Legal and Regulatory

Design-Build Trends, Challenges and Risk Mitigation

Design-build contractors with contractual responsibility for design and construction need strong contractual language and insurance programs to minimize risk exposures.
By Bill Webb
June 16, 2019
Legal and Regulatory

As the commercial construction industry continues to evolve and grow, design-build methodologies are becoming increasingly popular for their ability to speed completion rates, control costs and produce an overall more efficient process under the guidance of the design-build contractor (DBC).

The Design-Build Institute of America (DBIA) predicts that “over half of owners have already or will use design-build in the next five years” due to the opportunities it provides for innovation and fast-tracking projects. The organization also expects that design build methodologies will account for approximately 45% of all nonresidential construction spending over the 2018 – 2021 forecast period.

Design-build provides many benefits to projects owners, however, holding contractual responsibility for both design and construction does accompany its fair share of challenges and risks for the DBC. Although basic risk management principles are inherent to design build through improved communication and collaboration, strong contractual language and proper insurance programs can greatly control risk exposures.

Under traditional delivery methods, contractors generally warrant and guarantee that their work will conform with specifications, while being protected against design risk based on the Spearin Doctrine. Architects and engineers are held to the professional standard of care which does not require a warranty or guarantee. Bringing together design and construction under the DBC can shift the perceived professional standard of care to a warranty/guarantee standard. Professional Liability insurance carried by a DBC will not likely cover a heightened standard of care, which must be defined by clear contractual language.

Good or bad, it’s very easy for the lines of responsibility to blur once the work begins. Prime contracts should include language that will help the DBC overcome inaccurate prescriptive specifications and bridging documents in addition to clearly defining contingencies performance incentives and insurance requirements. This includes requiring each participant to carry their own coverage and not relying on the vicarious liability coverage found in the DBC’s Professional Liability insurance.

In addition, every subconsultant and subcontractor contract must carefully define the scope of services. They should also contain indemnification provisions that hold all the separate parties responsible for their own acts as well as Limitations of Liability, if accepted at all, that align with the available insurance proceeds.

When problems arise, clear dispute resolution methods should also be contractually outlined for helping to overcome these challenges. Otherwise, the DBC may be forced to bear the full financial responsibility of cost overruns and the damages for delays even if caused by the project owner or other third parties.

As a result, risk transfer strategies should be in play well before the first designs are even drawn. That’s because the services of every professional involved in the project have merged so intensely that even their “consultative advice” can produce exposures in this current “collaborative” atmosphere.

Contractor’s Professional and Pollution Liability (CPrL) insurance is integral for protecting design builders against the unexpected. As project risk has evolved so has CPrL. Coverage enhancements are available to respond to the heightened risks associated with design build delivery.

CPrL policies cover liability arising out of the acts, errors and omissions that may occur from providing professional services, whether performed by or on behalf of the insured, be it a general contractor, design/builder, construction manager or specialty subcontractor. Broad professional services language is available to cover the professional services related to project design and management including but not limited to architecture, engineering, construction and program management, contract administration, technical consulting and various other services customary to the design builder.

Little more than a professional liability coverage part a short time ago, CPrL programs have now broadened significantly to include Contractors Pollution Liability along with various first-party coverage parts focused specifically on design build risk. Unlike traditional liability coverage that indemnifies a third party due to actions of the Insured, Protective Indemnity and Rectification/ Mitigation are first-party coverages that indemnify the insured contractor when damaged by the actions of subconsultants. For instance:

  • Protective Indemnity literally indemnifies the insured contractor from the damages they are legally entitled to recover due to the acts, errors or omissions of their contracted design professionals. Protective is an excess coverage and serves as the delta between the total damages incurred and the insurance proceeds available from the responsible design professional.
  • Rectification/Mitigation indemnifies the insured for the expenses reasonably incurred to mitigate or rectify a negligent act, error, or omission arising from professional services that would otherwise lead to a professional liability claim. Rectification/Mitigation coverage is a primary coverage. Correcting problems before they become a claim not only saves the costs incurred to defend a claim, but can also lead to faster resolutions and the avoidance of costly delays.

As for availability, approximately 25 domestic carriers offer CPrL products with one or two new entrants entering the field every year. Coverage varies greatly and must be carefully assessed to align with the buyer’s specific needs.

As projects become more complicated and owner demands continue to rise, the frequency of claims has grown significantly in many sectors including the civil, healthcare, commercial building, and habitational sectors. Unfortunately, this trend has also coincided with the late reporting of claims by insureds who:

  • do not understand that the coverage is in place to insure against incidents and claims;
  • do not understand the importance of formally reporting incidents and errors; and
  • apply the “we screwed up, we should fix it” mentality, while failing to report the claim after the fact.

As a result, the proper reporting of known claims is essential for maximizing the protection provided under CPrL policies and avoiding the potential nullification of claims when needed the most.

by Bill Webb
Bill Webb, RPLU, is an assistant vice president within R-T Specialty, LLC’s National Environmental and Construction Professional Practice at ( RT New Day is a specialty intermediary for insurance agents and brokers with expertise in environmental insurance, environmental risk management and construction related professional liability. 

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