How to Protect Your Construction Company From Costly Design Mistakes

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ℹ ABOUT THIS EPISODE

This week, Wade and Stephen delve into the importance of professional and design liability insurance for construction businesses. They discuss how this specialized coverage acts as a safety net when expertise is questioned, preventing potential financial disasters. 

The conversation highlights real-world examples, state-specific filing limits, and the complexities of insurance claims. They also explain the critical difference between general and professional liability insurance and the importance of meticulous policy review to avoid costly exclusions. This episode is a must-watch for contractors aiming to safeguard their business against unexpected liabilities.

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⌚️ In this episode:

• 00:47 Understanding Professional Liability Claims
• 02:10 The Importance of Specialized Coverage
• 04:01 Common Misconceptions and Real-World Examples
• 05:27 Navigating Insurance Policies and Exclusions
• 08:13 The Role of Insurance Agents and Brokers
• 10:48 The Financial Impact of Liability Claims
• 15:31 Final Thoughts and Advice for Contractors

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] You ever notice how the best builders always measure twice, but cut once? The same careful approach applies to protecting your construction business from costly design mistakes and professional errors that no tool belt can fix. Today we're breaking down professional and design liability insurance.

Protection that works like a safety harness when plans go wrong or advice backfires. Unlike standard coverage, this insurance specifically shields you when your expertise is questioned, potentially saving you from financial disaster as effectively as proper bracing prevents a wall from collapsing. This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. what's the most surprising professional liability claim you've ever seen? I imagine this could be a interesting podcast. 

Stephen Brown: Well, that's a good question. Here's the thing about professional liability is you design something or you build something. [00:01:00] And it's not right. And you find out about it later. It's always going to either create a problem while the job's being finished or it's gonna come up down the road. Different states have different limits that you can file a claim against the workmanship that you've done. It's different in every state. It's called a statute of repose. It's how long you can file a lawsuit.

But professional liability claims have been one small design of a part from an engineering firm that backfired and absolutely broke up an entire system, a boiler and machinery, HVAC equipment claim. I'm thinking about for a Target store that happened literally the day of the grand opening.

Anyway, when those things happen and you've done business with a big corporation, even if it is fixed immediately, which this was, there was a huge cost to replace a lot of equipment, and there was ensuing insurance claims for lost profitability because it [00:02:00] happened. So, anyway it is a specialty coverage, professional liability, design liability, and also, general liability on your construction company.

I guess what I want our listeners to know most about this type of coverage is that there has to be an incident that occurs for coverage to be triggered. So every policy has a trigger and that trigger occurs when the accident happens. So the question is, are you covered at the time the accident happens and triggers a claim?

So in the insurance world, a professional liability, trigger is the key word. And the date of the claim and the current. And then the insurance companies will go back and they'll trace really who is at fault. And wildly enough, Wade, if you've ever been in a lawsuit, you notice that any plaintiff's attorney that is suing you for anything, names everybody and their brother in the lawsuit. And then the judge does a [00:03:00] summary review of that case and gets rid of people who he or she believes should not be involved in this situation.

And then it all starts and everybody starts pointing fingers. And insurance companies, once a claim is turned in, they handle it as they see best fit. And that makes some of our contractors crazy. Don't they realize this? Don't they do that? Well, in their world, they're seeing the cost of selling this is less than arguing and infighting the fact of who's right and who's wrong.

So that's what you're buying in this coverage, Wade. You're buying the legal protection that you need, and also to replenish the cost that you would have to come out of pocket, based on what may be at fault. So the smallest part in a boiler of an HVAC system that was designed specifically-- this particular claim I'm thinking about with the Target, it went back maybe 20 levels of people. 

Wade Carpenter: Well that's where I was sort of fascinated because I've never thought [00:04:00] about this kind of thing. And really started trying to understand what this was because I could see a contractor being blamed for something and maybe they just installed the part; the architect or whatever, but maybe they're getting blamed for it.

