Professional liability underwriters traditionally have perceived design/build as the most hazardous construction-related professional liability exposure. The combination of design activity, on-site supervisory presence and active participation in the actual construction add up to a high degree of control over an entire construction project. This greatly increases the probability that any problems with the ultimate result will be attributed to the design/builder. Consequently, liability insurance is critically important to the design/builder's management of the risk.

Construction Exposures And Professional Liability

There are three critical aspects of design-driven professional liability claims. First, the majority of professional liability allegations are false, groundless or fraudulent. Liability premiums in the US reflect the relative ease with which one can sue for negligence. Consequently, professional liability coverage for the defense of claims for alleged negligence is important.

Second, most design defects are discovered after construction and therefore most design claims are filed after construction. That causes a major distinction between professional liability and general liability policies — professional liability policies are claims-made and general liability policies are occurrence-trigger policies. This basic difference both allows and prevents other substantial coverage and pricing advantages under the two policies.

The third critical aspect is that design-driven professional liability damages break down as follows:

• 60 percent: Economic Loss
• 25 percent: Property Damage
• 15 percent: Bodily Injury

These percentages are significant because general liability policies typically cover only bodily injury and property damage — not economic loss. Even if negligence does not result in damage to property or harm to others, it is nevertheless costly.

Design-Driven Professional Liability Exposures

The following list of professional liability exposures runs the gamut, from pure design exposures to contractor/construction management-related exposures:

1. Negligence in preparing plans, drawings, designs and specifications.
2. Errors involving site surveys, soil testing, subsurface conditions, elevations and grading (subgrade exposures).
3. Failure to design a structure per minimum local building codes.
4. Negligence in selecting or recommending building materials.
5. Failure to detect faulty workmanship on the part of a subcontractor.
6. Suits relating to costs or quantity estimates.
7. Third-party bodily injury or property damage or workers’ compensation claims.

Contractor Professional Liability Exposures

Contractors’ professional liability exposures can be separated into the following three categories:

• Design-driven professional liability exposures
• Non design-driven professional liability exposures
• Professional liability exposures extending beyond the scope of professional liability insurance Contractors' professional liability exposures driven by design include the following:
• Vicarious (or contingent) liability arising from a design subcontractor hired by the contractor
• Liability arising from a joint venture partner who is a designer
• Liability arising from design performed by the contractor's own in-house design professionals

Contractors' professional liability exposures that are not necessarily driven by design include the following:

• Construction management
• Cost overruns
• Delays

The last two hazards result in economic damages. If the alleged cause is negligence in covered professional services, economic damages are typically covered by professional liability policies.

Contractors' liability exposures beyond the scope of professional liability insurance include the following:

• Liability broader than performing to industry standards (the standard of care)
• Contractual obligation to perform work in strict accordance with the contract documents (warranty)
• Contractual obligation to warrant work free of defects (warranty)
• Contractual obligation to deliver the finished product (performance bond)
• Contractual obligation to warrant work suited for an intended purpose or a guaranteed output at a guaranteed price (efficacy)
• Warranties regarding cost overruns
• Warranties regarding delays (liquidated damages or force majeure policies)
• Strict liability for ultra-hazardous activities

Many of the preceding exposures are uninsurable. Some are bondable, and highly specialized products exist for some very specific exposures. Many such products are expensive both to underwrite and to purchase and therefore are not widely used. Lenders often drive the purchase of coverages for liquidated damages and unexpected events (e.g., floods), as well as coverage guaranteeing that a project or product will perform as warranted by the designer.

While many construction exposures may not be covered by professional liability insurance, all should be important to professional liability underwriters. Because of design/builders' greater control of a project, they have greater liability for construction defects than do independently retained designers and contractors. The cause of a defect may not be readily ascertainable on a design/build project, but the party ultimately responsible is almost inevitably the design/builder.

