Is Your Insurance Program Designed to Insure Design‐Build Jobs? By G. Martin Irons, CPCU, CIC, ARM, Vice President ‐ Technical Development Department, The Graham Company Design‐Build is a construction delivery system where both the design and construction aspects of a job are contracted with a single entity. This approach continues to grow in both public and private sectors because it minimizes the project risk for an owner and reduces the delivery schedule by overlapping the design phase and construction phase of a project. A recent study by the Federal Highway Administration found that the project duration for Design‐Build projects was 14 percent less than the Design‐Bid‐Build approach, where the owner contracts with separate entities for the design and construction. As more and more owners look to the Design‐Build delivery system, for contractors the question remains: “Is my insurance program designed to protect me for this additional responsibility?” It is clear that Design‐Build jobs open the contractor to additional exposure. With the traditional approach, contractors have the protection of established construction contract law doctrines such as the Spearin doctrine, which holds that the contractor is not liable to the owner for loss resulting from defective drawings or specifications if the contractor can demonstrate they followed the drawings provided by the owner. (See United States v. Spearin, 248, U.S 132 (1918) The key issue to review from an insurance perspective is the type of professional liability coverage you have. With a Design‐Build approach, you, the contractor, hold the responsibility for the design contract. This exposure can be insured in various ways: 1. The Design Professional’s Liability Policy – Many contractors subcontract the design to a design professional. If this is your approach, here are some key points to remember: a. The designer's professional liability policy only protects the designer. It will not typically provide a contractor with additional insured coverage or contractual liability coverage if you are sued. Hence, contractors need an insurance policy that will protect them for their responsibility for the design contract. b. The limit of the design professional’s policy is shared over all their other jobs, and a claim from another job could exhaust their limit, resulting in inadequate claims coverage. 2. General Liability Policy – A contractor’s general liability policy will typically have an exclusion for professional liability. The most common exclusion excludes liability arising out of engineering, architectural or surveying services provided by you or on your behalf. This would likely exclude a contractor’s responsibility for the design contract (whether it is performed in‐house or subcontracted to a design professional). For those contractors who have worked with their broker to only have a limited professional liability exclusion, it is important to note that general liability policies limit the type of damages covered to “bodily Injury” and “property damage.” Design errors often do not result in actual physical injury or damage. For example, if a Design‐Build contractor miscalculates the cooling needs of the building, the property has not had any true physical damage, however, it now has a reduced value to the owner (for the market value to sell it or to rent it) due to the inadequate cooling system. In cases where fixing the problem is not feasible, the contractor will be asked to compensate the owner for this diminution of value. However, the general liability policy does not cover these types of diminution of value claims or other purely “economic” losses. To obtain coverage for this type of exposure, a professional liability policy is needed as discussed below. 3. Umbrella Liability Policy – Similar to the general liability policy, a contractor’s umbrella liability policy will typically have an exclusion for professional liability. The most common exclusion excludes liability arising out of engineering, architectural or surveying services provided by you or on your behalf. This would likely exclude a contractor’s responsibility for the design contract (whether it is performed in‐
house or subcontracted to a design professional). 4.
Contractor’s Professional Liability Policy – As discussed previously, professional liability policies provide a broader scope of covered damages that is not limited to “bodily injury” or “property damage.” However, these policies are limited to a specific scope of activities regarding the rendering or failure to render professional services. Your contractor’s professional liability policy will typically have a manuscript definition of covered professional services. This definition is critical to understand the coverage provided by your policy. If this definition focuses only on your contracting activities, it may not extend coverage for your responsibility for the design contract (whether it is performed in‐house or subcontracted to a design professional). The definition of covered professional services in your policy should be carefully reviewed to ensure your Design‐Build exposure is properly protected. In addition, since your umbrella policy limits will not typically provide excess professional liability limits, your current professional liability limit should be evaluated to determine if it is adequate to protect you for the additional design exposure you have assumed. 5.
Contractor’s Protective Professional Coverage – This coverage is a first‐party coverage that indemnifies you, the contractor, for your loss. Coverage applies excess of the design professional's professional liability insurance for costs you incur and are legally entitled to recover as a result of negligent acts, errors and omissions of design professionals with whom you hold a contract. This coverage is often not carried by a contractor, but here are several reasons why you should consider it: a.
