Insurance and Risk Allocation -...

Project-Specific Professional Liability Insurance and

Alternative Project Delivery Methods: Risk Allocation

Considerations and Functional Alignment

Practising Law Institute

June 25, 2014

David J. Hatem, PC

Donovan Hatem LLP Boston | New York

[email protected]

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Project-Specific Professional Liability Insurance

(“P-S PLI”)

• Definition: Professional Liability Insurance Underwritten on a

Project-Specific Basis with Coverage Defined and Dedicated for that

Project

• Focus of Presentation:

– Relationship of P-S PLI to Project Delivery Method

– Relationship of P-S PLI to Contractual Risk Allocation

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Project Delivery Method Approaches

• Traditional

– Design-Bid-Build (“D-B-B”)

• Alternative

– Design-Build (“D-B”)

– Public-Private Partnerships (“P3s”)

– Others

• Alliancing

• Integrated Project Delivery

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Risk Allocation Approaches

• Focus on Defective Design Risk

• Roles and Responsibilities of Project Participants

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Risk Allocation: D-B-B

• Traditional Delivery Method • Project Owners Have Risk Allocation Options • General Principles as to Roles, Responsibilities and

Risks for Design Adequacy – Project Owner Implied Warranty (Spearin) Obligation

– Design Professional’s Professional Standard of Care • Displacement of General Principles

– Performance Specifications

– Design Delegation • Risk Allocation “Lessons Learned”

– Risk, Control Correlation

– Fair and Balanced Risk Allocation Improves Procurement Process and Reduces Post-Award Claims Arising From Disappointed Commercial and Contractual Expectations

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Risk Allocation: D-B

• Single Point Principle • Significant Transfer of Design Adequacy Risk to Design-Build Team • Project Owner Relinquishment of Control and Dominance Over

Design Development Process • Disclaimer of Project Owner-Furnished Conceptual Design, Other

Information and Reports • Design-Build Team Defense and Indemnification of Project Owner

(and Others) For Use of Reliance Upon Project-Owner-Furnished Materials

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• Project Owners Have Significant Latitude in Risk Allocation Decisions in D-B – Generally, Less Statutory and Regulatory Limitations

• Aggressive Risk Allocation Trends and Practices of Project Owners in D-B – Degree of Project Owner Design Development

– Scope of Project Owner Review of Design Build

– Team Design Submissions

– Overly Prescriptive and Detailed Mandatory Design Standards and Requirements

– Broad Disclaimers

– Broad Defense and Indemnification Obligations

– Non-Inclusive of Differing Site Conditions Risk Sharing Provisions

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• Factors Driving These Aggressive Risk Allocation Trends and Practices – Present Economic Conditions

– Competition and Other Market Factors

– Design-Builder Opportunistic Bidding Practices and Strategies

– Project Owner “Cost Overrun” Aversion and Insulation • Impact of Aggressive Project Owner/Design-Builder Risk

Allocation on Professional Liability Risk for Design Professionals – Flow Down

– Preclusion of Design-Builder Equitable Adjustment From Project Owner Increases Risk of Design-Builder Claims Against the Design Professional

– Heightened Contractual Performance Standards – e.g., Warranty, Fitness for Purpose

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– Uninsured Contractual Liability, e.g., Warranty,

Quantity Overrun, Liquidated Damages, Defense and

Broad (non-negligence based) Indemnification

Obligations

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Risk Allocation: P3s

• P3s

– Definition

– Typical Relationship Structure

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P3 Contractual Relationship

Public Owner

Concessionaire

Financier

Financier Engineer

Design Build Contractor

Contractor

Trade Contractors

Design Professionals

Design Sub-consultants

Operations &

Maintenance Contractor

Stakeholders

Public Owner’s

Engineer

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Risk Allocation: P3s

– D-B+ - “Value for Money” Criterion

– Relational Risk Allocation

– Flow Down/Back to Back

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P-S PLI, Project Delivery Methods and Risk

Allocation – Functional Alignment

• Underwriting of P-S PLI – Consideration and Evaluation of:

• Roles, Responsibilities and Risks • Contractual Risk Allocation

– Project Monitoring As to Risk Factors • Material Variation Endorsement Approach • Joint Code Approach

– Customization/Manuscripting of P-S PLI Coverage • Alignment of Coverage with Risk Allocation • Relevance of Balanced Risk Allocation to P-S PLI

Coverage (Availability, Terms and Pricing)

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P-S PLI: Macro Issues in D-B and P3 Projects

• Who procures the P-S PLI?

• Who Will Be Insured?

– Design Professionals

– Design-Builder

– Quality Assurance/Quality Control Firms

– Trade Subcontractors Who Provide Design or Other

“professional services”

– Concessionaire in P3s

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P-S PLI: Macro Issues in D-B and P3 Projects

• Coverage For What Risks and Exposures?

– Definition of “professional services”

– Quality Assurance/Quality Control

– “Construction Management”

– Construction Means/Methods Design

• Insured v. Insured Exclusion

• Per Claim SIR Amounts, Allocation and Funding

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D-B and P3s

Project Participant Coverage Expectations: P-S PLI

• Project Owner

– No Restriction in Coverage Scope Than Traditionally Afforded

Under P-S PLI

– Professional Liability “Coverage” for Design-Builder, As Well As

All Design Professionals

• Separate or Combined Policy

• Protective Coverage (OPPI, CPPI) v. P-S PLI

• Indemnification Coverage

– Avoidance of Duplicative Coverages and Unnecessary Premium

Costs

– Preserving Coverage for “Owner” Claims as Distinct from Design-

Builder Claims Against Design Professionals

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D-B and P3


• Concessionaire

– Same Expectations as Project Owner

– Consequential Damage Coverage for Economic Damage Due to

Performance Deficiencies and Delays

– Indemnification Coverage for Itself, the Project Owner, Lender

and Other Stakeholders

• Design –Builder

– Primary Coverage (at a minimum indemnification) for Claims by

Third-Parties Based on Self-Performed Professional Services

and for its Claims Against Design Professionals

– Ability to Assert, and Have Coverage for, Professional Liability

Claims Against its Design Professionals

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D-B and P3


• Design Professionals

– Professional Liability Coverage for Claims Arising Out of

Performance of Professional Services by Design Professional

and its Subconsultants

– Coverage for Claims by Third-Parties (Project Owner,

Concessionaire, Design-Builder, and Others)

– Coverage for Claims by the Design-Builder for Economic

Damages, Including Consequential Damages

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P-S PLI, Project Delivery Methods and Risk

Allocation – Functional Alignment

– P-S PLI Not a Solution for Imprudent Risk Allocation

– Imprudently Underwritten P-S PLI Will Undermine and

Subvert Prudent Contractual Risk Allocation

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