Vicarious Liability

The doctrine of respondeat superior, derived from Latin, means "let the master answer." Under this legal doctrine, an employer is responsible for the actions of his or her employees; the captain of the ship is responsible for the actions of his or her crew; and the chief surgeon is responsible for the actions of everyone else in the operating room, including the nurse who leaves a sponge in the patient. Also, contractors or designers are responsible for the actions of subcontractors and subconsultants. This legal liability exists apart from liability for active negligence, such as negligent supervision or negligent hiring or selection. Thus, the design/builder is responsible for the design error of their subconsultant, even if there has been no active negligence on the part of the design/builder.

The design/builder will face defense costs for being named in a lawsuit, even if the design/builder is ultimately not found liable and the subconsultant is insured. Although the design/builder (or the design/builder's insurance company) may have the right to recover from a negligent subconsultant, defense is costly and therefore an important consideration in the risk management of the design/builder's professional liability exposure.

Owners' Liabilities And Impacts On Design/Builders' Exposures

Owners can also be held vicariously liable for the negligence of designers working on their behalf. While an owner's commercial general liability policy may respond to many such claims, they should confirm that their design-team members carry adequate professional liability insurance coverage. Owners can also purchase project-specific professional liability policies to better manage their vicarious design professional liability exposures.

The greater an owner's involvement in design, review or direction, the greater their risk of responsibility for design adequacy. Many sophisticated owners have valuable insight or even proprietary technology that should be incorporated into their end product. Nonetheless, owners should be aware that the greater their degree of involvement in the design or construction process, the greater their potential responsibility for design adequacy.

Even more so than in design-bid-build, owners' expectations greatly impact design/builders' exposures. First, owners may expect the design/build delivery method to eliminate most or even all of their risk, including any risk associated with design adequacy. While design/build transfers much of the owner's risk to the design/builder, the owner still retains some risk. For example, differing subsurface conditions are not caused by contractors, designers or geotechnical engineers. Also, owners may retain the geotechnical engineer to conduct a subsurface investigation prior to requesting proposals from design/builders.

Under the design/build delivery method, the designer is no longer an agent of the owner. This is an important distinction, especially for owners who are new to design/build. The architect no longer conducts site visits during construction in order to monitor the owner's interests. Usually, the architect now works for the contractor. Therefore, it is very important to clearly define the owner's expectations regarding the design/professional's role in a design/build project, particularly with respect to the designer's responsibilities during construction.

In response, many owners are employing bridging consultants -- designers or project managers who act as the owner's agent in reviewing and monitoring the work of the design/builder. Also, more sophisticated owners have in-house personnel capable of performing this task. As with anything new, the expectations of owners and clients are a starting point from which they measure their ultimate satisfaction or disappointment. As always, the amount and effectiveness of up-front communication remains the consultant's greatest risk management tool.

Implied Warranty Of Design Adequacy

A last point regarding design/build liability exposures: The design/builder impliedly warrants the adequacy of the design to the subcontractors. Traditionally, the owner was responsible for furnishing the design to others. This may seem like a subtle distinction, but it does have important ramifications. A subcontractor who cannot build something because of the design he has been given will now look to the design/builder, instead of the owner, for relief. From the design/builder's perspective, this is another transfer of risk to be recognized and managed.

Conclusion

Design/build exposures can be summarized as follows:

• Because they are the sole point of responsibility, design/builders may be held to a higher standard of care than the standard to which independent designers and contractors traditionally have been held.
• Design/builders retain more exposure than independent designers and contractors retain.
• Owners' expectations greatly impact design/builders' exposures.

Though design/build inherently concentrates exposures onto one entity, it is not necessarily the riskiest method of project delivery. In fact, many proponents maintain that design/build substantially reduces both errors and claims. With the recent increase in popularity of design/build in the last few years, its effect on the frequency and/or severity of design-and-construction-liability claims remains to be seen. Preliminary indications are both promising and realistic. Design/build fosters partnering, communication and often better results than the traditional design-bid-build method, but design/build has not eliminated construction defects, cost overruns or claims.

References

D. J. Hatem, "Design-Build: Professional Liability and Risk Management Issues for Design Professionals," The CA/T Professional Liability Reporter, Volume 2-No. 2, December 1996, pp. 8-20.