Claims trends affecting the construction professional liability segment
The various professional liability claims that arise for contractors or project owners are mostly related to the project delivery method.
The construction industry is currently experiencing a significant boom driven by demand for new projects, particularly those related to infrastructure. But as construction firms look to capitalize on these opportunities, they must also understand how the increasing complexities in project management and execution may make them more vulnerable to professional liability claims.
With social inflation continuing to increase legal expenses and claims costs, it is more important than ever that contractors and project owners recognize the evolving professional liability exposures and prioritize managing their risk.
Construction professional liability claims trends
The various professional liability claims that arise for contractors or project owners depend on the risk class but are mostly related to the project delivery method.
With heavy civil infrastructure projects, design errors and construction project mismanagement claims severity has been noticeably higher for projects utilizing Design/Build project delivery methods that include both lump-sum and fast-track elements. When a project is bid on a lump-sum basis, the biggest factor in choosing the winning bidder is the contractor that offers to construct the project at the lowest price. Substituting the lowest bid price in lieu of a contractor’s project experience or its financial viability can be a recipe for disaster.
Design/Build projects that are bid with a fast-track exposure include a very low percentage (less than 65%) of design completion in determining the project bid. The lower the percentage of design completion, the higher the likelihood that the project bid amount that won the contractor the project will be inadequate when the design reaches 100% completion. This exposure may be of no concern for smaller projects, but for those projects in which the construction values are several hundreds of millions of dollars or even cross the billion-dollar threshold, the difference between the project bid price and actual construction cost could be substantial.
Though both of these elements are intended to offer improved project efficiency and contain costs, they can lead to serious professional liability exposures when combined in bidding for heavy civil infrastructure projects.
Here are some examples of claims when these elements are not adequately contemplated in a project bid:
- Design flaws that cause structural issues: Instances where inadequate design of drainage systems or retaining walls caused significant structural failures that required costly remediation work.
- Soil and foundation problems: Projects that have been impacted by unforeseen soil conditions or foundation issues, which later led to sinking roadways or settling buildings that needed extensive repairs.
- Forgotten project components: When focused on lump-sum bidding, certain project components that have been forgotten or left out of the project in trying to achieve the lowest bid price.
- Hiring the wrong contractor: Lump-sum bidding brings all types of contractors to the bidding process. If the winning bidder has no prior experience with the magnitude of a particular project, cost overruns and time delays can result in hiring the wrong design professionals or the scheduling or sequencing of subcontractors.
Navigating the complex construction professional liability market
These notable claims issues have resulted in carriers paying significant losses. Though substantial capacity remains thanks to strong competition from legacy carriers and some newer entrants, premium rates continue to increase for those heavy civil infrastructure clients in which lump sum and fast track are elements of the Design/Build project delivery method. Some carriers still offer $25 million in limits of professional liability capacity to their contractor clients. However, if the limit is provided on the contractor’s annually renewable practice policy, it’s probable that a similar limit won’t be offered for their project-specific policies.
Agents and brokers should be sure that their contractor clients are familiar with the following risk mitigation strategies to manage their professional liability exposures:
- Apply enhanced risk management practices: Help clients to develop and implement a strong risk management strategy that includes project planning, a comprehensive contract review process and thorough documentation.
- Report incidents and claims immediately: Educate clients about the critical importance of reporting incidents or potential claims, as well as actual claims, in a timely manner. Engaging with the insurer early enables them to assess risks and approve mitigation efforts before the situation escalates and coverage is potentially put at risk.
- Know the legal and regulatory landscapes: Stay informed about legal and regulatory changes, particularly concerning disclosure requirements and statutory limitations, so potential liabilities can be addressed proactively.
- Encourage clients to learn and adopt alternative project delivery methods: Utilizing more collaborative approaches to construction project delivery, such as the Progressive Design/Build method, can improve communication and reduce disputes between stakeholders, which results in better project outcomes and reduces the likelihood of claims.
Progressive Design/Build
Heavy infrastructure contractors have also adopted an alternative project delivery method, Progressive Design/Build, that is more commonly utilized in water and wastewater projects. This method breaks down a project into two phases. The first phase allows the contractor to bring the design element of the project to 100% completion. When the design is complete, the contractor utilizes that information to update the final construction costs for the project. With these updated costs, the contractor and the project owner then decide whether they want to move forward with the second phase, implementation of the design. The contractor and project owner can choose to go their separate ways at the end of the first phase, and the contractor’s exposure should end there.
This alternative project delivery method, which is being implemented in road/highway and bridge projects across the country, has become an effective tool to manage the lump-sum and fast-track exposures found in common design/build contracts. By bringing the design component to 100% completion and determining the final construction costs, the two elements that substantially increase the likelihood of professional liability claims are removed. And if the contractor and project owner cannot agree on the final construction costs, the contractor’s exposure ends because the second phase (construction) does not take place.
It is evident that contractors, project owners and the carriers that insure these projects are seeing the advantages of Progressive Design/Build implementation. All parties benefit from reducing professional liability exposures in infrastructure projects. It lowers the cost not only to the contractor, project owner and insurance carrier, but also to the taxpayer that funds these projects.
It is imperative that agents and brokers educate themselves and their clients on evolving construction professional liability claims trends and that the agents themselves are aware of what clients can do to avoid ending up in costly claims situations.
The remarks in this piece are Mr. Adam’s and Mr. Sheiffele’s and do not necessarily represent the views of Berkley Alliance Managers, Berkley Construction Professional or W. R. Berkley Corporation.
About the Authors
Walter J. Adams Jr., is vice president, professional liability claims manager, for Berkley Alliance Managers. He has more than 23 years of experience handling claims. He can be reached at wadams@berkleyalliance.com.
Edward L. Sheiffele, Jr., is executive vice president of Berkley Construction Professional. He has nearly three decades of experience in underwriting construction professional and environmental liability insurance. He can be reached at ESheiffele@berkleycp.com.