insurance and risk allocation -...
TRANSCRIPT
Project-Specific Professional Liability Insurance and
Alternative Project Delivery Methods: Risk Allocation
Considerations and Functional Alignment
Practising Law Institute
June 25, 2014
David J. Hatem, PC
Donovan Hatem LLP Boston | New York
2
Project-Specific Professional Liability Insurance
(“P-S PLI”)
• Definition: Professional Liability Insurance Underwritten on a
Project-Specific Basis with Coverage Defined and Dedicated for that
Project
• Focus of Presentation:
– Relationship of P-S PLI to Project Delivery Method
– Relationship of P-S PLI to Contractual Risk Allocation
3
Project Delivery Method Approaches
• Traditional
– Design-Bid-Build (“D-B-B”)
• Alternative
– Design-Build (“D-B”)
– Public-Private Partnerships (“P3s”)
– Others
• Alliancing
• Integrated Project Delivery
4
Risk Allocation Approaches
• Focus on Defective Design Risk
• Roles and Responsibilities of Project Participants
5
Risk Allocation: D-B-B
• Traditional Delivery Method • Project Owners Have Risk Allocation Options • General Principles as to Roles, Responsibilities and
Risks for Design Adequacy – Project Owner Implied Warranty (Spearin) Obligation
– Design Professional’s Professional Standard of Care • Displacement of General Principles
– Performance Specifications
– Design Delegation • Risk Allocation “Lessons Learned”
– Risk, Control Correlation
– Fair and Balanced Risk Allocation Improves Procurement Process and Reduces Post-Award Claims Arising From Disappointed Commercial and Contractual Expectations
6
Risk Allocation: D-B
• Single Point Principle • Significant Transfer of Design Adequacy Risk to Design-Build Team • Project Owner Relinquishment of Control and Dominance Over
Design Development Process • Disclaimer of Project Owner-Furnished Conceptual Design, Other
Information and Reports • Design-Build Team Defense and Indemnification of Project Owner
(and Others) For Use of Reliance Upon Project-Owner-Furnished Materials
7
Risk Allocation: D-B
• Project Owners Have Significant Latitude in Risk Allocation Decisions in D-B – Generally, Less Statutory and Regulatory Limitations
• Aggressive Risk Allocation Trends and Practices of Project Owners in D-B – Degree of Project Owner Design Development
– Scope of Project Owner Review of Design Build
– Team Design Submissions
– Overly Prescriptive and Detailed Mandatory Design Standards and Requirements
– Broad Disclaimers
– Broad Defense and Indemnification Obligations
– Non-Inclusive of Differing Site Conditions Risk Sharing Provisions
8
Risk Allocation: D-B
• Factors Driving These Aggressive Risk Allocation Trends and Practices – Present Economic Conditions
– Competition and Other Market Factors
– Design-Builder Opportunistic Bidding Practices and Strategies
– Project Owner “Cost Overrun” Aversion and Insulation • Impact of Aggressive Project Owner/Design-Builder Risk
Allocation on Professional Liability Risk for Design Professionals – Flow Down
– Preclusion of Design-Builder Equitable Adjustment From Project Owner Increases Risk of Design-Builder Claims Against the Design Professional
– Heightened Contractual Performance Standards – e.g., Warranty, Fitness for Purpose
9
Risk Allocation: D-B
– Uninsured Contractual Liability, e.g., Warranty,
Quantity Overrun, Liquidated Damages, Defense and
Broad (non-negligence based) Indemnification
Obligations
10
Risk Allocation: P3s
• P3s
– Definition
– Typical Relationship Structure
11
P3 Contractual Relationship
Public Owner
Concessionaire
Financier
Financier Engineer
Design Build Contractor
Contractor
Trade Contractors
Design Professionals
Design Sub-consultants
Operations &
Maintenance Contractor
Stakeholders
Public Owner’s
Engineer
12
Risk Allocation: P3s
– D-B+ - “Value for Money” Criterion
– Relational Risk Allocation
– Flow Down/Back to Back
13
P-S PLI, Project Delivery Methods and Risk
Allocation – Functional Alignment
• Underwriting of P-S PLI – Consideration and Evaluation of:
• Roles, Responsibilities and Risks • Contractual Risk Allocation
– Project Monitoring As to Risk Factors • Material Variation Endorsement Approach • Joint Code Approach
– Customization/Manuscripting of P-S PLI Coverage • Alignment of Coverage with Risk Allocation • Relevance of Balanced Risk Allocation to P-S PLI
Coverage (Availability, Terms and Pricing)
14
P-S PLI: Macro Issues in D-B and P3 Projects
• Who procures the P-S PLI?
• Who Will Be Insured?
– Design Professionals
– Design-Builder
– Quality Assurance/Quality Control Firms
– Trade Subcontractors Who Provide Design or Other
“professional services”
– Concessionaire in P3s
15
P-S PLI: Macro Issues in D-B and P3 Projects
• Coverage For What Risks and Exposures?
– