Insuring Risky Business
October 1, 2007
What do service providers, EPC (engineering, procurement and construction) providers and asset owners involved in 3D laser scanning need to know about assessing liability and insuring against risk?
For service providers, technical challenges are not the only source of project risk; professional and general liability play as great a role--arguably greater since an uninsured or underinsured claim could put a company out of business and even bankrupt its principals. Key questions for service providers include, “What are your liabilities?” and “What constitutes appropriate and suffi- cient coverage?” Meanwhile, EPC and owner contracts include terms and conditions that address liability, often apportioning some of it to subcontractors. Here’s some insight into issues for all parties involved in insuring against this risk.
What's Covered?Jim Dalton, senior broker with U.S. Risk Insurance Group Inc., and Arthur Rayos, president of Rayos Insurance Agency, examined what constitutes “covered acts” for an audience of laser scanning professionals at the SPAR conference earlier this year, an annual event hosted by Spar Point Research LLC focusing on existing conditions data, technologies and work processes.
First, the distinction between professional and general liability is crucial. Dalton notes that professional liability insurance, often formerly called errors-and-omissions insurance, protects professionals against claims arising from negligent errors, acts or omissions in the performance of their professional services. General liability insurance, by contrast, covers legal liability to third parties that does not arise from a professional’s professional acts, errors or omissions; this commonly applies to exposure created by the firm’s premises or its operations.
So how is coverage defined in professional liability policies? This is based on each policy’s definition of the term “professional services,” Dalton says. “This is the most important part of your coverage because this defines what is serviced under the policy. Any specific area not included at the beginning will be excluded, so it’s important to address any type of services your firm will be engaged in at the very outset.” Depending on the specific policy form, professional services definitions indicate that coverage applies to the types of services listed in the policy’s declarations page, endorsements to the policy, or those services that the insured organization is licensed to perform. Dalton advises the insured to make sure that all types of services they offer fit within endorsements or are noted on the declaration page of the policy.
Disclosure to InsurersWhat should service providers disclose to insurers? Jason Matsumoto, president of Grenland AsIs North America Inc. in Houston, observed that it’s not difficult for a firm to obtain general liability coverage, as opposed to professional liability, for its laser scanning business--but by failing to disclose its full scope of services. He notes it is possible for service providers to operate without proper and comprehensive coverage by disclosing only some of their services, generally less risky ones such as office processing. Of course, he says, “The problem pops up when you get sued for something not covered.”
Other reports in the industry reflect that some service providers choose to forego professional liability coverage under the argument that, in simply providing existing-conditions or as-is data, they are not “design-responsible.” While that may be true, as Matsumoto puts it, “Try arguing the point when you get sued by a major offshore operator because their engineers designed and fabbed a $10 million assembly based off a bad set of scan data they took for granted was correct.”
Additionally, for service providers that operate offshore and/or in plant environments, it’s essential to disclose this fact before purchasing a policy, as it will have a major impact on pricing of both general and professional liability coverage. Matsumoto says this can drive up prices as much as tenfold.
Defining Professional ServicesU.S. Risk’s Dalton reports that commercial insurer CNA Insurance Company defines “professional services” as those services that the insured is legally qualified to perform for others in his/her practice as an engineer, architect, land surveyor, landscape architect, construction manager or as specifically defined by endorsement to the policy. Many laser scanning professionals are frustrated with this definition.
“What the industry has done from a subcontract services point of view is to generalize the task of laser scanning,” one service provider says. This makes it easy for owners and EPCs to make the terms and conditions governing coverage for laser scanning services “comply with any subcontract service to be performed in the field.” The result is high insurance costs for service providers--for some, unjustifiably high. “From a professional services approach,” this provider says, “this technology is totally dependent on how well the scope is defined by the EPC and the owner.” When mistakes occur, he says, the cause is often “dependent circumstances--poorly defined scope, bad reference control, site conditions, etc.--which the laser scan service provider could not be fully responsible for.” With current industry practice, “service providers are being overcharged for things they are not really responsible for. The cost of liability coverage, say for $10 million liability, is ridiculous for a $25,000 job. Service providers should be responsible for no more than the value of their contract.
“I think the insurance companies struggle with this as well. And I think this is a result of not understanding how this technology and these deliverables are used in production. Engineering companies are seeing great cost/benefits from laser scan technology, but that cost/benefit is only realized when the engineering project manager, construction contractor and laser scan service providers are in tune with one another to realize the benefit.”
But absent better understanding by insurers of the laser scanning services industry on the one hand, and better EPC/service provider cooperation on liability allocation on the other, he says, “it is becoming more difficult to stay in the laser scan service business, much less start from scratch, as a result of insurance costs.”
The Owner PerspectiveWhat are asset owner organizations doing to apportion liability and manage risk around 3D laser scanning services? “We handle it two different ways,” says an owner executive with extensive laser scanning experience. “If I contract with an external engineering supplier, in their scope of services I dictate that this is a 3D job, I want to use laser scanning, here’s why, and here are the deliverables I need.” The EPC in turn may contract a laser scanning service provider. If the service provider “gives bad information to the EPC, it will cause me pain,” this owner says. “But I don’t have a contractual relationship with that service provider, so I would hold my EPC accountable.”
On the other hand, he continues, “when I use my own in-house engineering group, I may contract directly with our in-house laser scanning group. If they were to make a mistake, I would just eat it; we are self-insured for our own engineering work from a liability viewpoint.” In either case, he says, owners’ interests are further protected by “errors-and-omissions and other kinds of insurance; sometimes I [the owner] am self-insured; other times the EPC has to have E&O insurance.”
But industry practice remains far from settled. “If an external service provider were to give me bad data,” an owner executive says, “I’m not sure what I would do. I’ve not yet had an experience where I’ve had to go after a laser scan service provider [for non-performance]. If that happened, I would refer to the contract to determine his liability--he might have to go back and re-scan.” But this would not fully remedy the problem. “We do have warranty and quality provisions in our contracts,” this owner continues, “so I could elect to exercise my right to withhold payment in the event of non-performance. But still, that would not help my schedule.”
Absent settled practice, an important safeguard for owners’ interests is the fact that “service providers are motivated to do good work,” this owner observes. “So it gets down to whether you as an owner understand the issues: how to specify the job, and how to check data quality, registration and control.”
The EPC PerspectiveHow do EPC providers apportion liability and manage risk around laser scanning activity in a project? Much of the answer lies in standard contract terms governing performance and liability. “For us,” one EPC executive reports, “the issues tend to be wrapped up in the contractual liability that exists between EPC and client.” Insuring for this liability is a routine part of doing business for EPCs.
Thus, for EPCs, managing this liability does not require the same money outlay as laser scanning service providers often have to make up-front on a job for professional liability coverage and any necessary bonding. Can EPCs offer their service providers any help with this? “As subcontractors,” an EPC says, “service providers are expected by EPCs to manage their own liability.” Admittedly “the return on what service providers are doing is not really commensurate with the risk they’re often asked to assume,” he says. On the other hand, “why would they be any different than a tried-and-true traditional surveyor? If laser scanning service providers can get themselves into that category” in the professional services definitions used by insurers to categorize and define risk, “then it will become a different conversation.”
Better understanding of laser scanning by both insurers and more owner organizations is an important part of the answer, in this EPC’s view. “Terms like ‘laser’ scare people,” he observes, “but there’s no survey job out there that isn’t using a laser instrument already.” Even where the EPC’s client perceives risk, “EPCs are not going to cover this risk for service providers,” he says. “To me, part of the answer lies in convincing owners to lighten up on their requirements for laser scanning service providers before EPCs bring them onto the [job].”