, some owners may opt to purchase a project-specific professional liability (PSPL) insurance policy on behalf of their design and construction team. These policies provide a dedicated limit covering the entire team for the length of the project, with an extended reporting period.

However, PSPL policies can be prohibitively expensive, often costing 40% to 50% more than an OPPI policy, and the market is limited. As the owner is not the named insured, it ultimately has no control over the policy, nor does the insurer have a duty to defend the owner in the event of a third-party claim. PSPL policies also lack many of the benefits that OPPI policies provide owners, such as first-party indemnity, designated coverage, multi-use capability, and defense provisions.

Why Marsh

The complexities of construction projects require a deep understanding of the construction process and its associated risks. Our team of construction industry specialists serves as trusted advisors to many of the world’s largest construction project owners. As one of the world’s leading risk advisors in the professional liability insurance space, Marsh has the people, data, and insights to help you build a risk management and insurance program designed to meet your needs.

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