Insurance Coverage for Design Build Insurance Coverage for Design - - PowerPoint PPT Presentation

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Insurance Coverage for Design‐Build Insurance Coverage for Design Build Construction Projects

Maximizing 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 TUES DAY, AUGUS T 30, 2011

Today’s faculty features: S tephen 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 and Insurance Insurance

Stephen D. Palley Ober Kaler sdpalley@ober.com 202.326.5075 John Hunt Forest City Ratner JHunt@fcrc.com Timothy E. Delahunt Kenney Shelton Liptak Nowak tedelahunt@kslnlaw.com 716.853.3801 7 6.853.380

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Webinar Overview Webinar Overview

• Introduction

Introduction

• 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?

6

Construction Delivery Construction Delivery

7

Design‐Bid‐Build Design Bid Build

• Owner’s design team prepares documents

O e s des g tea p epa es docu e ts suitable for construction.

• Contractor performs the work designed by the

p g y

• wner’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 requirements q

8

Design‐Build Design Build

• Owner contracts with one entity to design and

Owner 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 d connection with industrial facilities and power plants.

9

Design‐Build Design 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

• But . . .other owner retained

“professional”risks:

– Geotech? Pollution?

10

Other Considerations Other Considerations

• Construction Management

g

– 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”)

11

Cost impact Cost impact

• Design error without property damage or bodily

es g e o t out p ope ty da age o bod y injury – 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 costs Increased material costs – Increased material costs – Acceleration to avoid delay – Delayed opening y p g

12

Insurance – “Design” Risk Insurance Design Risk

13

Basic Coverage – CGL Basic Coverage CGL

• CGL

CGL

– 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 are insured?

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 damage

• r bodily injury covered?

14

CGL CGL

• Professional services exclusions

Professional 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 services

by or for you, including: 1. The preparing, approving,

• r failing to prepare or approve maps, drawings,
• pinions, reports, surveys, change orders, designs or

specifications; and 2. Supervisory, inspection or spec cat o s; a d Supe so y, spect o

• engineering services.

15

CGL CGL

• Following Omni v Harbor (see below) ISO now

Following Omni v. Harbor (see below) ISO now suggests CG 22 43 should be limited to policies issued to architects engineers and policies issued to architects, engineers, and surveyors.

• Other endorsements (discussed below) to be
• Other endorsements (discussed below) to be

used for means and methods.

S i ti d t CG 22 43 f – Some insurers continued to use CG 22 43 for contractors, though will change when this is noted noted.

16

CGL CGL

• CG

22 79 “Exclusion – Contractors – CG 22 79 Exclusion Contractors Professional Liability”

– Exception for contractors: “Professional services – Exception for contractors: Professional services do not include services within construction means, methods, techniques, sequences and , , q , q procedures employed by you in connection with your operations in your capacity as a construction contractor.”

17

CGL – Professional Services Exclusions CGL 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’s professional 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).

18

CGL CGL

• CG 22 80 (“Limited Exclusion – Contractors – Professional

Liability”).

– This insurance does not apply to ‘bodily injury,’ ‘property damage,’ ‘personal injury’ or ‘advertising injury’ arising out of the rendering of or failure to render any professional services by the rendering of or failure to render any professional services by you, but only with respect to your providing engineering, architectural or surveying services in your capacity as an engineer, architect or surveyor. – Same definition of “professional services” as CG 22 79, but exclusion is narrower because it does not apply to professional services provided by those hired by the insured. C CG 22 79 i hi h li l – Compare to CG 22 79 exception, which applies only to “construction means, methods, techniques, sequences, and procedures” employed by the insured .

19

CGL CGL

• Defense outside of limits

Defense outside of limits

• Higher policy limits, including availability of

follow form excess coverage follow‐form excess coverage

• Low or no deductibles or retentions
• Availability of additional insured coverage
• But . . . potential gap if pure design error

p g p p g causes consequential loss only (e.g., delay but no property damage or bodily injury). p p y g y j y)

20

Professional Liability Insurance Professional 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 include

Professional services will be defined to include architecture, engineering, surveying, and possibly

• ther 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 general l rule.

• Generally exclude claims arising out of construction

means and methods.

21

Professional Liability Insurance Professional Liability Insurance

• PLI policies typically include purely economic

PLI 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

cosntruction means and methods.

22

Professional Liability Insurance Professional Liability Insurance

• 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 status

No additional insured status

– and AI subject to cross‐suits exclusions for claim against named insured. against named insured.

23

Builders Risk Builders Risk

• First‐party

coverage for risk

• f

physical First party coverage for risk

• f

physical damage to the work during construction

• Owner general contractor and subcontractors
• Owner, general contractor, and subcontractors

typically 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 b provisions, avoids third‐party claims between insureds for damage to the work

24

Builders Risk Builders Risk

• Higher BR limits reflect value of completed

g e ts e ect a ue o co p eted project

• Design builder and trade subcontractors covered

g

• Coverage for “soft costs”/consequential losses by

endorsement

– Scope of coverage for “consequential” losses: see Zurich American Insurance Company v. Keating Building 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 and

exceptions p

25

Builders Risk Builders Risk

• BR policies typically contain exclusions related to

defective design

• Example:

We will not pay for loss or damage caused by or We 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 . . .

26

Builders Risk Builders Risk

• Such exclusions are often subject to an ensuing

j g loss exception, such as: In the event an excluded cause of loss results in a Covered Cause of Loss the Company will in a Covered Cause of Loss, the Company will be liable only for such resulting loss or damage.

• Therefore, if a design defect leads to, e.g., a

collapse or fire, the damage caused by the collapse or fire itself would be covered This sets collapse or fire itself would be covered. This sets up disputes over the extent of the total damage that is “ensuing.”

27

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

• Owner is insured

Owner 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 h against design professional and exhaust the professional’s PL coverage (where available)

28

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

• Contractor’s own “professional” liability

Contractor 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 retention

and/or deductible

29

Challenges and pitfalls Challenges and pitfalls

• Determining who is covered

Determining who is covered

• Identifying and distinguishing “construction”

and “design” risks and design risks

• Securing adequate limits

30

Challenges and pitfalls Challenges and pitfalls

• Conforming policy and contract language

Conforming policy and contract language

– e.g., consistency between waiver language and coverage trigger and/or policy conditions coverage trigger and/or policy conditions.

• Coverage gaps

Li it d k t it

• Limits and market capacity
• Mega‐projects, PML and the black swan

31

Questions? Questions?

32