insurance coverage for design build construction...

Presenting a live 90‐minute webinar with interactive Q&A

Insurance Coverage for Design‐Build Insurance Coverage for Design Build Construction ProjectsMaximizing CGL, PLI and AI Coverage to Mitigate Risks for D‐B Contractors

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, SEPTEMBER 15, 2011

Today’s faculty features:

Stephen D. Palley, Principal, Ober | Kaler, Washington, D.C.

John Hunt, Counsel, Forest City Ratner, Brooklyn, N.Y.

Timothy E. Delahunt, Partner, Kenney Shelton Liptak Nowak, Buffalo, N.Y

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Design Build Construction andDesign Build Construction and Insurance

Stephen D. Palley

Ober Kaler

[email protected]

202.326.5075

John Hunt

Forest City Ratner

[email protected]

Timothy E. Delahunt

Kenney Shelton Liptak Nowak

[email protected]

716.853.3801

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Webinar OverviewWebinar Overview

• IntroductionIntroduction

• Construction delivery methodology

C f d i i k i b i i• Coverage for design risks in basic construction policies

• Coverage for design risk in newer products

• Insurance challenges for design‐build projects.g g p j

• Questions?

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Construction DeliveryConstruction Delivery

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Design‐Bid‐BuildDesign Bid Build

• Owner’s design team prepares documents O e s des g tea p epa es docu e tssuitable for construction.

• Contractor performs the work designed by the p g yowner’s design team

• Implied warranty (from Owner to Contractor) regarding plans.

• But distinctions can blur: – coordination drawings, “value engineering”, shop drawings, performance specifications, state and local law requirementsq

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Design‐BuildDesign Build

• Owner contracts with one entity to design andOwner contracts with one entity to design and build project

• Typically contractor led but can be designer• Typically contractor led, but can be designer led (with contractor as sub to designed)

Al f d EPC ( i• Also referred to as EPC (engineer, procure, construct) contracting, particularly in

i i h i d i l f ili i dconnection with industrial facilities and power plants.

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Design‐BuildDesign Build

• Project can have design‐build components –Project can have design build components design assist, design delegation, etc.

• No owner warranty re plans waivers and• No owner warranty re plans – waivers and limitations of liability often heavily negotiated.

B h i d “ f i l"• But . . .other owner retained “professional" risks:– Geotech? Pollution?

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Other ConsiderationsOther Considerations

• Construction Managementg– Construction manager ‐‐ role in either a design‐bid‐build or design‐build project. At risk agency– At risk, agency

– “Professional” obligations?• BIM, Green Construction, LEED, ,

– BIM may create efficiencies through communication about project scope, design, schedule and cost.However can it draw non design professionals into– However, can it draw non‐design professionals into “design” decisions ?

• Public Private Partnerships (“PPP”)

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Cost impactCost impact

• Design error without property damage or bodily es g e o t out p ope ty da age o bod yinjury – potential cost impact:– Disruption, ripple impact– Schedule compression, “hop‐scotching”– Delay to follow on trades

d d l di i– Extended general conditions – Demobilization, remobilization costsIncreased material costs– Increased material costs

– Acceleration to avoid delay– Delayed openingy p g

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Insurance – “Design” RiskInsurance Design Risk

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Basic Coverage – CGLBasic Coverage CGL

• CGLCGL– Questions at the outset where design build used:

• Who is insured?Who is insured?– Subcontracted A/E firms? For what sorts of risks?

• For what period of time are losses covered?

• What risks are presented? What types of losses areinsured?

Does contractor have coverage for A/E vicarious liability– Does contractor have coverage for A/E vicarious liability

– Are “purely economic losses” not caused by property damageor bodily injury covered?

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CGLCGL

• Professional services exclusionsProfessional services exclusions– ISO form CG 22 43 (“Exclusion – Engineers,Architects or Surveyors Professional Liability”)Architects or Surveyors Professional Liability ).

• rendering or failure to render any professional servicesby or for you, including: 1. The preparing, approving,or failing to prepare or approve maps, drawings,opinions, reports, surveys, change orders, designs orspecifications; and 2. Supervisory, inspection orspec cat o s; a d Supe so y, spect o oengineering services.

