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Laura Wagner

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Underwriting Director, North America Construction, Professional and Pollution, AXA XL

As long as there have been complex construction projects, there have been construction project managers. In ancient times (think pyramids and aqueducts), the architect fulfilled the project management role. We have come a long way from ancient times and a long way from relying on architects to manage the construction process.

Construction project delivery methods continue to evolve, and owners / architects are increasingly delegating construction phase services to contractors. Coupled with the growth in construction management services and increased use of technologies for early collaboration, contractor design liability has fundamentally shifted. From pre-construction services, where a project’s strategic direction is created to design/build where a contractor is contractually responsible for design to integrated project delivery where the owner, contractor, architect/engineer along with key trades share all of the project risk, design responsibility for construction companies continues to increase.

According to the Amy Iannone, DPR Construction’s Insurance Leader, “We are expected to assume or manage design risk on almost every project.” Even if a contractor is not hired as a design builder, they are managing design risk as a construction manager, by working in a design-assist role, or by hiring subcontractors that have design as part of their scope. Many trade contractors, including but not limited to mechanical, electrical and plumbing, routinely have design in their scope of work.

Being involved in the pre-construction phase of a project also increases professional liability risk. This risk is even greater if the contractor is not awarded the construction phase of the project. During the pre-construction phase, the project strategy is set, and this plan is an ongoing reference point for other project participants. During pre-construction, design begins. Schedule and budget are determined. Permits, entitlements, labor and resources are procured, some involving long lead time. Value engineering for certain project components may also be performed at this point to meet client budgetary constraints.

It is relatively easy to identify professional liability risk if an entity is stamping design drawings. It becomes much more difficult to identify when there is a lot of knowledge applied to complex pre-construction and/or construction processes but there are no drawings to stamp. Design risk starts in setting the project scope and ends with the client’s expectations as to what they are getting. Claims and disputes arise when there is a disconnect between the two. According to Scott Wright, General Counsel and head of risk management for Limbach, a large specialty contractor, “There must be a clear understanding of client expectations on design and getting that documented in the contract.”

So, what’s a contractor to do? If the decision is made to move forward with a project and not avoid the project risk through the all-important go / no-go process, it really boils down to managing and/or transferring the risk.

Scott Wright, General Counsel and head of risk management for Limbach, a large specialty contractor, “There must be a clear understanding of client expectations on design and getting that documented in the contract.”

Managing the risk
Understanding the legal environment in the project jurisdiction is an important facet of managing professional liability risk. How do economic loss doctrines and anti-indemnity statutes apply? Are your standard contractual risk transfer clauses enforceable in the state you are working? With 50 states and international projects, understanding the legal environment is no small task and has direct application in drafting project contracts and determining the liability landscape.

Contracts are intended to provide certainty in the event of a dispute and are critical to managing risk. Projects are routinely started before a full set of drawings is complete. Contractual language needs to reflect both scope changes through a formal change order process as well as things that are “just defined” as the design progresses. According to Dennis Power, Chief Financial Officer for the Opus Group, a large design / build firm, “Builders poised to deliver the greatest value to their customers are those who embrace the design role, understand design risk, and then appropriately manage the risk through their contracts, methods of operation and delivery of services.”

On top of legal and contractual aspects of professional liability, managing new employee’s knowledge base around professional liability is also critical. If a firm truly identifies where professional risk is and is successful in getting compensated for taking that risk, it is the employees that are ultimately managing the risk. They need to understand what they are managing and the critical points in that process. Who is being trained and on what? Risk management departments need contract and insurance training. They need to understand how to set appropriate levels of professional liability insurance from subcontractors / subconsultants, the impact of limitations of liability in contracts, and the importance of developing a process to report claims under claims-made and reported professional liability insurance policies. Project managers, supervisors and foremen need training on the above, but perhaps more training on how to recognize problems in the field or in their subcontractors / subconsultants scope of work that could impact their firm’s professional liability.

Knowing your client is also key. Based on AXA XL Risk Drivers data, challenging clients are a determining factor in predicting claims on a project. There are differences in having a large general contractor as a client versus being hired directly by the project owner. In general, one understands the construction process and one has a vision for their completed project. If an owner’s vision changes as the project progresses, it can result in differing and perhaps missed expectations. Some clients believe in partnerships with their construction teams. Others are litigious. Scott pointed out that “knowing your client can make the difference in managing a project’s professional liability risks successfully.”

Technology use is increasing in the construction industry. Building Information Modeling (BIM) is one of the most important technology tools used in construction, allowing for a more coordinated effort between parties and clash identification before actual construction begins. Integration improvements are allowing parties to work both within and outside of the model. In addition to BIM, the use of laser scans, drone footage, wearables and intelligent sensors is increasing. Technology will improve the efficiency of a process and provide more data. However, according to Dennis, “There is no software application that will fix a broken process.”

Transferring the risk
Transferring risk to another party whether another project participant or an insurance carrier is an important aspect of managing professional liability. According to Amy, “Managing the insurance requirements for subcontractors is the hardest part. There are tons of subcontractors that should carry professional liability insurance but don’t because they don’t think they have the risk.”

As construction continues to evolve, it can also be challenging to identify emerging professional liability risks. Increases in renewable energy projects and the use of prefabrication, modular, cross laminated timber, robotics and 3D printing make it challenging to determine where professional liability lies. Layer onto that the different project delivery methods and contractual provisions, and it becomes even more complicated.

Just as contractors and project owners need to make sure their expectations are aligned, insurance carriers, brokers and contractors will need to align expectations around insurance as well. Just as construction companies are evolving, insurance carriers are being tasked with combining coverages in unique ways, developing new coverage to meet emerging risks and assisting construction companies in navigating their increasing and changing liabilities. As the use of technology increases and construction materials and methods evolve, it is more important than ever for contractors and insurance carriers to get to know each other and work together. In a changing professional liability landscape, it will take true partnership and team efforts to identify, manage and transfer professional liability risk using the full suite of insurance products available today.

About the author
Laura Wagner is a Vice President and Underwriting Director for AXA XL’s Construction Professional and Pollution Liability group.


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