The Professional Services Endorsement—BEWARE!
The Professional Services Endorsement—BEWARE!
Keeping it simple, a Commercial General Liability (CGL) policy provides a CM with two independent yet important obligations from the insurance carrier. First, the policy provides the manufacturer with a legal defense of a claim or lawsuit funded entirely by the insurance carrier. Second, the policy grants limits or dollars up front to defined amounts that can be used for either a settlement or payment of an adverse claim/lawsuit. These limits, of course, are subject to any policy deductible or self-insured retention amount.
The CGL policy is intended to cover losses that result in “bodily injury” and/or “property damage.” Economic damages, such as delay damages and costs of repair for defectively designed or manufactured trusses, are not covered. While the terms “bodily injury” and “property damage” are defined in the policy itself, their application to CMs is more easily illustrated with the following examples.
During erection, as a bundle of roof trusses is lifted to the top plate, some of the trusses come apart and cause injuries to a passerby and damage to erected walls. The injury and all the property that is damaged is covered by the manufacturer’s CGL policy falling within the definition of both “bodily injury” and “property damage.” There is no coverage, however, for damage to or replacement of the roof trusses because this is damage to the products of the insured and, therefore, not considered “property damage” due to exclusions contained in the policy.
A homeowner sues a manufacturer of floor trusses for sagging floors, alleging improper design loading was utilized. To restore the floors, furniture is moved out of the house, sheetrock and some flooring is removed, and the trusses are strengthened, restoring the floors. All the property that is damaged and the repair costs are covered as falling within the definition of property damage; but, for the reasons explained in the previous example, there is no coverage for the money spent to actually repair the floor trusses themselves.
The CGL policy is an important component of every truss manufacturer’s risk management and liability avoidance strategy or plan. The coverage can be diminished, however, when the insurance carriers begin to layer in exclusion upon exclusion through endorsements that are added to the policy. These endorsements that contain exclusionary language are intended by the carriers to eliminate coverage under the conditions described in the endorsements. For example, when mold claims (asserting either or both injury and property damage loss) became prevalent a few years ago, underwriters for insurance carriers crafted a mold endorsement exclusion that is now contained in every CM’s CGL policy. That means any claim of mold resulting in either bodily injury or property damage asserted against a CM is no longer covered by a manufacturer’s CGL policy.
We are beginning to see another very significant exclusionary endorsement added to CM CGL policies. This endorsement is commonly referred to as the Professional Services Endorsement. This endorsement, which goes by ISO number CG 22 43, is formally entitled “Exclusion – Engineers, Architects or Surveyors Professional Liability” endorsement. (See sample endorsement below.) Neither the title nor the language of this endorsement seems to impact a CM on the surface because most manufacturers do not engage in engineering per se and do not provide “professional services.” I will tell you, however, that, if this endorsement were in play in either of the two examples and the defect in trusses was related to design, the ability of the CM to rely on its CGL policy for a defense and payment would be very much in doubt.
Let’s take a closer look at the endorsement language. First, the endorsement states there is NO insurance for bodily injury or property damage arising out of the rendering or failure to render “professional services” by either the insured or any engineer hired by the insured. While most of us would seem to think that we are not providing “professional services,” the unfortunate thing is how this endorsement defines that term. “Professional Services” is defined to include the preparation of shop drawings and/or specifications. That would seem to include truss design drawings, whether sealed or not, and truss or other engineered product placement diagrams. In fact, an engineered truss drawing would probably also be viewed as a truss engineering “specification.” While I am not aware of any formal legal precedent established by any of the courts on whether the Professional Services Endorsement would exclude coverage for any defect, error or omission relating to truss design, a fair reading of this language would suggest that would be the case.
Insurance industry experts I have talked to suggest that underwriters include this endorsement into CM’s policies because they view the exposure from truss design and placement claims should not be covered by the CGL policy, but instead by a professional liability or errors and omissions policy. These types of policies are purchased by a variety of professionals and professional firms, including architects and engineers. While some truss manufacturers may own a professional liability policy, most do not.
Is professional liability insurance an alternative? Professional liability insurance generally will contain a standard exclusion for claims arising out of the design or manufacture of products by the insured. If that exclusion is not dealt with, the professional liability policy will have little value to a CM. In order for a claim to be covered, it must arise out of a “Breach of Professional Duty” in the performance of “Professional Services,” both of which are defined terms in the policy.
“Professional Services” is then defined as those services the insured is, “legally qualified to perform for others in their capacity as an architect, engineer....” Since truss manufacturers generally do not sell services, but instead sell products, you have to ask yourself whether you would have any coverage if you purchased a professional liability policy.
Will a professional liability policy effectively provide coverage to truss design and placement work done by truss technicians? Will this policy protect an engineer sealing truss designs, if the company for whom he or she works sells products and not services? Assuming even a truss design engineer would have coverage, which I think is doubtful, unless that engineer works for an engineering firm that performs services, it is the work of truss designers and not the truss design engineers that would more likely give rise to a claim against a truss manufacturer. A truss design loading claim, for example, would not seem to constitute a “Breach of Professional Duty” in the performance of “Professional Services,” which is the requirement for a Professional Services policy. The funny thing is that builders and contractors who customarily ask their truss manufacturers to have professional liability insurance, especially if the manufacturer has the Professional Services Endorsement in its CGL policy, do not understand the limitations of the Professional Liability policy, yet they continue to request this type of coverage!
1. Review your current CGL policy to see if the Professional Services Endorsement is included in the policy. If it isn't included, consider yourself lucky and make sure that endorsement does not find its way into future CGL policies you purchase.
2. If the Professional Services Endorsement does exist in your CGL policy, consult your broker to see if the endorsement can be removed easily or even upon payment of an increased premium.
3. If you determine it is a good idea to purchase a professional liability policy in addition to your CGL policy, carefully read the policy definitions, coverages and exclusions. Consider asking that any exclusionary product design claim exclusions be deleted and submit alternative drafts of language defining “Professional Services” to include those design activities your company actually undertakes.