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CGLCGL

• Following Omni v Harbor (see below) ISO nowFollowing Omni v. Harbor (see below) ISO nowsuggests CG 22 43 should be limited topolicies issued to architects engineers andpolicies issued to architects, engineers, andsurveyors.

• Other endorsements (discussed below) to be• Other endorsements (discussed below) to beused for means and methods.

S i ti d t CG 22 43 f– Some insurers continued to use CG 22 43 forcontractors, though will change when this isnotednoted.

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CGLCGL

• CG 22 79 “Exclusion – Contractors –CG 22 79 Exclusion ContractorsProfessional Liability”– Exception for contractors: “Professional services– Exception for contractors: Professional servicesdo not include services within constructionmeans, methods, techniques, sequences and, , q , qprocedures employed by you in connection withyour operations in your capacity as a constructioncontractor.”

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CGL – Professional Services ExclusionsCGL Professional Services Exclusions

• Harbor Insurance Co. v. Omni, 912 F.2d 1520 (D.C. Cir. 1990).Sheeting and shoring deemed “professional” nder older form of ISO professional ser ices– Sheeting and shoring deemed “professional” under older form of ISO professional services exclusion (CG 22 43). ISO promulgated new endorsements.

• State Farm v. Habitat Construction Co., 875 N.E.2d 1159 (2007). – professional services exclusion inapplicable to general contractor who was “not an architect,

engineer, or supervisor [where the plaintiff’s] Complaint [did] not allege otherwise”). g , p [ p ] p [ ] g )• Cowell v. Gaston County, 190 N.C. App. 743, 660 S.E.2d 915 (2008).

– by its plain terms, exclusion applied only to engineers, architects or surveyors. • Noyes v. Canadian Indemnity Co., 487 F. Supp. 433 (D. Colo. 1980).

– professional services exclusion did not apply to damage alleged to have arisen out of insured’sprofessional services exclusion did not apply to damage alleged to have arisen out of insured s consulting services in connection with oil and gas well construction and maintenance when the services at issue were not provided by a “professional” under applicable state law;

• Aetna Fire Underwriters Insurance Co. v. Southwestern Engineering Co., 626 S.W.2d 99 (Tex. App. 1981).

“ i i i ” d i d fi i i f “ f i l i ” i CG 22 43 i– “engineering services” as used in definition of “professional services” in CG 22 43 is ambiguous, and the ambiguity is to be construed against the insurance company).

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CGLCGL

• CG 22 80 (“Limited Exclusion – Contractors – ProfessionalLiability”).– This insurance does not apply to ‘bodily injury,’ ‘property

damage,’ ‘personal injury’ or ‘advertising injury’ arising out ofthe rendering of or failure to render any professional services bythe rendering of or failure to render any professional services byyou, but only with respect to your providing engineering,architectural or surveying services in your capacity as anengineer, architect or surveyor.

– Same definition of “professional services” as CG 22 79, butexclusion is narrower because it does not apply to professionalservices provided by those hired by the insured.C CG 22 79 i f “ i– Compare to CG 22 79 exception, for “construction means,methods, techniques, sequences, and procedures” employed bythe insured .

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CGLCGL

• Defense outside of limitsDefense outside of limits

• Higher policy limits, including availability offollow form excess coveragefollow‐form excess coverage

• Low or no deductibles or retentions

• Availability of additional insured coverage

• But . . . potential gap if pure design errorp g p p gcauses consequential loss only (e.g., delay butno property damage or bodily injury).p p y g y j y)

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Professional Liability InsuranceProfessional Liability Insurance

• Coverage for errors and omissions in performing“professional services” (which might be defined as,e.g., “wrongful acts” or “professional negligence”)

• “Professional services” will be defined to includeProfessional services will be defined to includearchitecture, engineering, surveying, and possiblyother services, including construction management

• Claims made coverage• Claims‐made coverage• Typically maintained by A/E firms on a practice basis –limits depend on size of firm but lower as a generallrule.

• Generally exclude claims arising out of constructionmeans and methods.

