Getting Professional with Construction Risks

For large scale construction projects spearheaded by public agencies, the primary focus point is often on the construction itself. When challenges occur, they are often attributed to the prominent fixtures seen on the project, such as tower cranes, heavy equipment, open excavations, traffic obstructions and high voltage exposures. However, field offices also have exposures that can be as damaging as what occurs in the field itself. Professional liability risks within project planning, design, management and related specialized scopes should be given equal focus in risk transfer as higher profile exposures found in construction activities.

With the growing use of design-build, construction manager at risk and progressive-design-build delivery methods, public agencies are encountering more complex, layered professional exposures than ever before. Beyond the delivery method itself, there are a myriad of risks that can be found in a construction budget’s soft costs. These include design, engineering, construction management, material testing, soil testing, quality control, commissioning and consulting. Claims arising from these activities include physical damage to the project, third-party bodily injury or property damage and economic losses caused by project delays or cost overruns.

Contractual risk transfer is one of the strongest lines of defense for public entities to protect their assets from these high valued exposures. It is critical for agencies to structure contract requirements for trades with professional risks to include:

• Proper professional liability limits
• Consistent policy maintenance provisions through the course of the agreement and after completion
• Adequate pass-through requirements for any lower tier subconsultants or subcontractors

The indemnification provisions should only contain limitations of liability that an agency is legally obligated to, and not to a degree negotiated by the professional service provider. Many times, design professionals will seek to limit their liability to the amount of their contract, which can cause significant exposures for a contracting agency with a nine-figure project when a professional service provider may only have a six to seven-figure contract.

Public agencies often rely on annual practice polices carried by the professional service providers. However, the challenges in exclusively relying on these polices include:

• The agency cannot be named as an additional insured on the policy, which does not allow access to defense coverage in the event of a third-party claim where both the agency and designer are named in a suit. This also limits any potential for partial payments on more severe losses that may require on-going payments.
• As professional policies are more often than not written on a claims made basis, the in-force policy is exposed to claims occurring back to the policy retroactive date, which can create a long prior tail of exposure.
• If policies are not maintained and no extended reporting coverage is purchased, there is no policy to respond for claims arising after the work is completed.
• Both prime designers and subconsultants involved in the project may be underinsured within their practice policies either by way of what they generally carry or due to an erosion of limits from prior or active claims.

An alternative to the practice professional policy approach is for an agency to require the prime designer to carry a project specific policy, which can provide higher limits and are dedicated exclusively to the project. However, some of the challenges with a project specific policy include:

• It is the most expensive way to insure against the exposure and can often be cost prohibitive.
• Coverage typically cannot extend to other firms contracted with the public entity other than the prime designer, which means only those firms directly within the prime designer’s contract chain can be covered. This may leave trades such as the geotech, owner’s rep and outside inspectors outside of coverage from the project specific policy.
• The public entity itself cannot be named as an additional insured, which causes the same issues as not being an additional insured on a practice policy.

While practice and project specific policies are tailored exclusively for the professional service providers, there is an option for public entities to consider that is exclusive for them – Owner’s Protective Professional Indemnity (OPPI). OPPI can be written on a project specific basis, to cover multiple projects a public agency may have, or on an annual basis to cover projects starting in a given policy year for long term capital improvement plans. It provides excess coverage above the responsible designer’s policy in the event of limit exhaustion, as well as difference in conditions coverage.  It additionally provides defense coverage for the agency in the event of a third-party claim that triggers coverage from the policy. Coverage is also provided through the earlier of 10 years or the statute of repose for design defects in the applicable jurisdiction. It offers significant cost reduction as compared to project specific policies and extends to the full complement of owner contracts, including lower tier subconsultants. By in large, if a professional service is being provided for the project, OPPI sits excess above their underlying professional liability policy.

OPPI is available for all project delivery methods and most common construction project types, including infrastructure, commercial, institutional and certain types of residential projects. The primary drawback to OPPI is that it typically will not work for small to mid-sized projects due to minimum premiums, but it will generally start to make sense for projects $50M – 60M and up. Whether a public entity decides to purchase OPPI or not, it is important to pay close attention to the exposures it faces from professional services provided for its projects. Strong indemnity language and robust insurance requirements are paramount to protect a public entity’s interests from these potentially costly exposures.