So what if they're out there saying, I didn't design anything. How can I be possibly liable for something like this? So, explain what this coverage really would--

Stephen Brown: Sure. And you never know whether one of your employees might do something that is off plans. Now I know there's constant inspections to the specifications and blueprints that have to be signed off by the architects and engineers that design these products that you're building.

But as a general contractor, as a subcontractor, you could have some exposure here. You may not, but I can tell you the professional liability for a contractor that does not do design work is just relatively inexpensive. Be cause as you know, there's just not a lot of exposure there. [00:05:00] But I see more and more owners put that in their job specs, that you have to cover that, whether you're the architect or engineer.

And you can say, well, I'm getting an insurance certificate from my architect and engineer that I've retained to do the work. So you're a design build contractor, and you should definitely have professional liability. Because they're gonna name you in the lawsuit and that liability is what protects you. It's what keeps you from immediately going out and hiring an attorney and paying them out of your own pocket. Does that make sense?

Wade Carpenter: Yeah, and let me ask you just a dumb question because this is not my world. I would think something like general liability would normally cover that, but I understand it absolutely does not. Is that a fair thing to say? 

Stephen Brown: General liability covers bodily injury or property damage that occurs in the course of your doing business. It does not include design liability in any way, shape, or form. And specifically, insurance policies are really interesting. You're covered unless they're excluded from [00:06:00] coverage. It's written by the insurance company and it's up to your agent to help you determine whether that's the best policy for the situation you have.

At McDaniel Whitley, we deal with different contracts all the time, and we look at insurance specifications. So when you're bidding a job, first thing they ask us what kind of cost do I need to add in for coverages that we don't have?

And I would say 80% of the time, our clients have most coverages that are required in all the jobs they're regularly bidding. Every now and then, maybe you do work for a certain state entity and their levels of insurance requirements are just over the roof. They almost make it impossible for you to bid the job, there's so much ridiculous cost involved.

But somebody somewhere has worked up these job specs to just completely protect the owner, and whether they're practical or not for you as a Contractor. They're only practical if you can add those costs into your bid.

Wade Carpenter: You mentioned the design build [00:07:00] contractor, but I've also known contractors that just, hey, we're just gonna write up the plans for you.

 I'm sure there's probably some kind of gray area where contractors may unknowingly actually take on some kind of design liability, just trying to be helpful, I guess. 

Stephen Brown: Yeah, it most certainly happens. You never know what kind of something that one of your employees wants to do to ingratiate themselves to the client. Yeah, well, I just don't think that's designed right. I tell you what, you're gonna have trouble with that, done that way. So, I think we should do it this way. And the owner says, yeah, go ahead. And then it's not what was designed and there's a problem because of it. You're gonna be sued for that and you gotta have coverage.

Again, I'm not trying to sell insurance to folks that don't need it, but I'm saying the common misconception is as a contractor, I just don't need that coverage.

When we're talking about maybe $2,500 a year for a million dollar policy. This is just not an expensive proposition here.

Wade Carpenter: Well, I can see this is a big blind [00:08:00] spot. I've never really paid attention to it. And is there a difference between, what I would say is honest mistake or a mistake in the eyes of the insurance company? Is that a stupid question?

Stephen Brown: Well, I always like to put as many coverage as I can with the same carrier instead of piecemeal it to different carriers if I can, because then if a claim falls into gray area, it's harder for them to say no to handling your defense of it and the cost associated with it.

In our business, and having been an a construction insurance agent for over 40 years, we get those phone calls all the time, Wade that always start off with, hey man, how you doing? Hey uh, listen, I gotta talk to you about something. And that's a claim. I can predict it like the sun coming up in the morning from my clients when there's a claim. And most of the time that claim is covered.

Then if there's a situation where we communicated to you [00:09:00] that the coverage was available and you chose not to buy it, it's in our proposal. You said no. It's the only way we can defend ourselves. Otherwise it's our problem. First of all, if it's not covered, we've cost our client money and we've also cost them as a client.

