Insurance for Design-Build

Design-build projects are becoming more and more prevalent. They are even gaining wider acceptance in the public sector. Unfortunately, traditional insurance products do not adequately protect the participants in these arrangements.

Design-builders may be organized in a number of ways. The most prevalent has the contractor taking the lead, then using one or more design professionals as subcontractors or subconsultants. On some larger private projects — especially in the industrial sector — the design professional may take the lead. In other cases, the contractor and design professional form joint ventures or other jointly-owned business entities.

This can create problems with insurance because traditional coverage is not organized around these sorts of activities. In a classic design-bid-build project — the kind in which the designer and the builder each have separate contracts with the owner — the design professional's liability is tied to negligence. Absent some provision in the contract (which design professionals are careful to avoid), design professionals don't guarantee perfect drawings, perfect specifications, or a given result. There are no guarantees, warranties, or standards of care higher than the absence of negligence. At the same time the contractor is not only protected against the owner for faulty design, but looks to the owner to warrant the drawings and specifications.

A design-build project changes all this. In a design-build project, the design-builder's liability to the owner is based on the contract and is ordinarily much greater than for mere negligence. If the design professional is the design-builder, and the completed project does not satisfy its intended purpose, the design professional can be liable even if its work was not negligent.

Contractors, too, have increased liability as design-builders. In addition to direct liability for the services it provides in the construction arena, and for bodily injury and property damage arising from its work, a contractor in the lead role can incur contingent liability for damages arising from the acts of the design professional, and for those of the design professionals on its staff.

Traditional insurance policies are not designed to provide coverage for this increased liability. In the case of the design professional, traditional policies cover only those damages that arise from the design professional's negligence. They do not cover guarantees, warranties, and strict liability (liability without fault). Similarly, they don't cover contractual liability, such as indemnity obligations. Generally, they don't cover fines, penalties, and punitive damages — even those arising out of the negligence of the design professional — and offer only limited coverage for environmental issues. Also, most policies only provide defense costs "inside the limits", which means the costs of defense reduce the amount available to pay claims. (These are sometimes called "Pac Man" policies, as a result of their tendency to chew up coverage.) Finally, professional liability policies are almost always of the "claims made" variety, which requires coverage to be renewed in future periods, and makes coverage subject to erosion by claims on other projects.

The contractor's traditional insurance creates similar problems in the design-build context. Traditional contractor commercial general liability (CGL) policies exclude professional liability, either totally or to the extent that it does not apply to the contractor's operations in connection with the construction work. The standard exclusion for damage to the contractor's work arising from its own work will apply to its own design. Builder's risk policies, and certain umbrella policies, may provide coverage for physical damage to the contractor's work during construction, but they almost always exclude coverage for design liability.

Because of the special attributes of traditional insurance policies, a contractor design-builder cannot rely on the design professional's liability coverage. It also should not rely on endorsements that purport to add limited professional liability coverage to CGL policies. These usually apply only to damages arising from bodily injury and property damage — and provide no coverage for economic loss.

Arguably the best approach is the project policy. This may be in the form of a stand-alone policy, or as part of the owner's "wrap up" coverage. Such coverage can be specially tailored to the risks of the particular project, and the limits aren't subject to erosion from other projects. Project policies are not always available, however.

Some contractor's professional liability policies are on the market, but they have their own shortfalls. Because these policies exclude classes of risks, the exclusions need to be addressed by the design-builder either in its agreement with the owner, or as a specific aspect of the required markup to its price. Typical limitations in such policies include:

• Only negligent acts and omissions of the design-builder (and those for which it is responsible) are covered;
• There is no coverage for failure to meet performance standards, or schedule criteria;
• There is no coverage for warranties and guarantees, unless the insured would have been liable for the failure to satisfy them as a result of its own negligence;
• Coverage is on a "claims made" basis;
• There is no coverage for the costs of repairing or replacing defects caused by faulty workmanship;
• Damages to the design-builder's own property is not covered; and,
• Contractual liability, including indemnity obligations, are not covered except to the extent that the design-builder would have been liable to the injured party as a result of its own negligence.

Design-build arrangements require careful thought, not the least of which is the need to assure that risks are covered by insurance, and that the risks insured meet the expectations of all the players.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

BACK TO TOP | BACK TO ARTICLE INDEX | PRINTER-FRIENDLY PAGE