Dynamics of claims management in professional liability of designer-builders

Nearly half of U.S. construction projects are now in design-build in a steady move. As a result, entrepreneurs are taking on more professional liability (“PR”) risk than ever before, and the risk management landscape is changing. HGV risk and claims management presents unique challenges. Specifically, HGV coverage requires proactive claims management and project coordination. Therefore, design-build projects should involve significant collaboration between all parties involved in the project.

Claims Made Coverage Considerations

PL policies generally offer three types of coverage:

  1. Professional indemnity covers the defense and indemnification of claims arising from acts or omissions of the insured in the provision of a defined set of professional services, including construction management, project management and design work in the context of design and construction.
  2. Protection Indemnity covers protection claims for amounts the Insured is entitled to recover from Downstream Design Professionals resulting from their failures to perform professional services that exceed the party’s own liability insurance downstream.
  3. Rectification or mitigation coverage covers the cost of rectifying a professional error before a claim is made.

HGV policies are written on a claims and statements basis, meaning they cover claims made and reported to the carrier during the policy period. An insured must give notice of any claim or potential claim to their insurer to preserve their coverage. This requirement can create significant practical challenges as construction progresses and issues arise. If a design-builder spends time trying to avoid or fix a problem that delays notifying their insurer, they may find themselves without coverage. This is particularly problematic with “mixed” or “ambiguous” claims involving design errors and installation errors.

Design-builders often wisely seek to expand the definition of “professional services” to allow for greater coverage. However, they should be careful to realize that in doing so they have also expanded their notification obligations. Since policies require timely notice of a claim or potential claim to preserve coverage, anything that might be an indication of project management or design error may trigger the obligation to notification of the insured.

Notice and reporting issues can escalate depending on the interrelated parts of a given construction project. PL policies typically contain interlocking claims provisions that push any new claim into a past – and therefore potentially expired – policy period if it is related in any way to circumstances that occurred before the current policy. While this may seem to be the intent of coverage in the event of a claim, it is difficult to comply with this condition in the context of construction. For example, when delays occur at the start of a project that does not involve PL coverage during an insurance period, and redesign or sequencing issues occur during an insurance period. later, carriers can argue that they are interdependent. Therefore, coverage may be affected if the delays are not reported to the carrier as a first claim during the initial policy period.

For these reasons, it is essential to quickly inform a HGV carrier of anything that could even potentially be related to the HGV risk. The progress, sequencing and/or redesign of a project may change during the lifetime of a project due to early logistical complications or disagreements. Consequently, informing HGV carriers of anything that could involve a professional risk at any given time becomes essential. As all parties in a design-build project take on more job responsibilities, this means developing tools and strategies to allocate and manage PL risk from the outset is essential.

Implementing Design-Build PL Risk Transfer for Success

PL coverage is a valuable and effective tool for managing construction management and design risk. However, it is essential that your project is configured to take advantage of the available coverage. Early and thorough coordination of all parts of a project, especially among brokers, risk managers and operations departments, is essential to accomplish the intended PL risk transfer. Prior to the offer, the parties should endeavor to identify and delegate the design risks and offer insurance products to cover these risks. This should include working with designers and architects, as well as downstream parties who may take on more design responsibility than usual, throughout the process to ensure a coordinated effort to identify and manage the potential risk of PL.

It is imperative to educate all parties involved in a project on the need for effective complaints management. This may mean designing and implementing protocols to help project managers or people in the field recognize issues that could potentially involve PL coverage. People working in day-to-day operations need to know when and how to escalate to risk management and legal teams. Something that arises first as a delay or contractual argument between project entities or vendors can be fought over for years when it could have been resolved by PL coverage in the first place. However, if everyone on the project is educated and protocols are in place from the outset to identify and escalate potential grievances, PL coverage can respond effectively.

PL policies are designed to intervene where any professional error could potentially give rise to a claim. In particular, rectification coverage under these policies should help mitigate the costs of correcting errors before they give rise to a claim. However, some PL policies may require rectification requests to be submitted and approved before covered work takes place. This presents logistical challenges on a project because adherence to schedules and sequencing is critical, and people on the ground work hard to resolve issues quickly and efficiently. Accordingly, procedures for identifying and preparing potentially covered costs should be integrated into project and risk management processes to ensure coverage is accounted for.

With more parties assuming professional responsibility for design-build projects, greater coordination and collaboration among them is required to effectively manage the transfer of risk. In the context of hedging, and with PL policies in particular, this means that early and ongoing management of protocols and procedures appropriate to the nature and requirements of the policies is essential.

conclusion

PL coverage can be a very effective risk transfer tool in the booming design-build market. However, the unique aspects of these policies require highly proactive planning and ongoing coordination to realize their potential. Since all parties to design-build projects potentially benefit from effective risk transfer, it is essential to develop comprehensive strategies and protocols to identify and respond to issues that may involve PL coverage.

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