Integrated Project Delivery: Developments in Design Liability Insurance and Risk Management Presented by: Gene Todaro and Frank Musica Victor O. Schinnerer & Company, Inc. FEBRUARY 8, 2011 PRESENTER BIBLIOGRAPHIES Gene Todaro has been with Victor O. Schinnerer and Company, Inc. in the Construction Industry Group for thirty years. His primary focus is underwriting, servicing and marketing of accounts in the Contractor's Professional and Pollution Liability Program. Previously, he was involved in Project Liability Insurance, Architect/Engineers, National Accounts and as the Underwriting Manager for the Construction Industry Group. He is frequently asked to speak at industry group sessions concerning architects, engineers and contractors professional and pollution insurance issues. Frank Musica is senior risk management attorney for Victor O. Schinnerer & Company, Inc. which he joined in 1991 to assist the program in identifying the transformations in construction-related related professional services, the liability exposures created by contractual language, legislation, regulations and court rulings, and management processes and procedures to reduce the risk profiles of firms. FEBRUARY 8, 2011

The Changing Systems of Design and Construction Integration of design and construction Efficient delivery of construction project Client demands for savings time, cost, hassle and results Client demands for accountability Control of design process Multiple design sources Delegated design responsibilities FEBRUARY 8, 2011 3 High-Risk Issues That Could Impact Sureties Blurring of the bright line legal treatment of design and construction Replacement of design negligence standard with contractual obligations of design-build and integrated project delivery Increase in design services provided by contractors, subcontractors and others Replacement of professional liability coverage with financial assets of contractors FEBRUARY 8, 2011 4

Integrated Project Delivery and the Use of BIM Legal Treatment Statutes and registration laws Case law on negligence versus contractual obligations Insurance Coverage Issue of contractual exposures, shared risk and waivers Problems covering speculative risks and moral hazards Financial System Lenders reliance on deep pockets Bonding difficulty FEBRUARY 8, 2011 5 Integration for Green Construction Project Performance Shared liability for direct and consequential damages: Delayed third-party certification Failure to meet design or construction integrity requirements for specific certification level Deficiency in meeting high-performance standards or contractual obligations for initial and life-cycle costs Fraud, material misrepresentation and deceptive practices claims related to performance or cost FEBRUARY 8, 2011 6

Design Exposures and Coverage for Contractors Coverage is available for: Direct liability for in-house design by a licensed professional Vicarious liability for subcontracted design to a licensed professional Joint Venture or shared design responsibility Integrated Project Delivery cooperative design Design Assist or delegated design responsibility FEBRUARY 8, 2011 7 Design Exposures and Coverage for Contractors Coverage is available for: Construction Management/Project Leader CM At-Risk design coordination obligations CM Agency design coordination obligations Program/Project Management contractual duties Selection of design team Self-performed design services Subcontract design services Coverage depended on scope of contractual duties FEBRUARY 8, 2011 8

Design Exposures and Coverage for Contractors Design Liability Coverage differs from CGL Endorsed CGL policy usually only covers Bodily Injury and Property Damage caused by negligently performed design services No coverage through CGL endorsement for: The cost of remedial design or reconstruction Economic damages resulting from design liability FEBRUARY 8, 2011 9 Various Coverage Forms for Contractors Three Contractor options: Contractor Professional Liability Contractor Pollution Liability Contractor Professional and Pollution Liability All the protection and coverage of the professional and pollution liability policies combined FEBRUARY 8, 2011 10

Developments in Contractor Coverages Contractor Professional Liability Coverage available for: In-house and subcontracted services Joint ventures with design firms CM Agency and At-Risk Services Coverage includes: Failure to detect faulty workmanship of subs when responsible for design and construction Rectification of design problems in construction Mold, silica and respirable dust FEBRUARY 8, 2011 11 Developments in Contractor Coverages Rectification Coverage Enhancement Rectification means reasonable and necessary fees, costs and expenses incurred to rectify a design defect caused by a professional service in any part of the construction or engineering work as long as the insured is responsible for design and construction. FEBRUARY 8, 2011 12

Developments in Contractor Coverages Contractor Pollution Liability Coverage for pollution claims, including costs for government-mandated mandated clean-up Coverage for tort liability of client arising from insured direct or subcontracted activities if contractually assumed Coverage for transportation of pollutants No exclusion for asbestos, respirable dust or silica FEBRUARY 8, 2011 13 New Integrated Project Delivery Insurance Lead designers, general contractors, subconsultants and subcontractors can be covered under a project specific policy. Includes professional liability, pollution incident liability, and contractors design liability coverages. Dedicated policy covers the design exposure on design-bid-build, build, design-build and firms entering into integrated project delivery (IPD) projects FEBRUARY 8, 2011 14

New Integrated Project Delivery Insurance Extended Reporting Period up to five years is available depending on the duration of the project Coverage can be offered for projects with construction values between $10 million and $300 million Non-cancellable except for nonpayment of premium Also available for AIA Single Purpose Entity project delivery system FEBRUARY 8, 2011 15 Key Exclusions in Contractor Coverages Professional liability exclusions: Express warranties/guarantees Means, methods, techniques, sequences and procedures of construction Faulty workmanship of insured contractor (but no exclusion of negligent oversight of subcontractors) Cost estimates or bid inaccuracy FEBRUARY 8, 2011 16

