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05.13.2019

Underlying Risk Exposure of Design-Build Delivery Method

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

Contractors and design builders utilizing a project delivery method for a construction project face both professional and non-professional exposures. The design-builder must assess the responsibilities and risks it has assumed in the contract agreement and determine how best to manage those risks. With the increase in the quantity and complexity of design-build projects, it is important for design-builders and design professionals to equitably allocate risk to the party most suited to manage those risks.

A design-build agreement is a contractual relationship between an owner and design-builder, which defines the roles and responsibilities of the parties. The design-builder assumes control of the construction project and assigns project-specific specialty work to its selected design professionals and trade subcontractors. Risk exposure for a design-builder can include damage to the property and supplies to unexpected incidents that may occur on the site during construction or for claims emerging after completion of the project. The greatest risk that demand insurance coverage result from professional liability incidents that trigger claims due to direct or contingent exposures when the design-builder contracts to provide “all design and construction services.”

The design-builder’s professional liability exposures are related to the design services outlined in the contract with the owner and then subcontracted to design professional as set forth in the agreement, which can range from very onerous to fair and equitable. Claims can arise when the design-builder unfairly allocates risk to a design professional who is ill equipped to manage that risk. For example, a design professional may not be suited to manage the risk of a specialty subcontractor who is contractually obligated to warrant and guarantee their work.

There are various tools available to assist the design-builder in mitigating risks. A design-builder with professional liability insurance coverage in the form of an annual professional liability practice policy should execute adequate mutual indemnities with its design professional sub consultants. The policy should include protective indemnity coverage, which is a type of first-party cover available in the contractor’s professional lability policy in the event that the sub consultant’s professional liability insurance is inadequate or exhausted.

When the insurance requirement of the design-builder and its design sub consultant is a project specific policy covering both entities, the “insured vs insured” exclusion precludes the design-builder from making claims against the insured design professional. Rectification coverage can provide a solution. Rectification insurance covers the costs to rectify design defects discovered during construction and when there is clear and convincing evidence that the design defect would have otherwise triggered a negligence claim.

The increasing prevalence of complex, multi-party design-build delivery projects requires thorough assessment and evaluation of the risks at the outset. The entire design-build team should be involved in seeking appropriate insurance options and solutions to protect their respective professional liability exposures and legal obligations. Fortunately, the insurance industry has responded with customizable, sophisticated products and services to address the risk factors within this specialty sector of the construction industry today.

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