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Insurance and Risk Management Products and Services That Align with Design-Build Project Delivery

Safety

When most teams embark on a new construction project, one of the first considerations is usually not insurance. Some view insurance as a necessary evil; others view insurance as a critical piece of their comprehensive plan to manage and allocate risk.

Most construction risk exposures can be transferred through the use of a combination of traditional insurance and surety products available in the current marketplace. While these traditional products are available on an individual basis, the real challenge is selecting the appropriate combinations of products to successfully address the specific project delivery method chosen for the project. For purposes of this article, the primary discussion will be on the insurance and risk management products and services that align with the design-build delivery method.

A design-build agreement between the owner and the contractor or design-builder describes the design and construction of the project. The design-build agreement may be an industry-standard agreement, such as one sponsored by the Design-Build Institute of America, American Institute of Architects, Engineers Joint Contract Documents Committee or other entities. It is prudent for the design-builder to assess the responsibilities and risks they have assumed in the design-build agreement and determine how best to manage those risks. The design-builder will assume certain risks, insure others and transfer significant risk to their downstream design professionals and trade subcontractors. Often the design responsibilities are subcontracted to a qualified design professional. One thing to keep in mind is that even though this design responsibility is subcontracted, the design-builder remains legally liable for those professional services.

The typical risks of the design-builder are both professional and non-professional exposures. The non-professional risks and exposures include:

  • 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 certain performance specifications.

The design-builder is responsible for the safety of all employees and third parties on the project site. Accidents on the job site 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. Because of this exposure, a contractor or 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.

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 professional’s services directly performed by the design-builder.

The most common available professional liability insurance options are the professional liability annual practice policy or a project-specific professional liability policy. The professional liability annual practice policy is issued by the insurance company to cover all risks in the performance of professional services up to the policy limits, on an annual basis. The project-specific policy is a policy issued for a specific project for the duration of the project plus an extended reporting period.

A design-builder with professional liability coverage in the form of an annual professional liability practice policy should execute adequate mutual indemnities with its design professional subconsultants and should also consider protective indemnity coverage. Protective indemnity coverage is a type of first-party coverage which is available in the contractors’ professional liability policy in the event that the subconsultant’s professional liability insurance is inadequate or exhausted.

For example, a design-builder executes a design-build agreement with an owner for the design and construction of an apartment building. The design-builder subcontracts to an architect for design services and is damaged due to negligent provision of professional services of the design professional. The design-builder brings a claim against the design professional. The claim is adjudicated and the design professional’s insurance is inadequate or exhausted. Protective indemnity insurance would cover the unpaid amount up to the policy limit.

When the insurance requirement for the design-builder and its design professional subconsultants is a project-specific policy covering both entities, an insured vs. insured exclusion precludes the design-builder from making claims against the insured design professionals. A solution is to provide rectification coverage. Rectification coverage pays for the cost to rectify design defects discovered during construction where there is clear and convincing evidence that the design defect would otherwise trigger a negligence claim. Insurance carriers have implemented very specific criteria to assess rectification claims. This solution enables the project to continue with minimal cost and disruption.

In another example, the design-builder adds itself and the design professional on a project-specific policy – purely third party coverage. Construction is underway and the design-builder encounters a design defect that requires redesign and/or reconstruction. Because of the insured vs. insured exclusion in a project-specific policy, the design-builder cannot sue the design professional. Rectification would be the solution for the design builder to recover the costs to rectify a design error without adjudication of negligence. The coverage would reimburse the design-builder for rectification costs reasonably and necessarily incurred by the design-builder to redesign and/or remediate a design defect that would otherwise lead to a professional liability claim covered under the project-specific policy.

The complexity of how projects are structured lends itself to some nontraditional placements of professional liability insurance. Larger infrastructure and privately funded high-profile projects are best insured through a dedicated project-specific policy. The level of intricacy of the contractual relationships of the parties will dictate the type of professional liability policies procured to transfer and manage the risk.

It is critical to review and assess the scope of work allocated to each party early in the project development in order to create the best solution to address the risk appetite of each participant. Risk should be allocated to the party most capable of managing that risk. It is not uncommon for one professional liability policy to be written for the design-builder and another to be written to insure the design team. Different Limits of Insurance and retentions may apply depending on the participants’ scopes of work and risk appetite.

A good project-specific risk management program from a professional insurance provider can be a valuable asset to the design-build team in assisting with claims mitigation, management and monitoring. Some project-specific liability insurers offer risk management programs and others do not. A comprehensive risk management service program may include:

  • preliminary risk assessment, including an early comprehensive evaluation of local statutes and laws applicable to each team member;
  • early evaluation of the allocation of risk among all participants;
  • development of procedures to assess and monitor changes in established project parameters throughout the execution of the project; and
  • dedicated program manager appointed to:
    • provide legal advice and claims management at no cost to the insured design team;
    • monitor defense counsel;
    • coordinate meetings with owner and insureds to review the status of claims, in order to keep communications open;
    • provide reports to insureds regarding status of claims; and
    • work with the insurance company, defense counsel, insureds and owner for a speedy resolution of claims.

Experienced project-specific policy insurers generally tailor a risk management program for each project-specific policy. These risk-management programs are designed to be minimally intrusive on project members and the benefits can be substantial. The frequency of monitoring a project varies depending on the size and complexity of the project. The utilization of a dedicated risk management program has resulted in less litigation and conflict on projects of all sizes and complexities.

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