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Design and Construction

Introduction

In recent years it has become common place for contractors to incur a design liability, either by offering a design service as part of an overall building package or through a design and build contract where the design work is sub-contracted.

What do Insurers look for?

What do insurers look for? There is of course no professional body for contractors. It is for this reason that insurers have to pay careful attention to the qualifications and experience of the principals and staff. If a contractor is offering professional services then insurers will expect to see qualified staff, frequently a qualified Architect, Engineer or Surveyor. If there are no qualified staff, then insurers will want to see CV's for those involved in technical work, normally demonstrating at least five years' practical experience, maybe more depending on the services offered.

Insurers will be particularly interested in the types of projects and the sectors the proposer is involved in:

Home building		Insurer Perception of Risk
Individually designed		lower risk
Multiple low rise		medium risk
Multiple high rise		medium/higher risk
Modular (repetitive design)		high risk

Public/commercial buildings
Hospitals		higher risk
Schools/universities		medium risk
Offices/retail/warehouses		lower risk

Engineering construction
Highways		high risk
Bridges/tunnels/dams		very high risk
Harbours/jetties		very high risk
Sewage/water schemes		high risk

Industrial
Power/manufacturing plants		high risk
Refineries/petrochemical installations		very high risk
Mechanical plant bulk handling equipment		high risk
Industrial building systems		medium risk

Insurers are particularly interested from which discipline income is derived. The following areas may form part of the services provided by the contractor: architectural, civil and structural engineering, surveying, mechanical and electrical engineering, heating and ventilation engineering, chemical engineering, soil engineering and nuclear engineering.

Work undertaken involving the structure or foundations of a building are seen by insurers as those offering a very high level of exposure to large claims e.g. where one failure could give rise to the failure of part or all of the overall structure.

Examples of such work would include the excavation or piling of a new building's foundations, the building of steel infrastructure or roofing. In contrast, the service elements to the building work are less devastating, such as heating and ventilation, electrical and mechanical work, where the loss would be limited to a small area of work that could be rectified in isolation to the overall contract. The problem is that these less severe areas lead to greater frequency. In how many buildings does the heating and air conditioning actually work properly?

Moreover, cutting back on building services specifications is seen as an easy way to cut project costs that can later end in tears. Real problems have been encountered with contractors involved in very speculative building projects (which often cost developers money that they look to recover), cladding or roofing contractors (cladding can crack or simply fall off) and risks where there is almost more of a product guarantee exposure - such as the design and manufacture of machinery (which often does not do what it was supposed to do). In a hard market, these risks are often declined.

Other areas of interest for underwriting purposes include:

Contract sizes. There is a direct relationship between the size and complexity of the job and the exposure.
Technology. Is the firm using 'cutting edge' technology or standard, tried and tested processes?
Overseas exposure. Does the practice carry out work for overseas clients? Careful consideration would be paid to such work carried out for US or Canadian firms.
Retroactive exposure. Does the practice have an exposure to claims arising from past work, whether in the current firm or a former practice?

Proposal forms further clarify the extent of a contractor's exposure to design-related claims by asking for a breakdown of turnover and fee income. Examples are:

Turnover where the firm designs and constructs from its own design and provides full technical supervision. The buck stops with the contractor. It is the highest rated.

Fees where the firm provides design and technical services only (i.e. no construction is undertaken by the firm). This is pure consultancy work. Insurers will normally treat this in the same way as the corresponding consultancy such as an architectural or engineering consultancy firm. If there is no turnover other than this, then the risk has been wrongly assessed and the incorrect form completed!

Turnover where the firm constructs from others' designs performed on behalf of the firm (i.e. where there is a contingent design liability). This is contingent exposure. The contractor must ensure that the design team has and maintains adequate PI. The contractor's PI insurer might even make this a warranty. The contractor is in the firing line for claims but should be able to pass the buck to the design team. This area is rated lower than full blown in-house design.

Turnover where the firm constructs from others' design and others' technical supervision. There is no direct design exposure at all. But care should be taken if the contractor designs temporary works, such as access roads.

Example of Claims

Design failure. Contractors provided client with a design and build service in respect of construction of a quarry conveyor belt capable of carrying tonnes of material. Design of system sub-contracted out to specialists. After catastrophic failure of conveyor belt machinery, substantial damage was caused. Although the claim was subrogated by PI insurers against specialist designers, the claim was settled against Contractor for £42,000.