It's over when we fail to properly look after our client. So, there's that aspect to it. But from our standpoint, not just professional liability, there's pollution liability, cyber liability. There's D&O coverage for your board of directors for your construction company as you get larger. There's so many specific type of liability coverages that just professional liability doesn't-- it only covers the design build aspects of the claim. Does that make sense?

Wade Carpenter: Well, I could see a lot of. builders saying, okay, I'm not the architect, I just built what they give me. So does that logic, not protect them in court?

Stephen Brown: Well, it, it does, and you know that [00:10:00] as a reputable architect, that they have insurance and they've given an insurance certificate either to you or to the owner. It's not even a bad idea to ask them for proof of coverage. Because here's the thing, if it's a design issue and you know who the carrier is for the architect or engineer, then you can say, you need to make this right, or I'm gonna file a claim on your insurance, and the insurance has to respond to that.

So.

Wade Carpenter: Well, in sort of trying to understand this, I saw a case where somebody made a suggestion and the owner turned it around and made a claim. It was like a six figure claim. It's like, how could one little suggestion about how to do something turn into a six figure claim?

Stephen Brown: Yeah. How could that possibly happen? We did a podcast on the perfect storm, bond claim scenario. Everything that could happen happened in this particular project. But same on the insurance side. How can a small thing [00:11:00] cause a multimillion dollar claim, and where is the coverage?

Remember that any attorneys are chasing where the money is, and if you don't have that money in insurance, then they're gonna be trying to come after the assets of your company, whatever that is.

So I always say, if you're worried about insurance, you got to figure out a way to add that into your overhead or job cost. And that's something that you would definitely, in your profession and your experience, help them figure out.

But from an insurance standpoint workers' comp, general liability that's based on payroll or subcontracted costs, and as a result of it, you can use that percent in your labor burden to add it just like a tax rate for your employees when you're coming up with job costing.

And in our insurance world, there's so many things that can go wrong and will go wrong, and we surround ourselves at McDaniel Whitley with absolutely the best and brightest underwriters [00:12:00] and brokers and company folks that we can find. People that we know have been in the trenches with thousands of claims regarding the coverage that they specialize in and their experience is worth its weight and gold to us and we value it.

And if they're a little bit more expensive than someone else, we're going with them. ' cause we know it's done right.

Wade Carpenter: Right.

Stephen Brown: So all you can do is try to build a plan to protect you. One insurance coverage is called an umbrella, because you can picture an umbrella protecting you from overhead. This level of protection just needs to be understood what's available and what your exposures are.

Wade Carpenter: I'm actually sort of looking at some of the cases that I had thought about. Saw one where they basically, I'm not sure whether it was the owner or whatever, they made this harmless recommendation, like moving a, think it was a vent or a fixture or [00:13:00] something they moved. The architect drew it a certain way, I guess, but they thought, okay, well it's-- but anyway, blew up into this full blown liability claim. Do you see things like that where contractors get held liable for that?

Stephen Brown: Absolutely. Whether you are liable or you're responsible or not isn't gonna stop someone from naming you in a lawsuit. That's the scary thing about it. You may shop your insurance hard and get a cut rate price, and that insurance is only as good as the company and the legal department and the claims department behind it when a claim occurs.

At McDaniel Whitley, we just try not to spend any time with companies like that. We can't afford it. We're not going to do it. So, you kinda have to be aware of that, especially, there's some good company and coverages online that you can find, maybe at less cost, but you know, all you're buying is a piece of paper.

So if you're not prepared to really study what you're purchasing. You might say, well, I'm just getting this [00:14:00] so I'll get the insurance certificates so I can get my license, or whatever the purpose is. As your company grows and change, you've gotta understand that the dynamics of your exposures change exponentially.

