WIXLIB

Lessons Learned from Construction Contractors Large Claims for ProfessionalLiability CoverageJanuary 29, 2019Michael A. Davis, RPLULead Professional Liability Underwriter, ZurichNorth American Commercial Insurance

Overview Study parameters Rectification case study Protective indemnity case study Rectification and protective indemnity comparison I’m not a design-builder Differences in risk for different project-delivery 2019 Zurich American Insurance Companysystems You-can’t-make-this-up case study Construction management case study Losses by project types for contractors versus Professional services Concurrent-causation case study Other lines of coverage Reporting under different professional liability (PL) coverage partsReporting under multiple lines of coverageProject-specific policesDo I have to report everything?What increases risk? How do you avoid disasters?designersJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage2

Study parameters Large losses– 500,000 or more incurred by the policy Construction contractors– Not designers– Not environmental service firms 2019 Zurich American Insurance Company What really happened?January 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage3

Root causes of loss 2019 Zurich American Insurance Company may or may not be the same as the covered professional services, or January 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage4

2019 Zurich American Insurance CompanyWhat is addressed by one insurance contract may or may not be the driving cause of losson the project as a whole.January 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage5

Subcontracted design exposure 2019 Zurich American Insurance CompanyRECTIFICATION CLAIM EXAMPLE

Now what? 11-story dormitory Insured was at-risk construction manager via joint venture (JV) 2019 Zurich American Insurance Company Deep foundation package was a design-build subcontractJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage7

Tunnel-formed, cast-in-place 2019 Zurich American Insurance CompanyHow about a shot from the top?Photo courtesy of The Zurich Services CorporationJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage8

2019 Zurich American Insurance CompanySure!Photo courtesy of The Zurich Services CorporationJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage9

Hello, value engineering 2019 Zurich American Insurance CompanyRammed Aggregate Pier Construction ProcessDiagram courtesy of Mark Bergman, The Zurich Services CorporationJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage10

University housing case study Used owner’s geotechnical study– Differential settlement should be no more than ½” Construction of the rammed-aggregate pier system completed with no apparent issues 2019 Zurich American Insurance Company Installation of the building cast-in-place concrete framing proceeded once foundation completedJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage11

University housing case study 2019 Zurich American Insurance CompanyTunnel-Formed Cast-in-Place Concrete SystemPhoto courtesy of The Zurich Services CorporationJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage12

University housing case study While constructing the eighth floor, the contractors noticed settlement Surveys revealed excessive differential settlement throughout the tower– Some areas of the tower had settled as much as 5 inches 2019 Zurich American Insurance Company Construction of the tower was stoppedJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage13

University housing case study 2019 Zurich American Insurance CompanyTunnel-Formed Cast-in-Place Concrete ColumnPhoto courtesy of The Zurich Services CorporationJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage14

The meter’s running The rammed-aggregate-pier subcontractor discovered and acknowledged that they had made a designcalculation error that accounted for half of the settlement being experienced. 2019 Zurich American Insurance Company However, they firmly stated that not all of the settlement was caused by their design error.January 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage15

University housing case study 2019 Zurich American Insurance CompanyMicro pile installation in partially completed structurePhoto courtesy of The Zurich Services CorporationJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage16

University housing case study 2019 Zurich American Insurance CompanyMicro pile installationDiagram courtesy of Mark Bergman, The Zurich Services CorporationJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage17

What’s my point? The rectification claim was expensive– Damages were still incurred, but mitigated The overall project delivery method was not design-build 2019 Zurich American Insurance Company– It was a construction management- at-risk (CMAR) joint venture– The subcontract was design-buildJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage18

Who sued contractors for large PL claims?9%4%1%1%9%OwnerGC/CMMultiple Third-PartiesThird-PartySubcontractor 2019 Zurich American Insurance CompanyArchitect76%At least one in four large claims are on projects with new clientsData Source: 2014 Study of Zurich CPPI large losses from 1994-2013January 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage19