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• PLI policies typically include purely economicPLI policies typically include purely economic damages – delay damages– delay damages

– cost overruns

loss of revenue– loss of revenue

– etc.

A d i ll l d l i i i f• And typically exclude claims arising out of construction means and methods.

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• Defense costs within limits (“wasting” policies)Defense costs within limits ( wasting policies)

• Low limits compared to potential design risk

i h d d ibl i• High deductibles or retentions

• Applies only to liability claims

• Coverage only for designer

• No additional insured statusNo additional insured status– and AI subject to cross‐suits exclusions for claim against named insured.against named insured.

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Builders RiskBuilders Risk

• First‐party coverage for risk of physicalFirst party coverage for risk of physicaldamage to the work during construction

• Owner general contractor and subcontractors• Owner, general contractor, and subcontractorstypically qualify as insureds

Fi h b d i• First‐party coverage that, based on anti‐subrogation rules and waiver of subrogation

i i id hi d l i bprovisions, avoids third‐party claims betweeninsureds for damage to the work

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Performance BondsPerformance Bonds

• Performance bond is not insurance• Important risk transfer device, nonetheless• Generally, addresses contractor “performance” default• Incorporation of contract by reference• Implication in design‐build project where A/E has direct

t t ith t t tcontract with contractor, not owner.• Are surety’s obligations different?• How should this be addressed at outset?• How should this be addressed at outset?• How have sureties addressed this?• Traps for the unwary?Traps for the unwary?

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• Higher BR limits reflect value of completedg e ts e ect a ue o co p etedproject

• Design builder and trade subcontractors coveredg• Coverage for “soft costs”/consequential losses byendorsement– Scope of coverage for “consequential” losses: seeZurich American Insurance Company v. KeatingBuilding Corporation 513 F Supp 2d 55 (D N J 2007)Building Corporation, 513 F.Supp.2d 55 (D.N.J. 2007)

• Design related losses subject to exclusions andexceptionsp

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• BR policies typically contain exclusions related to defective design

• Example:We will not pay for loss or damage caused by orWe will not pay for loss or damage caused by or resulting from any of the following . . .Faulty, inadequate or defective:(1) Planning, zoning, development, surveying,

siting;(2) Design specifications workmanship repair(2) Design, specifications, workmanship, repair,

construction, renovation, remodeling, grading, compaction . . .

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• Such exclusions are often subject to an ensuingj gloss exception, such as:

In the event an excluded cause of loss resultsin a Covered Cause of Loss the Company willin a Covered Cause of Loss, the Company willbe liable only for such resulting loss ordamage.

• Therefore, if a design defect leads to, e.g., acollapse or fire, the damage caused by thecollapse or fire itself would be covered This setscollapse or fire itself would be covered. This setsup disputes over the extent of the total damagethat is “ensuing.”

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Owners Protective Professional and d ( )Indemnity Insurance (OPPI)

• Owner is insuredOwner is insured• Availability of policy typically not disclosed• Supplements A/E practice policies for Owner.Supplements A/E practice policies for Owner. • Similar to an umbrella, excess or “difference in conditions” policy.

• First and third party coverage• Owner to pursue liability/indemnity claim

i d i f i l d h hagainst design professional and exhaust theprofessional’s PL coverage (where available)

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Contractors Protective Professional and Indemnit Ins rance (CPPI)Indemnity Insurance (CPPI)

• Contractor’s own “professional” liabilityContractor s own professional liability

• Vicarious liability for subcontracted design

Off d b i f i k• Offered by a variety of insurance markets

• May be subject to high self‐insured retentionand/or deductible

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Challenges and pitfallsChallenges and pitfalls

• Determining who is coveredDetermining who is covered

• Identifying and distinguishing “construction” and “design” risksand design risks

• Securing adequate limits

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Challenges and pitfallsChallenges and pitfalls

• Conforming policy and contract languageConforming policy and contract language– e.g., consistency between waiver language and coverage trigger and/or policy conditionscoverage trigger and/or policy conditions.

• Coverage gaps

Li it d k t it• Limits and market capacity

• Mega‐projects, PML and the black swan

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