Design Error and Resultant Financial Loss
Design or engineering loss in large construction projects can be insured in myriad ways. Historically, the project owner contracted with a single venture which was responsible for all design and engineering issues and had several options for how to insure. The design professional would have evidenced professional liability coverage either by using their annual practice policy or by insuring their liabilities with a dedicated architect/engineer project-specific policy covering the prime designer and any sub-consultants under written contract. The design builder would similarly provide professional liability cover for their professional services (value engineering, feasibility, constructability reviews) either through an annual practice or project specific contractor's professional liability policy.
With respect to P-3 projects, most projects are under a design build delivery model in which the design liability is included within the scope of work of the design builder who either has designed the project with in-house design or has a prime designer as a sub-consultant.
We're seeing a trend in which P3 concessionaires request professional liability insurance under a project-specific policy structured to provide primary coverage for both the design builder and include all design professionals as a named insured. When both design and construction are named insureds under a single professional liability insurance contract, the insurance approach has a "tragic flaw." Absent removal or modification of the insured versus insured exclusion, and in some cases the related entity exclusion, the project specific professional liability insurance policy will not respond to suits brought by the design builder against the design professionals.
These overreaching professional liability insurance requirements so serve to preserve limits for indemnification of damages suffered by the concessionaire. However it does not protect or address the needs of the design professionals. The insurance coverage structure does not preclude the design builder from bringing suit against the design professional, it simply precludes the project-specific policy from responding to defend or pay damages. The design professional must then seek coverage under their practice policy. The failure to address the needs of the design professional in the coverage specifications reduces the value of project-specific insurance and adds to the total cost of insurance for the project.
Rectification coverage may be added to a professional liability policy (project or practice). This coverage extension will provide coverage to the policy insureds to fund expenses required to remedy a design defect caused by design/engineering error. This coverage extension can remedy certain aspects of a professional liability claim without resorting to litigation, but it is an imperfect solution in that it does not address the design builder's lost profit, schedule delay or other consequential loss.
Relevance of builder's risk to respond to design/engineering error:
Certain dimensions of a professional liability exposure can be addressed by a builder's risk policy, but this endorsement (usually one of three iterations) is not a surrogate for dedicated professional liability coverage. In order for a builder's risk policy to be responsive, there needs to be:
- An "occurrence" in accordance to the builder's risk terminology
- Resultant loss or damage, and
- Coverage expansion to include loss arising out of design error (London Engineering Group LEG 1-3 wordings).*
The mere discovery of an error or omission and the related financial loss is not covered by a builder's risk policy unless there is a collapse, fire, etc., and determination of underlying causality as design/engineering related.
*On civil construction, the equivalent wordings are DE 1 to 5.
Insurance products underwritten by Westport Insurance Corporation, First Specialty Insurance Corporation, North American Capacity Insurance Company, North American Specialty Insurance Company, North American Elite Insurance Company, Washington International Insurance Company, or Swiss Re International S.E. All subsidiary insurance companies are subject to a common S&P rating of AA- and AM Best Rating of A+ Class 15. Nonadmitted insurance products are available only through licensed surplus lines brokers and may not be available in all states.
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