Expert Commentary

Constructing Professional Liability Insurance Requirements for Design-Build Projects

As a project owner, it is extremely imperative to require evidence of professional liability (PL) insurance from the construction firm you hire to design and build your project. However, when you do this, what are you trying to accomplish?


Design and Professional Liability
June 2013

Over the past year, I have seen an increasing request for contractors to evidence PL insurance. That is a good thing. In addition, many of those requirements required a dedicated PL program/limit of liability for the project. That makes a lot of sense. However, before you require any entity to provide evidence of PL insurance, you have to ask yourself, what do I want to insure against? This is a basic question, I know, but I think one that is often overlooked.

As an example, I have seen PL insurance specifications written for a design-builder to purchase PL insurance for the design team (not part of the design-build entity) and the design team subs/members. In this case, it would appear that the owner wants to insure only against design errors arising from the design services provided by the design team. Or does he? It's clear to me that this owner doesn't want to insure the project against PL risk, just design liability.

I have seen other instances where an owner has accepted a certificate of PL insurance from the engineering firm under contract with the construction firm, not even under direct contract with the owner. So, there is no contractual relationship between the owner and the engineering firm. Is this supposed to help owners sleep at night and protect against costly PL claims?

I've also seen specifications where the owner requires project PL insurance in the name of the construction firm or construction joint venture (not including any design professionals) but the project policy is positioned excess of all the practice PL policies of all the design professionals on the project. While conceptually, this may sound logical and prudent, I could envision a nightmarish event when a PL claim arises and the design professional responsible for the error has not amended its practice PL policy to be primary and noncontributory, therefore also triggering the project policy via other insurance provisions in both policies.

Marketplace Realities

Many of the specifications I have seen recently do not take into account practicality or its availability in the marketplace. For example, I recently came across a $20 million PL insurance requirement on a $3.2 million industrial renovation project. The professional risk was extremely low, if any, but the owner held steadfast to the $20 million requirement. The cost of PL insurance alone was nearly 20 percent of the project cost!

I've seen a $10 million PL requirement on a $5 million parking garage dismantling project. Again, the professional risk was not significant, but the contractor needed to purchase a dedicated $10 million PL insurance policy. Maybe there are ulterior motives, but as Harry said to Lloyd in the movie Dumb and Dumber when they were looking for Mary Swanson in the Aspen, Colorado, phonebook, "I ain't seeing it, Lloyd."

Maximizing the Benefit

As already stated, the good news is owners are waking up to the overriding fact that all construction projects present PL risk and the owner is the ultimate holder of that risk. The not so good news is that I think the majority of these specifications are not written properly to maximize the benefit of PL insurance. So, back to the question: what do you want to accomplish when requiring evidence of PL insurance for your design-build project? Do you want to merely insure against design errors—a narrower approach—or do you wish to protect against a broad range of construction-related PLs, therefore optimizing your insurance dollar?

Many times, the contractor's professional risk is overshadowed and minimized by the design risk; however, such exposures can also tremendously impact the project. For instance, and aside from prime design risk, contractors present owners with unique PL risks such as:

  • Design liability via lower tier subcontract agreements (not under the auspices of the prime design professional). For example, a mechanical/electrical/plumbing (MEP) contractor may perform some of the design, as well as the installation. In this case, the design-builder or general contractor holds a contract for both design and construction/installation and assumes the liability of any negligent acts as a result of the MEP's services. This can occur for contracts related to curtain walls, glazing, exterior insulation finishing systems, fire suppression systems, retaining walls, alarm systems, landscaping, etc.
  • Construction means and methods (CMM). For example, assume a civil contractor is building a bridge and is responsible for creating the false work. Because this is a fairly sophisticated area of work, the contractor hires a design professional to design it. Therefore, the contractor has a vicarious design liability exposure—even though it falls into the realm of CMM. This occurs on a variety of tasks such as tower cranes, scaffolding, shoring, etc. Many believe this to be covered under a commercial general liability policy, but what happens if the loss has nothing to do with bodily injury or property damage. What if the loss is pure economic damages?
  • Subcontractor management. Project scheduling, sequencing, and coordinating of subcontracts can expose both owners and contractors to PL risk. When subcontractors incur additional expenses due to negligent schedule management, they may initiate suits against the general contractor or design-builder. Another potential exposure involves faulty construction or work. Typically, the contractor has a contractual obligation to ensure the work is constructed or installed free of defects. Potential exposure develops when the contractor fails to identify a subcontractor's faulty work. (Of course, the degree of exposure will vary depending on the delivery method and scope of services agreed to via the contract.)
  • Constructability reviews/assessments. Professional opinions/input provided by the contractor via traditional methods or use of building information modeling brings about exposure to professional risk.
  • Value engineering. Contractors are often presented with providing opinions or collaborating on alternatives to the designed process, product, or material.
  • Performance specifications. Unlike design or prescriptive specifications where the contractor constructs or installs exactly as the designer drew it up, performance specifications require the contractor to determine what products, processes, or materials will provide the performance required. This allows the contractor the freedom to apply its professional opinion in selection of products, processes, or materials. Selecting the improper materials could present the contractor with professional risk. This exposure is magnified when you apply sustainable design and construction techniques where new processes and products are introduced daily.

Conclusion

So, the next time you sit down to create a PL insurance specification, you really need to think about all the possible pitfalls and whether it is necessary to insure against professional risk or merely the design liabilities posed by design teams. There is a big difference. If it's the former, then it is imperative to require the design-builder to carry the PL limits/policy, because, ultimately, they are the entities holding the contract for the services that pose the professional risks inclusive of design.


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