It provides coverage for costs you (the contractor) incur as a result of the acts/omissions of the design professional you hired. Note, however, that it does not provide protection for suits brought by third parties against you for your vicarious liability for hiring the design professional. For example, if the design professional designs the project with improperly sized rebar and it is not discovered until the job is nearly completed, the contractor could incur substantial rework costs and schedule delays that may or may not be insured by the design professional’s policy. b.
The coverage applies excess and difference in condition of the design professional's own coverage. This means the contractor would be protected if the design professional's coverage is exhausted or determined not to apply. This often happens because the design professional’s policy limit is shared over all their other jobs, and a claim from another job could exhaust their limit. c.
This coverage basically operates like automobile uninsured/underinsured coverage. If the design professional you hire is not properly insured and you sustain a loss from their negligent design, this policy provides protection to you for your loss. 6.
Builders Risk Insurance Policy – This policy insures damage to the structure during construction and typically includes the owner, general contractor and subcontractors as insureds. The builders risk policy covers certain losses that otherwise would potentially be covered by the contractor’s professional or general liability policy, but the contracting parties prefer to have the builders risk policy be primary because it eliminates the need to determine who was at fault during the course of construction. With regards to Design‐Build projects, most builders risk policies will include an exclusion for defects or errors in design, construction materials or workmanship. However, contractors should work with their brokers to ensure this design exclusion has a “give‐back” for resulting loss from a covered peril. For example, if there is a design error in the support of a beam that then falls during construction and destroys the hardwood flooring, a builders risk policy with a resulting damage “give‐back” would provide coverage for the damage to the floor. Hence, a properly endorsed builders risk policy is also an important component of protecting a contractor’s Design‐Build exposure. 7. Bonds – The last area of a contractor’s insurance program to review is their surety bonds. A contractor’s bonding is usually a sensitive subject because it often requires personal indemnification by the individuals who own the contracting firm. For typical Design‐Bid‐Build construction projects, a performance bond is issued to the owner to provide the assurance that the bonded contractor will complete the construction of the project, while the architect’s obligation to perform consistent with generally accepted standards of care is provided by the architect’s professional liability insurance, which protects the architect for lawsuits for negligence brought by the owner. Copyright  The Graham Company 2011. All Rights Reserved.
With the traditional bidding approach there is a clear distinction between the design and construction of the project. However, on Design‐Build projects this is blurred. The contract includes both the design and construction services, and the bond that secures a Design‐Build contract may be “guaranteeing” the accuracy and adequacy of the design. As a result, surety companies often attempt to limit their exposure on Design‐Build projects to only the construction portion of the project by using limiting language or disclaimers in the surety bond form. Bonds are not the best mechanism for covering design risks, nor are bond premiums adequate for this additional risk. Unlike other forms of insurance, the surety expects no losses to occur and the bond premium is more of a “certification fee” that the contractor is capable of performing the project than an estimate of expected future losses. As a result, contractors can expect the surety to do a more thorough analysis of the contract language for Design‐Build jobs to review that the contractor is not being held to the “highest standard of care” and also verify the amount of professional liability insurance provided for the job by the contractor and outsourced design professional (if applicable). While the Design‐Build approach is advantageous for the project’s owner, it forces a contractor to assume the responsibility for the design contract. Prior to bidding, it is critical that your insurance program be designed to protect you for this added responsibility. Reviewing your program with your insurance broker is essential to make sure you aren’t surprised by an uninsured professional liability claim. About the Author: G. Martin Irons, CPCU, CIC, ARM, Vice President ‐ Technical Development Department As the Team Leader for the Technical Development Department, Marty is an insurance coverage expert and is responsible for coordinating the training and development of new employees in a three‐year training program, client education and internal quality assurance. He is a member of The Graham Company's practice group for both construction and mergers & acquisitions. He has been with The Graham Company for over 20 years. Marty is a graduate of Penn State University with a bachelor of business administrations in finance and holds the Chartered Property and Casualty Underwriter (CPCU), the Certified Insurance Counselor (CIC) and the Associate in Risk Management (ARM) designations. Copyright  The Graham Company 2011. All Rights Reserved.