Deadlines 2019 Zurich American Insurance CompanyPROTECTIVE INDEMNITY CASE STUDY

Protective indemnity case studyDesign-builder entered a negotiated, fixed-price contract to deliver a new gas-fired power plant Engineer and owner had a long-term relationship– Both were new relationships for the contractor 2019 Zurich American Insurance Company The project was in a locale outside of the contractor’s normal operationsJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage21

Protective indemnity case study The site was constrained in size in order to locate the new plant next to an existing gas refinery that wouldfeed gas to the new plant 2019 Zurich American Insurance Company The team chose a design utilizing underground piping in order to conserve spaceJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage22

Protective indemnity case studyNobody listensOwner-provided geotechnical report indicated organic, compressible soils expected to exhibit secondaryconsolidation over time Owner’s geotechnical engineer recommended concrete-filled steel piles for the heavy turbines and timberpiles for the pipes Design-builder’s engineer designed a foundation supporting the heavy turbines with piles, but no deep 2019 Zurich American Insurance Companyfoundations for the pipelinesJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage23

Protective indemnity case studyContract deadlines matter Design-builder had several months – from contract inception to final design – to revise the fixed price Designer planned for the pipes to sit unsupported on the soils Work began one week after final design 2019 Zurich American Insurance Company The piles driven for the heavy structures immediately began to sinkJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage24

Protective indemnity case studyOh, now you listen! Designer immediately revised their decision and concluded that the pipelines needed to be on piles Design-builder concluded that the designer’s negligence impacted the cost of the project by 30 million 2019 Zurich American Insurance Company after the date for fixed-price revision had passedJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage25

Protective indemnity case studyWill this be expensive? The next few months involved significant:– Redesign ( )– Pipeline and duct reinforcement ( )– Project-scheduling impact ( ) Delay of 111 days acceleration costs to mitigate liquidated damages 2019 Zurich American Insurance Company Limitation of liability fees ( 9 million)January 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage26

Protective indemnity case studyDamages and results 30 million in damages:––––– 12 million 10 million 2 million 2 million 4 millionHard costsAccelerationExtended general conditionsLost productivityOverhead and profit 2019 Zurich American Insurance Company Arbitrated with contribution from designerJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage27

Protective indemnity case studyRisk management principles violated Inadequate contractor review of design in advance of contract deadlines Failure to manage to critical contract deadlines 2019 Zurich American Insurance Company Inadequate management of new owner and designer relationshipsJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage28

Protective indemnity case studyWhat did you learn? Be aware of value-engineering decisions Contract terms matter 2019 Zurich American Insurance Company Relationships matterJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage29

2019 Zurich American Insurance CompanyContractor’s protective indemnity vs. rectificationJanuary 29, 2019Contractor’s protective indemnityRectificationOnly applicable to design buildersCreated for design buildersCan be pre- or post-completionOnly pre-completionExcess/difference in conditions (DIC) designer’sPLSelf-insured retention (SIR) appliesInsured can sue designer for damages toinsured, including lost profits and additionalcosts incurred by insuredPay Insured costs – not profit – to avoid claimfrom Owner for damages to OwnerInsured sues their designer, then tendersprotective indemnity claim to Insured’s own PLcarrierInsured tenders rectification claim to their ownPL carrierLessons Learned from Construction Contractors Large Claims for Professional Liability Coverage30

Who sued contractors for large PL claims?Design/BuilderGeneral ContractorCM At-riskAgency CMProgram ManagerMechanical Subcontractor 2019 Zurich American Insurance CompanyConcrete SubcontractorJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage31

Differences in risk for different project delivery systemsDesign-bid-build 2019 Zurich American Insurance CompanyDesign-buildJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage32

2019 Zurich American Insurance CompanyINCIDENTAL PROFESSIONAL EXPOSURE CLAIM

[Another] medical facility Insured general contractor Superintendent liked to do his own surveying– Incorrectly transposed a control point across multiple structural steel components Subcontractors began to notice 2019 Zurich American Insurance Company A professional surveyor was available on the projectJanuary 29, 2019Lessons Learned from Construction Contractors Large Claims for Professional Liability Coverage34