Key Exclusions in Contractor Coverages Professional liability exclusions: Delays not caused by design negligence or agency CM services Job-site safety Pollution incidents not triggered by negligent design services (unless contractor has stand- alone or combined professional/pollution policy) FEBRUARY 8, 2011 17 30 25 20 15 10 5 Claim Trends and Examples Frequency of Claims per 100 Firms 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 All Firms D-B Entities FEBRUARY 8, 2011 18

Claim Trends and Examples Severity of Paid Claims $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 All Firms D-B Entities FEBRUARY 8, 2011 19 Integrated Project Delivery: Developments in Design Liability Insurance and Risk Management YOUR QUESTIONS? If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenter directly: Gene Todaro Construction Underwriting Specialist Victor O. Schinnerer & Company, Inc. Gene.A.Todaro@Schinnerer.com 301-961-98289828 FEBRUARY 8, 2011 20

C O N T R A C TO R WA R S TO R I E S I L L U S T R AT I N G T H E VA L U E OF PROFESSIONAL LIABILITY Professional liability insurance isn t just for architects and engineers. As a contractor, you too need to be covered. The following claims scenarios are based on real cases and they illustrate that despite your best efforts, things sometimes go wrong. Professional liability protects you from unsatisfied clients and potentially faulty or defective work by your subcontractors. School Woes I XYZ Construction Company was hired as the construction manager overseeing the construction of a new elementary school. After the project was completed, the school district filed suit against various parties, including XYZ Construction Company, alleging damages due to defective workmanship and shoddy construction. The school district also alleged damages as a result of construction debris left behind when construction was completed. The school district claimed XYZ Construction Company, as the construction manager, was required to monitor the work and notify the school district and the district s architect of any problems. As part of the lawsuit, the school district argued XYZ Construction Company had not made as many site visits during construction as required by the contract. The main issue in this claim was defective workmanship. The school district claimed that XYZ Construction Company should have been able to spot the defective work during its site visits. XYZ Construction Company used AIA B801 contract documents that specified the required number of site visits. The company had documentation showing the dates and times of all site visits, as well as specific notes describing what it had observed. XYZ Construction Company s professional liability insurance carrier paid over $70,000 in defense costs to have this claim dismissed. If XYZ Construction Company had not carried professional liability coverage, this expense would have come out of the company s bottom line. School Woes II ABC Construction Company was hired to provide for the design and installation of a wet fire-suppression system for a new high school. Sometime after the work was completed, the sprinkler system went off in a closet. The incident resulted in $211,000 worth of damage to the gym floor and sports equipment. While it s not clear why the sprinkler went off, the investigation found that ABC Construction Company should not have specified the sprinkler head used. Ultimately, the sprinkler head manufacturer and the community school district s general liability carrier also contributed to the settlement costs. Despite the global settlement, ABC Construction Company s costs included $65,000 to settle the claim and $10,000 in defense costs.

Health Club Air-Handling Problems Ten members of a health club sued the owner after maintenance equipment fumes leaked into the women s locker room and caused respiratory problems. Their claim: the air-handling unit was improperly located in a maintenance/equipment room, leading to harmful fumes leaking into the locker room. They also alleged that the health club was not properly outfitted with a fresh air exchange system. Design Services USA was brought into the suit because it had subcontracted the HVAC design engineer. Design Services USA s insurance carrier has spent approximately $85,000 in defense costs before the trials even started. Various claims from the injured health club members totaled several hundred thousand dollars. The Overheated Office Building RG General Contracting was hired to provide design/ build services for a new office building. The company subcontracted a local mechanical design/build firm to handle the mechanical, electrical, and plumbing portions of the work. When the building was completed and people started working in it, they discovered the office thermostats didn t work properly. As a result, some offices were uncomfortably warm while others were too cool. The problem was traced to a fault in the HVAC design. Repair costs of $175,000 were borne by RG General Contracting and paid by the insurance carrier. The work included installing several new and larger heat pumps in the building, as well as placing some additional pumps in other locations throughout the building. Even though the subcontractor was responsible for the faulty design, RG General Contracting as the prime contractor was vicariously liable for its subcontractor. Thus, it was the party sued. Victor O. Schinnerer & Company, Inc. Two Wisconsin Circle, Chevy Chase, MD 20815 Phone: 301-961-9800 / Fax: 301-951-5444 www.schinnerer.com 2

Professional Liability Case Studies A Lapse in Judgment and Insurance Exhausted Limits Leave Contractor Responsible GC/CM Held Responsible for Site Safety Design Error Produces Cost Overrun Paying for Others Mistakes www.planetcontractor.com

Pollution Liability Case Studies Just how important is pollution liability coverage? Fumes Spread through Building Forklift Accident Contaminates Site Before You Dig... System Malfunction Pollutes Factory s Air Supply Phase I Failure Spreads Pollutants to Nearby Stream Improper Installation Contaminates Drinking Water www.planetcontractor.com