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06.17.2019

Insurance Solutions for Design-Build Delivery Method Construction Projects

Valerie P. Onderka and Donna M. Hunt - Vice President - AIA, Esq. Assistant Vice President

Insurance is an important element in a comprehensive design-build delivery plan to help manage and allocate the risk inherent in most construction projects.  Most exposures can be transferred through a combination of traditional insurance and surety products.  The challenge is selecting the appropriate insurance products to address the specific nature of the design-build delivery agreement entered into by the property owner and the design-build contractor, who is legally liable for professional services.

The typical risks of the design-builder are both professional and non-professional exposures. The non-professional risks and exposures include direct damage to property, supplies, and materials related to the project; property damage and bodily injury resulting from the contractor’s operations on the project premises and occurring after completion of the project; environmental exposures resulting from the release or dispersal of hazardous materials from the project site; railroad liability exposure for operations within 50 feet of a railroad; and payment and performance guarantees, including obligations to complete the project within a certain schedule according to certain performance specifications. The design-builder is responsible for the safety of all employees and third parties on the project site. Accidents on the job site may result in workers compensation claims and OSHA fines and penalties.

Insurance coverage concerns for the design-builder encompass a wide range of risk exposures related to the many different services it provides. Typically, a design-builder can secure builder’s risk insurance, construction wrap-up insurance, commercial general liability insurance, contractor’s pollution liability insurance, railroad protective liability insurance, surety bonds, automobile insurance, and workers’ compensation insurance policies to address their non-professional exposures. 

The design-builder’s professional liability exposures are related to the professional services assumed in the design-build agreement with the Owner and then either executed in-house or subcontracted to the appropriate design professionals. The level of professional risk that the design-builder assumes in the design-build agreement may vary from very onerous to fair and equitable. The design-builder is concerned with geotechnical exposures, differing site conditions, environmental liabilities, and vicarious exposures for design defects.

The design-builder should secure professional liability insurance for all professional services assumed under its contract with the owner.  Available options are a professional liability “annual practice policy” or a “project-specific policy.”  An annual practice policy provided by a specialty insurance carrier is a claims made and reported coverage that responds to professional liability claims reported within the policy period, up to the policy limits, on an annual basis.  A project-specific policy is issued to cover the professional exposure of all named design professionals, for one specific project for the duration of the project and through an extended reporting period. Project specific policies are suited for projects executed through the design-build delivery method.

In some instances, project complexity may dictate the need for more customized, non-traditional professional liability solutions.  Larger commercial infrastructure and privately-funded high-profile construction projects should be insured with a dedicated project-specific program to effectively transfer and manage the underlying risks reflected in the perceived intricacies of the contractual relationship.  In some cases, a design-builder purchases a project specific policy separately from the design professional team.  When various liability policies are secured, different limits of insurance and retentions may apply, depending on the participants’ respective scope of work and risk appetite.

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