Public Owner Professional Liability Insurance Practices: Research Findings
Executive Summary
Key Finding: Public owners frequently pay for project-specific professional liability (PSPL) insurance coverage for their design teams on large infrastructure projects. This practice is well-established among major public agencies and is becoming increasingly common as a risk management strategy.
Bottom Line: Your request for public owner-procured professional liability insurance has strong precedent and aligns with industry best practices for large infrastructure projects.
Payment Practices: Who Pays for PSPL Coverage
Standard Industry Practice
The research reveals a clear pattern of owner-paid professional liability insurance on major infrastructure projects:
- Primary Finding: "While project owners typically pay the premium — and often are the ones who ask for a PSPL — design firms should proactively advocate for PSPL coverage to safeguard against potential costly liabilities"
- Owner Control: "A project policy may be procured by either the owner or the lead design firm, although the premium is normally paid entirely by the owner"
- Cost Structure: Professional liability insurers have developed various approaches where "a common approach is to place and bill for the coverage for both phases at the outset of the project, with underwriting and premium based on the project owner's program and budget for the project"
Why Public Owners Pay for PSPL Coverage
Strategic Risk Management Benefits:
- Dedicated Project Limits: PSPL limits are dedicated to the specific project and cannot be eroded by claims on other projects, unlike practice policies
- Cost-Effective Higher Limits: "An appropriate limitation of liability (LOL) cap, along with design team-purchased PSPL up to the LOL and owner-procured insurance as excess, can be a more cost-effective way to purchase higher limits"
- Broader Qualified Bidder Pool: "Project policies also allow project owners to set the limits of liability without concern of restricting the search for qualified firms"
- Coverage Certainty: "A project policy's liability limits will be available even if design team members are acquired or go out of business"
Documented Examples of Public Owner PSPL Programs
Major Airport Authorities
Los Angeles World Airports (LAWA):
- Set professional liability coverages with limits beyond $25 million for architecture and $5 million for engineering
- "The owner shopped the underwriters for an owner-procured umbrella policy over and above all professional liability coverage"
Orlando International Airport (OIA):
- Implemented similar owner-procured umbrella policies over design team coverage
- Recognized that higher limits were "either impossible to attain for many firms or would severely limit the competitive playing field during procurement"
Transportation Agencies
Federal Highway Administration (FHWA):
- Recognizes Owner Controlled Insurance Programs (OCIPs) that include professional liability coverage
- "Several agencies have implemented Owner Controlled Insurance Programs (OCIPs), including ACTA, AZ DOT, TCA, UT DOT, and UTA. Some OCIPs included errors and omissions coverage"
Alameda Corridor Transportation Authority (ACTA):
- "ACTA purchased an owner's protective errors and omissions policy"
Utah Transit Authority (UTA):
- "UTA required the contractor to provide errors and omissions coverage" as part of their OCIP program
Alternative Owner-Procured Professional Liability Products
Owner's Professional and Protective Indemnity (OPPI)
Growing Market Adoption:
- "More owners are requesting their insurance risk managers to explore different products as risk transfer mechanisms in order to better protect against unseen liabilities or risks on a project"
Cost-Effectiveness:
- "Offers a cost-effective alternative to project-specific professional liability (PSPL) policies"
- "PSPL policies can be prohibitively expensive, often costing 40% to 50% more than an OPPI policy"
Coverage Structure:
- "The OPPI product is designed to indemnify construction project owners for any errors and omissions of hired professionals, such as architects and engineers, on a construction project in excess of professional liability insurance"
Owner-Procured Excess Coverage
Third-Party Coverage Option:
- "There is a third type of PSPL insurance that can be purchased by the owner and is meant to sit excess of the practice insurance of the design team"
Historical Context:
- While historically the design community was reluctant, this approach is now more accepted when combined with appropriate limitation of liability caps
Industry Trends and Market Dynamics
Federal Infrastructure Projects
FHWA Recognition of Owner-Controlled Programs:
- Owner Controlled Insurance Programs commonly include professional liability coverage
- "The types of insurance typically included are: Workers Compensation, General Liability, Excess Liability, Pollution Liability, Professional Liability, Builders Risk, and Railroad Protective Liability"
State-Level Requirements
Texas Government Code Example:
- "A construction manager-agent selected under this subchapter shall maintain professional liability or errors and omissions insurance in the amount of at least $1 million for each occurrence"
- Demonstrates legal framework supporting professional liability requirements
Public-Private Partnership (P3) Projects
Comprehensive Insurance Programs:
- P3 projects commonly include owner-directed insurance programs
- "Project insurances should also include a waiver by the insurer of its rights to subrogation"
Cost Considerations and Pricing
PSPL Premium Structure
Rule of Thumb Pricing:
- "A good rule of thumb to determine if PSPL is a viable option is to use approximately 20% of the policy limit for the premium, with self-insured retentions ranging from $500,000 to $5 million for a $10 million to $50 million policy"
Flexible Retention Arrangements:
- "Greyling has helped its clients navigate how the retention payment is structured between the design team, or even paid for by the owner"
Owner Cost-Benefit Analysis
Long-term Value:
- Owner-paid PSPL provides certainty of coverage terms and limits
- Eliminates risk of coverage gaps due to design firm business changes
- Enables higher coverage limits without restricting bidder pool
Recommendations for Contract Negotiations
Precedent Documentation
Strong Industry Foundation:
Your request aligns with established practices at:
- Major airport authorities (LAWA, OIA)
- State transportation agencies (AZ DOT, UT DOT)
- Federal infrastructure programs
- Public-private partnership projects
Key Negotiation Points
- Cost-Effectiveness Argument: Owner-procured coverage is often more cost-effective than requiring individual design firms to carry high limits
- Risk Management Benefits: Dedicated project limits, guaranteed availability, and joint defense provisions
- Competitive Procurement: Broader pool of qualified design firms can participate
- Coverage Certainty: Terms and limits guaranteed for project duration regardless of design team changes
Alternative Structures to Consider
- Owner-Procured Excess Coverage: Owner provides umbrella coverage over design team practice policies
- OPPI Coverage: Owner's Professional and Protective Indemnity as alternative to full PSPL
- Hybrid Approach: Design team provides base coverage with owner-procured excess
Conclusion
The research demonstrates that public owner payment for professional liability insurance is a well-established and increasingly common practice on large infrastructure projects. Major public agencies regularly procure this coverage as part of comprehensive risk management strategies.
Key Supporting Evidence:
- Direct statements that "project owners typically pay the premium"
- Multiple documented examples from major public agencies
- Industry recognition of cost-effectiveness and risk management benefits
- Growing trend toward owner-controlled insurance programs
Your negotiation position has strong precedent and aligns with industry best practices for projects of this scale and complexity.