Alleged specification failure. Major fire at Heathrow Terminal 1 emanating from fast food restaurant caused multi-million pound damage. Insured, one of 13 defendants added as co-defendants by building insurers. One of many allegations involved the inadequate specification of extractor flue that allowed hot gasses to build. Although the contractor was involved in specification, the claim was successfully defended. Costs £50,000.

Design failure. Temperature of new cold storage room at factory consistently too high because of inadequate design. Paid £250,000 plus costs.

Inadequate design. Air extraction and temperature control at restaurant failed to work properly. Restaurant was closed pending repairs. Paid £150,000 plus costs.

Structural design defect. Incorrect structural calculations contributed to total building failure of new car park. Paid £750,000 plus costs.

Negligent project management. Contractor instructed in role of project managers on existing but uncompleted development, problem due to bankruptcy of original contractors. Project involved restarting development, i.e. putting it back on track, utilising previous designs but new professional team. Allegations of negligence concerning duplication of work carried out by original team and additional duplications between new team, Surveyors, Engineers and QS. This led to an over-run on the contract budget. Settled £26,500.

Main Bodies with PI Rules

At present there are no established professional bodies that regulate the industry or issue mandatory guidelines on PI.

For more information, please contact us directly at HCC International.

Wordings

As mentioned earlier, off-the-shelf PI policies are not adequate for Contractors with a design liability. There are a number of reasons for this:

Activities of a Contractor may be excluded. They will not provide cover for liability arising out of the negligence of specialist designers, consultants or sub-contractors of the insured (subrogation rights against such consultants must be maintained).
They will not indemnify the insured against costs and expenses incurred in respect of action taken to mitigate a loss that otherwise would be subject to a claim under the PI policy.
They will not always provide cover for the defence civil or criminal proceedings brought under listed building, building regulation or health and safety legislation.

Wordings are not normally written on a 'civil liability' basis (covering all civil liability, not just negligence). Generally they are written on a 'legal liability' basis providing cover for legal liability arising from negligence in the conduct and execution of professional activities.

Usual Cover

The operative clause of a D&C policy is very restricted. Insurers want to cover only professional exposures and do not want to end up paying for poor workmanship on under-priced contracts. So, cover is normally limited to design or specification, feasibility study, technical information calculation, surveying undertaken only by or under the direction and direct control of a properly qualified Architect, Engineer or Surveyor. Supervision cover will normally be limited to situations where the insured is not supervising their own or their sub-contractors' workmen in their contractor capacity. Other professional activities that are intended to be covered will normally need to be endorsed separately.

Usually the limit of indemnity for Contractors will be 'aggregate' with legal costs inclusive within the limit of indemnity. Occasionally, in very soft market conditions, 'any one claim' may be available with legal costs in addition. The excess will normally apply to insurers' costs and expenses. As cover is not normally provided for on a 'civil liability' basis, additional cover for liability for lost documents and libel and slander will usually need to be added.

The Usual Exclusions

Design and construct policies demand careful attention to exclusions. Typically, policies will exclude:

Death or bodily injury.
Loss or damage to physical property (but loss of documents are covered).
Punitive or exemplary damages (many policies have no geographical or jurisdiction limitations).
North American offices and jurisdiction.
Liability to other Insureds.
Nuclear risks.
Claims and circumstances known at inception of the cover.
Onerous collateral warranties.
Pollution - care must be taken here if the contractor needs or wants environmental claims covered.

The Usual Extensions

Loss of documents.
Libel and slander.
Collateral warranties.
Adjudication in accordance with the Housing Grants, Construction & Regeneration Act 1996.
Duty to warn - a Contractor that has no design or professional supervisory responsibility may still have a duty to warn the client if they become aware of a design defect, (many insurers will not give this cover).

Associated Links

Chartered Institute of Building
These corporate members have earned the right to call themselves Chartered Builders, a title which puts them on par with other construction professionals like architects, engineers and surveyors.

British Computer Society
The BCS is the only Chartered Engineering Institution for Information Systems Engineering.

Institution of Electrical Engineers
Founded in 1871, IEE is the largest professional engineering society in Europe and has a worldwide membership of just under 140,000.

British Property Federation (BPF)
The BPF is the trade association of the property industry, representing owners and investors in commercial and residential property. The property assets held by BPF members are over £100bn.

The Association of Consulting Engineers (ACE)
ACE is the UK's leading trade association for engineering, technical and management consultancies.