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Risk and Claims Exposures When Using Design-Build As a Project Delivery Method

Construction

, Construction Executive

It is prudent for a design-builder to assess the responsibilities and risks is has assumed in a design-build agreement and determine how best to manage those risks. A design-builder will assume certain risks, insure others, and transfer significant risk to its downstream design professionals and trade subcontractors.

A design-builder’s typical risks are both professional and non-professional exposures, including:

  • direct damage to property, supplies and materials related to the project;
  • property damage and bodily injury resulting from the contractor’s operations on the project premises and occurring after completion of the project;
  • environmental exposures resulting from the release or dispersal of hazardous materials from the project site;
  • railroad liability exposure for operations within 50 feet of a railroad; and
  • payment and performance guarantees, including obligations to complete the project within a certain schedule according to performance specifications.

The design-builder is responsible for the safety of all employees and third parties on the project site. Accidents on the jobsite may result in workers’ compensation claims and OSHA fines and penalties.

The design-builder’s professional liability exposures are related to the design services assumed in the design-build agreement with the owner and then subcontracted to design professionals on the project. The level of design risk that the design-builder assumes in the design-build agreement may vary from very onerous to fair and equitable. The design-builder is concerned with geotechnical exposures, differing site conditions, environmental liabilities and vicarious exposures for design defects. A design-builder should carry its own contractor’s professional liability insurance coverage for the professional services (i.e., design services) that it assumes under contract with the owner. This may be provided on a project-specific or practice basis. A contractor’s professional liability policy operates the same as a designer’s professional liability policy. Coverage can encompass the contingent design exposure of the design-builder entity and any design professionals within the joint venture.

The professional liability claims exposure of the design-builder can be either direct or contingent exposure to design claims where a design-builder contracts to provide “all design and construction services.” Design-build claims can increase claims made by a design-builder against its sub-consultant design professionals when the design-builder unfairly allocates risk to a design professional that is not suited to manage that risk. For instance, a design professional is ill-equipped to manage the risks of a specialty subcontractor that is contractually obligated to warrant and guarantee its work.

For the past few years, the design industry has experienced lower frequency, but higher severity, on construction defect claims, particularly in the residential sector. It appears that plaintiffs are settling construction defect claims against contractors with savvy defense attorneys for small percentage on the dollar. Owners or end users then seek further recovery from design professionals, who are often the last party standing. In addition, emphasis is placed on the design professional’s “contract administration” and “observation services” regardless of the actual scope of work articulated in the contract, thus triggering design professionals’ liability policies.

Other triggers of claim activity include:

  • increase in claims frequency for MEP and HVAC engineers/architects for “coordination” on vertical construction defect claims;
  • onerous sub-consultant agreements, when misalignment of the allocation of risk puts a burden on the design professionals’ defense of “design-related” claims; and
  • increased contractor cost overruns and delay claims result in triggering design professionals’ professional liability policies.

With the increase in quantity and complexity of design-build projects, it is important for design-builders and design professionals to equitably allocate risk to the party most suited to manage that risk. The entire design-build team should be involved in seeking appropriate insurance solutions to protect their respective professional liability exposures. The good news is that there are numerous products available in the insurance industry today.

 

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