Commentary: The Added Risk Considerations of Design Build Delivery
A recent study by the Federal Highway Administration determined that on average, design-build projects were completed 14% faster than the traditional design-bid-build projects. Design-build, however, exposes contractors to risks they don’t have under traditional delivery methods.
Since under design-build, the contractor is responsible for design, it is also responsible for damages and costs arising out of inaccurate or flawed design documents. Although a majority of the risk can be transferred contractually to the design professional subconsultant, the contractor still retains additional exposure.
To maximize the benefits of design-build, it is essential that each party’s responsibilities and obligations be clearly defined under the contract. This applies to both the owner/contractor agreement and the contractor/design professional agreement. A well-written scope of services agreement will spell out what each party will and will not do, and what they can do for an additional fee.
It is critical that this be clear at the outset; if it isn’t, you should spend some time and get it right. If you can’t agree on who is supposed to do what at the start of the project when everyone is on good terms, you certainly won’t be able to figure it out at the end of a project when relationships may have deteriorated.
A scope of services agreement will not only decrease misunderstandings as to who is responsible for what, it can also prevent duplication of effort. Likewise, a “teaming agreement” is helpful to make sure that all parties to the project work together to maximize project successes and minimize potential disputes.
Indemnification
The indemnity agreements are critical—both the contractor’s obligation to indemnify the owner and the design professional’s obligation to indemnify the contractor (assuming the contractor is subbing out the design). In many cases, the owner will require the general contractor to execute a Type I indemnity in the owner’s favor. With a Type I indemnity, the indemnitor (in this case, the contractor) is responsible for everything that goes wrong on a project unless the indemnitee (the owner) is solely (100%) negligent. While this isn’t fair, it is legal, and for the most part, insurable under a contractors general liability policy.
Unfortunately, most design professionals will resist signing a similar indemnity in the contractor’s favor. The reason for this is that the contractual liability coverage provided under a design professional’s professional liability policy is not as broad as the contractual coverage in the contractors general liability policy. Where the general contractor is probably insured if it signs this type of agreement, the design professional will not be. The ultimate indemnity the design professional is willing to agree to will come down to a negotiation between the contractor and the design professional.
An integrated insurance program is critical to any construction project. The project owner, contractor, and design professional all have insurance issues to deal with, and these should be clearly spelled out in the agreement.
Builders Risk Insurance
Builders risk insurance, also known as course of construction insurance, is a first-party property insurance that covers the real property during construction. Whether this is secured by the owner (which we recommend), or the contractor, several elements should not be overlooked:
● Coverage should be written on a “special peril” (all-risk) basis.
● Hard costs (cost of construction) and soft costs (design costs, finance charges, insurance premiums, future profits) should be carefully evaluated to make sure limits are appropriate.
● All stakeholders should be named insureds on the policy.
● The value of a well-written builders risk policy should not be underestimated. It is always better to have a loss paid under a property policy than a liability policy, which is usually triggered by a lawsuit.
Contractors Insurance
Insuring a design-build project from a general liability, automobile and workers’ compensation standpoint is not much different from a design-bid-build project. The challenge is the professional liability exposure that the contractor assumed when taking on responsibility for design. Certainly the contractor should ask the design professional to indemnify them from design negligence.
Most, if not all, design professionals will be agreeable to this; however, there are some issues a contractor should be aware of:
● A design professional liability policy provides coverage only if the design professional is negligent. The law does not require the design professional to be perfect, and the perfect set of plans has yet to be drafted. In other words, there can be errors in the plans that don't fall below the standard of care. In situations like this, the design professional is not negligent, and the contractor will have to bear the risk.
● A design professional liability policy is written on a claims made and reported basis (as opposed to most general liability policies, which are written on an occurrence basis). If the design professional drops their coverage before a claim is made, there will be no coverage, even if they had the insurance when they did the design.
● A design professional liability policy covers all of the work the design professional has done. It is conceivable that when a claim is made against them, their limits could have been exhausted by other claims.
● Design professionals historically have not carried significant limits of coverage. One or two million dollars in total limits is common, even for firms designing significant structures. As mentioned, above this limit is for all the design firm’s work and also includes defense costs within the limit.
For these reasons, contractors should strongly consider purchasing contractors professional liability insurance, which not only covers the contractor for its legal liability arising out of its own professional services but also protects the contractor from its vicarious liability arising out of the negligence of its subconsultants. In addition to professional liability, a CPL policy can also include contractors pollution coverage.
Dispute Resolution
Identifying potential problems and resolving disputes in a timely matter is critical to the success of a project. Stakeholders should be encouraged to discuss concerns before they become claims. Ideally these issues are worked out amongst team members. If, however, this is unsuccessful, the next step should be mediation. If mediation is unsuccessful, you have to consider arbitration or litigation. But, if it is at all possible, the dispute should be settled by the parties to the dispute.
Jeff Cavignac is president and principal of Cavignac & Associates, a leading commercial insurance brokerage firm in San Diego. Website: www.cavignac.com