The smallest thing, creating the largest claim. And then there's the egregious claims. They call them nuclear verdicts in our industry or in the legal profession. But a paving Contractor up in Kentucky just paving a two-lane road, did not follow proper protocol that they had signed off on the apron on the side of this two lane road.

The Department of Transportation said, yeah, in this situation you don't need to follow a protocol. And it was kind of done verbally. And this contractor did not have a proper emergency median situation. It was literally sloped in such a way that when a woman driving the car with her four small children a tire [00:15:00] hit that median that didn't exist.

It was designed literally to flip her car over.

And unfortunately it killed her and most of her children, so that's a nuclear verdict. And at this point you say, where did the money come from to pay that nuclear verdict? It was in insurance. There was a lot of insurance in place.

Wade Carpenter: Yeah. Well, I could see a lot of these people play blame games. Just pick anybody that had anything to do with it, even if their role was clearly executing what they were told. 

Stephen Brown: Well, Wade I certainly wasn't trying to scare our listeners. I'm not in the business of selling scare tactics to get people to buy anything. But in this type of situation, this particular paving contractor was extremely large and they could afford to buy huge limits of protection and pass that on in the form of job cost.

Okay, that's an ideal situation. because remember, as a Contractor, the more assets that you have to [00:16:00] protect-- you formed a LLC or a C Corp, right? So you're protected against personal exposures. The law gives you that protection. But if you wanna be outta business and have your company wiped out over this claim, it's not just that, it's also your reputation in it.

If you're not properly insured and your company goes under, not everybody's gonna sit around and listen to whose fault it was. They're gonna go, oh yeah man, so and so, really... so there's that aspect of it, but proper insurance, like professional coverage, design liability, and all these coverage we talk get the price, think about it. Make sure your agent's thinking about it, most importantly.

Wade Carpenter: I'm gonna hit you with a question here, I'm sure you can answer it. But if you're reviewing policies, what would you say are the top three red flags to look for that basically mean that a Contractor isn't properly protected in their insurance coverage.

Stephen Brown: Well, first of all, you may be a specialty contractor [00:17:00] that subcontracts something else out, like electrical or, some concrete or whatever. A lot of general liability policies exclude subcontractors. You have to look for that exclusion in the policy. Then you have to look for specific exclusions that are excluding things that you don't do every day.

So, in answering your question, there's companies out there that will give you very inexpensive quotes based on what they're gonna insure. And they make sure that nothing else is covered. So, like I said, first thing to read when you read your policy are the exclusions. What's not covered?

So there were subcontractor exclusions. There was underground collapse coverage exclusion. Wow, is that not important if you're a utility contractor? There's boom crane exclusions. What if you're a rigging contractor? Each contractor has certain exclusions that really apply to generally what they do for a [00:18:00] living.

So we try to get them the absolute broadest policy that you can get. Because we're not only protecting you, we have to protect ourselves.

Wade Carpenter: Yeah, I mean, well that's where I was going with this is like, you got somebody that's doing like standard boilerplate coverage just for contractors in general, but maybe specialty or you. Especially sub doing something. How would a Contractor know if their agent, I mean my take was they need somebody experienced like you that has seen a lot of these things, but, what would you say to somebody like, am I really covered? Or are they just like, okay, this is a cheap policy, they've just had some boiler plate coverage when they--

Stephen Brown: Well my existing customers know from experience that we've been looking after their back and new clients. We have to assure them that we're doing that or they may have heard about us from other customers. That's why we only handle contractors. We don't handle other lines of coverage. [00:19:00] That is our specialty. That's what we do day in and day out. Just like you're a construction CPA, that's your specialty.

In our world, you are looking for someone that, that knows what they're doing in that specialty, in that line of work. And you're also looking for someone that can come in and analyze your current coverages and see what might be lacking.

And in the old days, there were a lot of insurance consultants that would charge a construction company a fee to do an analysis of all their coverages and break it down. But a good agent will be doing that anyway. We don't wanna nickel and dime you out of business, then you can't make money and then we can't make money.

