Legal Notes: Design-Build contracts require detailed insurance consideration

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Understanding and managing the potential liability risks associated with construction contracts are factors all contractors face when bidding on a project.

Corbin Devlin of the Edmonton Law Firm McLennan Ross LLP describes the four main contract models currently in use for non-residential construction.

Perhaps the best known is the design-bid-build model, involving several contracted professionals plus a separate contract between the project owner and a general contractor. A construction management model has a construction manager hired by the owner, who is then broken down into “construction manager as agent” and “construction manager at risk” contract models. Integrated project delivery is a contractual collaboration between partners that includes shared risks and rewards.

And then there’s the design-build model, which now accounts for over 40% of non-residential buildings in North America. Here, a single entity is engaged to undertake and execute all design, procurement and construction.

Design-build has an appeal to homeowners, writes Devlin. In return for what he calls “a degree of certainty about the price and timing of the project”, the owner gains “relatively less risk associated with scoping the project or having an incomplete design.”

Devlin points out, however, that regardless of the type of contract used, there are “many instances where disputes arise due to a fundamental difference in expectations or misunderstanding by one of the parties regarding the contractual allocation of risk. “.

Managing liability risk is particularly acute when design-build contractors use in-house designers or outsource some of these services to outside professionals. Often there is a heavy dependence on insurance.

Nicole Markowitz and Richard Robinson with an international law firm based in the United States Peckar and Abramson, PC., point out that there may be significant gaps in many standard Errors and Omissions insurance policies.

“Often professional liability policies do not insure against all defects or deficiencies in the work of the designer. Instead, policies are written to guard against a finding of liability on the part of the designer, and that liability is based on failure to meet an applicable standard of care.

Defining the “standard of care” can lead an architect to maintain that his goal is not necessarily to achieve perfection and that reasonable latitude for errors should be expected, write Markowitz and Robinson.

“When the courts adopt this standard, there could be an error, but no liability for that error and therefore no insurance coverage.”

Problems arise when a design-build contractor accepts a different standard.

“When this happens, the two most common risk management mechanisms that designer-builders anticipate, assuming the risk has been transferred to the designer or through insurance, may not work as intended. In turn, the designer-builder may face unmanaged risk.

Markowitz and Robinson suggest that design-build contractors consider Professional Contractors Protection Insurance (CPPI) coverage, explaining that this type of policy can alleviate many of the shortcomings that can be left unprotected.

They describe how a “well-developed CPPI” can not only provide professional liability insurance, but can also provide appropriate coverage for the mitigation and rectification of design errors discovered during construction.

“He may proactively correct this error or omission before any claim is asserted by the owner.”

A CPPI can also provide protective coverage.

“Protective coverage complements professional designer professional liability insurance coverage by providing direct benefits to the contractor / designer-builder for any downstream claims for costs greater than what will be paid by the designer-builder’s liability insurance. professional designer. “

It is also essential that any contractor engaged under a design-build agreement carefully consider and understand where their exposure to design liability might lie.

“Design-build contractors need to be aware of the pitfalls that may exist in relevant agreements, as well as the weaknesses that may exist in risk management strategies previously considered sufficient. “

As Devlin concludes, regardless of the contract model followed, potentially discovered risks lie in wait for those who do not take into account the suitability of the contract model chosen for the current project, or a simple misunderstanding of the distribution of risks inherent in the project. contract model chosen. contract template.

John Bleasby is a freelance writer based in Coldwater, Ontario. Send your comments and ideas for the Legal Notes section to [email protected]

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