Design Liability: The Hidden Risk
Subcontractors are subject to unexpected "design" or professional negligence liability arising from the performance of customary activities involving expertise and judgment. While comprehensive general liability and builders risk policies do not offer protection, this risk can be recognized and insurance coverage obtained.
In a traditional construction project, the owner contracts with an architect for design services (and the architect retains other design professionals for engineering and design of mechanical, electrical and foundation systems) and separately with a contractor for construction. In such projects, the design professionals may incur liability for professional negligence in the event of design deficiencies which cause damage to property or personal injury. A growing number of states also permit contractors or subcontractors to sue design professionals directly for professional negligence in either creation of plans and specifications or management and inspection of work.(1)
In such traditional projects, the risk of design is also separately managed. The designer's (architect or engineer) professional liability insurance covers its professional acts, errors and omissions, while the contractor's or subcontractor's general liability insurance covers most of the potential losses that arise from construction activities.
Many projects are conducted on a design-build basis. Design-build means that a single entity is responsible for both the design and construction of a project. The design-builder may be either a single company, or a joint venture. Where contractors undertake design-build projects, a gap in the coverage of professional liability risks may arise. Although a design-builder which is primarily an architectural or engineering firm is probably adequately insured, a contractor that provides design services in-house or subcontracts design work is not insured for design defects unless it has professional liability coverage. A design-build contractor can be held liable for professional negligence of both in-house and independent contractor design work, even if the contractor does not prepare or seal the plans and specifications.(2)
Contractors or subcontractors that perform design-build work must make sure that they are adequately insured for the professional design services which they are providing. For design-build work, this often can be effectively accomplished by project policies or wrap-up policies which insure against the professional liability of all the parties to the process. Project policies cover specific jobs for a period of typically 3 to 5 years, and may be offered by professional liability carriers. Wrap-up policies may combine both professional and general liability coverages into a single policy.
Fortunately, the professional design risk in traditional or design-build projects is readily identifiable and well-recognized. Recent court decisions have imposed designed liability on contractors and subcontractors "in addition to and outside of" these normal risks. For example, the U.S. Court of Claims has held that where a contractual provision requires a contractor or subcontractor to use its own expertise and judgment, the design responsibility shifts from the owner/architect to the subcontractor or contractor.(3)
This type of "hidden" liability for design can arise from a variety of activities customarily undertaken by subcontractors. Examples of activities which require the exercise of expertise and judgment, giving rise to design liability issues, include:
1. Meeting the requirements of "performance" specifications (rather than design specifications);
2. Preparing shop drawings which amplify and supplement the level of detail and specificity of the project drawings;
3. Selection and submission of products, either as alternates or in fulfillment of requirements to submit "suitable for use or installation" materials;
4. Performing work where the project specifications are schematic or diagrammatic rather than complete;
5. Coordination of plans, drawings, specifications or the work of allied trades;
6. Contract provisions requiring checking plans and specifications for errors or discrepancies and notifying the contractor or owner of any errors or discrepancies noticed;
7. Provisions requiring that the subcontractor calculate or verify the performance of assemblies (such as wind load resistance or sound transmission characteristics);
8. Provisions requiring the subcontractor to meet all requirements of a manufacturer of a product. In short, common subcontractor activities include design responsibilities. However, the professional negligence risk involved is normally not covered by industry standard general liability policies.
Standard general liability policies do not provide coverage for professional negligence or design responsibility. Although design-build firms are aware of the need for separate professional liability coverage, subcontractors who are called upon to contribute expertise to the work, or construction managers, can be sued for professional negligence and should consider additional coverage by policies or endorsements.
Builders risk policies, which can be issued as either "named peril" or "all risk" types of coverages, exclude liability for design and specifications.
In order to handle the risk of a "hidden" design liability which is excluded from standard comprehensive general liability policies, a subcontractor or contractor should purchase an endorsement adding this coverage to the policy.
Merely disclaiming the risk of design may not effectively limit your liability for design issues, even if all of the contingencies can be identified and listed in the disclaimer, because the risk is based on the actual performance of activities requiring expertise and judgment.
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