Be sure your insurance program offers protection for additional risks created from design-build jobs.
The design-build approach continues to grow in both public and private sectors. A recent study by the Federal Highway Administration (FHWA) found that the project duration for design-build projects was 14 percent less than the design-bid-build approach, in which the owner contracts with separate entities for design and construction. In design-build projects, a single party-the design-build team-works under a single contract to provide the design and construction of a job. This method can significantly reduce the project's delivery schedule.
Design-build jobs, however, create additional risk exposure to contractors. Contractors have more protection with the traditional approach because of established construction contract law doctrines, such as the Spearin doctrine. This doctrine holds that the contractor is not liable to the owner for any loss resulting from defective drawings or specifications if the contractor can demonstrate he followed the plans and specifications provided by the owner.
As more owners use the design-build delivery system, contractors must be sure their insurance program offers protection for this additional responsibility.
The Design Professional's Liability Policy
Many contractors subcontract the design to a design professional. If this is your approach, remember these key points:
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. Contractors need an insurance policy that will provide protection for any responsibility they assume for the design contract.
The design professional's policy limit is shared over all of his or her other jobs, and a claim from another job could exhaust his or her limit, resulting in inadequate claims coverage.
General Liability Policy
A contractor's general liability policy will typically have an exclusion for professional liability. The most common exclusion is for liability from 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).
A limited professional liability exclusion in a general liability policy limits the type of damages covered to bodily injury and property damage. But design errors often do not result in actual physical injury or damage. For example, if a design-build contractor miscalculates a building's cooling needs, the property has not had any true physical damage, but it does reduce the building's value to the owner (the market value to sell or rent it) due to the inadequate cooling system. If correcting 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.
Umbrella Liability Policy
Similar to the general liability policy, a contractor's umbrella liability policy-the policy designed to provide protection against catastrophic losses-will typically have a professional liability exclusion. The most common exclusion is for liability from 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).
Contractor's Professional Liability Policy
While professional liability policies provide a broader scope of covered damages, these policies are limited to a specific scope of activitiesThe contractor's professional liability (CPrL) policy will typically have a manuscript definition of covered professional services. This definition is critical to understand the coverage provided. If the definition focuses only on your contracting activities, it may not extend coverage for any work performed 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.
Contractor's Protective Professional Coverage
This coverage is a first-party coverage that indemnifies the contractor for any 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. Contractors often do not carry this coverage but should consider it for several reasons:
It provides coverage for costs the contractor incurs as a result of the design professional's acts/omissions. Note, however, that it does not provide protection for suits by third parties brought against you for hiring the design professional. For example, if the design professional designs the project with improperly sized rebar, but 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.
The contractor would be protected if the design professional's coverage is exhausted or determined not to apply.
This coverage basically operates like automobile uninsured/underinsured coverage. If the design professional is not properly insured and you sustain a loss from negligent design, this policy provides protection for your loss.
Builder's Risk Insurance Policy
This policy insures damage to the structure during construction and typically includes the owner, general contractor and subcontractors as insureds. The builder's risk policy eliminates the need to determine who was at fault during the course of construction.
Most builder's risk policies for design-build projects will include an exclusion for defects 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 liability. For example, if a beam falls during construction and destroys the flooring because of a design error, a builder's risk policy with a resulting damage "give-back" would provide coverage for floor damage.
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 assurance that the bonded contractor will complete the construction of the project.
The traditional bidding approach provides a clear distinction between the design and construction of the project, but this distinction is blurred on design-build projects. The contract includes both the design and construction services, and the bond that secures a design-build contract may be "guaranteeing" the design's accuracy and adequacy. 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 and bond premiums are not the best mechanisms for covering design risks. 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. As a result, sureties will conduct a more thorough analysis of the contract language for design-build jobs to be sure the contractor is not held to the "highest standard of care" and to verify the amount of professional liability insurance provided for the job.
Since the design-build approach forces a contractor to assume responsibility for the design contract, it is critical to see if your insurance program is designed to provide the necessary protection prior to bidding. Reviewing your program with your insurance broker is essential to avoid any surprises by an uninsured professional liability claim.
Insurance Program Checklist
In order to fully understand your construction business' exposure in a design-build project, review these seven aspects of your insurance program with your broker:
- Contractor's Professional Liability Policy
- General Liability
- Umbrella Liability Policy
- The Design Professional's Liability Policy
- Contractor's Protective Professional Coverage
- Builder's Risk Insurance Policy
Construction Business Owner, June 2011