So, but we need to make you aware of what you're doing and exposure. The scariest thing to us is two, two things: posting on your website something you've never done before as something that you do. And the second thing is actually doing that something or something else that we didn't know you were gonna do.

And in our line of work, contractors are [00:20:00] famous for not telling us something they're doing. It's like, yeah. And mine tell me, because I'm kind of like, why wouldn't you, you know, I noticed you were doing this. I just kind of wanna mention a couple of things to you. I handle it that way.

Because they've got to tell me what they're doing. And the good news is if I'm handling their surety bonding and it's a bonded project, that's really good because I'm looking at it from two angles. I'm providing your bonding and your insurance on that project.

Wade Carpenter: I swear you keep leading me into my questions, but I can see one professional liability claim really sort of wreck the finances and maybe trigger issues with your bonding or your financing down the road. I mean, I could see that happening and it does sound like cheap insurance to make sure that doesn't happen.

Stephen Brown: Well, don't hold me to that quote. It just kind of depends on other rating factors. But generally, if you don't regularly do design work like an architect or engineer, the coverage is reasonably priced. Also, the coverage has what is either called an occurrence basis [00:21:00] or claims made basis, and the professional liability on an occurrence basis is even more reasonable the first year you get it because each year you renew that policy, you have to buy what's called tail coverage to cover the years previous.

And if you're doing business in state of Tennessee in the statute of reprose is seven years, you're gonna wanna buy tail coverage going back seven years at every renewal, forever. So that will make the cost go up eventually. So you gotta know what kind of policy you're buying. And the current policy is more expensive than a claims made policy.

Wade Carpenter: Okay.

Stephen Brown: Isn't insurance fun, Wade?

Wade Carpenter: Absolutely. 

Stephen Brown: It's like talking about tax code. I just don't think our listeners can really get into this topic, but I want them to just know what's covered and what's not covered. I'm not promoting myself, but I want to make sure wherever you are located, anywhere in the world as our listener, you're just giving it a little bit of thought and trying to understand what your coverage is. And as always, Wade, you can reach out [00:22:00] and ask me any questions.

Wade Carpenter: You talk about construction CPA, but having a true bond agent that understands and is not just trying to sell you your personal liability policies and you see them on TV with various memes. But you know, I think that Stephen can write coverage in multiple states. I don't know if it cover all of the United States, but, maybe you can address that.

And to bring us home, I mean, is there one thing you wish every contractor understood about about this type of insurance before they learn it the hard way?

Stephen Brown: You get what you pay for. And construction insurance is not a world where you go with the cheapest, just like a construction bid. There's a happy medium. You don't have to go with the biggest, most high profile company either. You wanna go with someone that literally is invested in you and cares about helping protect you on the project.

So as I walk around my office on any given day and I'm listening to conversations [00:23:00] going on around our office, it's absolutely nonstop. Every day we're open, every year we're open, every minute we're open. It's always something and we're learning from it, and we're getting experience from it.

And our business model works because we're not greedy or selfish. We care about our clients. So I thank you for the pitch that you can call me to be your insurance and bonding agency.

But more importantly, whoever you're dealing with make sure that you're getting answers that you need. Make sure that your agent's responding to you, and preferably if you can combine insurance and bonding, it's a little bit better protection from you, but not necessarily.

Wade Carpenter: Well, I think there's been some great information on a topic I'd never even thought about.

Anyway I appreciate you bringing the message. If our listeners have questions or comments, we'd love to hear about them.

We appreciate you listening today to The Contractor Success Forum. We do this every single week, haven't missed a week in over four years. We're in our fifth year now, so.

[00:24:00] Appreciate the great information. We will put Stephen's information in the show notes so you can reach out to him. I know he doesn't mind a call, so give him a call. Please like, share, subscribe, do all that fun stuff, and we will see you on the next show.