SDV Insights

Dynamics of Managing Professional Liability Claims for Design Builders


Nearly half of America’s construction projects are now design-build in a continuing shift. As a result, contractors are taking on more professional liability (“PL”) risk than ever before, and the risk management landscape is changing. There are unique challenges to managing PL risks and claims. Specifically, PL coverage requires proactive claim management and project coordination. As a result, design-build projects should involve significant collaboration amongst all of the parties involved in the project.

Claims Made Coverage Considerations
PL policies typically provide three types of coverage:

  1. Professional Liability covers defense and indemnity against claims arising out of acts or omissions of the insured in rendering a defined set of professional services –including construction management, project management, and design work in the design build context.
  2. Protective Indemnity covers protective claims for amounts the insured is entitled to recover from downstream design professionals arising out of their failures in rendering professional services that exceed the downstream party’s own liability insurance.
  3. Rectification or Mitigation Coverage covers the cost to rectify a professional error before a claim is made.

PL policies are written on a claims-made and reported basis, meaning they cover claims made and reported to the carrier within the policy period. An insured must tender notice of any claims or even potential claims to their carrier to preserve coverage. This requirement can create significant practical challenges as construction progresses and issues arise. If a design-builder spends time trying to avoid or fix an issue delaying the notice to its insurer, it can find itself without coverage. This is especially problematic with “mixed” or “ambiguous” claims involving design errors and installation errors.

Design-builders often wisely seek to broaden the definition of “professional services” to allow for greater coverage. However, they need to take care to realize that in doing so, they have also expanded their notice obligations. Because the policies require timely notice of a claim or a potential claim to preserve coverage, anything that could be an indication of a project management or design error may trigger the insureds’ notice obligation.

Notice and reporting issues can compound based on interdependent portions of a given construction project. PL policies typically contain interrelated claims provisions that push any new claim back into a past – and thus, potentially expired – policy period if it is related in any way to circumstances that occurred prior to the current policy. Although this may seem congruent with the intent of claims-made coverage, it makes complying with this condition difficult in the construction context. For example, where delays arise early on in a project that does not implicate PL coverage during one policy period, and redesign or sequencing problems occur during a subsequent policy period, carriers may argue they are interrelated. As a result, coverage might be impacted if the delays were not tendered to the carrier as a claim first made in the initial policy period.

For these reasons, it is critical to provide notice to a PL carrier early on for anything that may even potentially relate to PL risk. A project’s progress, sequencing and/or redesign can shift over the lifetime of a project based on early logistical complications or disagreements. Accordingly, providing notice to PL carriers of anything that might implicate professional risk at some point becomes critical. As all parties to a design-build project take on more professional responsibility, this means developing tools and strategies to allocate and manage PL risk from the outset is critical.

Setting up Design-Build PL Risk Transfer for Success
PL coverage is a valuable and effective tool for addressing construction management and design risk. However, it is critical that your project is set up to take advantage of the coverage that is available. Early and extensive coordination of all parties on a project, especially amongst brokers, risk managers, and operations departments, is essential to accomplish intended PL risk transfer. Before the bid, parties should be working to identify and delegate design risks and lining up insurance products to cover those risks. This should include collaborating with designers and architects, as well as downstream parties that may be taking on more design responsibility than usual, along the way to ensure a coordinated effort at identifying and managing potential PL risk.

It is imperative to educate all parties involved in a project on the need for effective claims management. This may mean designing and implementing protocols to help project managers or people on the ground to recognize issues that could potentially implicate PL coverage. People working in day-to-day operations need to know when and how to elevate things to the risk management and legal teams. Something that first arises as a delay or contract argument amongst project entities or suppliers might be fought over for years when it could have just been addressed by PL coverage in the first instance. However, if everyone on the project is educated and protocols are in place up front for identifying and elevating potential claims, PL coverage can respond effectively.

PL policies are designed to respond where any professional error could potentially give rise to a claim. Particularly, rectification coverage under these policies should help mitigate the costs to correct errors before they result in a claim. However, some PL policies may require rectification claims to be submitted and approved before covered work takes place. This presents logistical issues on a project because keeping up with schedules and sequencing is critical, and the people on the ground are working hard to get problems resolved quickly and efficiently. Accordingly, procedures for identifying and preparing potentially covered costs need to be integrated into project and risk management processes to ensure coverage is captured.

With more parties taking on professional responsibility on design-build projects, greater coordination and collaboration amongst them is needed to effectively manage risk transfer. In the coverage context, and with PL policies specifically, this means early and ongoing management of protocols and procedures tuned to the nature and requirements of the policies is essential.

Conclusions
PL coverage can be a highly effective risk transfer tool in the burgeoning design-build market. However, these policies’ unique aspects require highly proactive planning and ongoing coordination to realize their potential. With all parties to design-build projects potentially benefiting from effective risk transfer, developing comprehensive strategies and protocols to identify and respond to issues that have the potential to implicate PL coverage is essential.
 

For more information, contact Eric M. Clarkson at EClarkson@sdvlaw.com






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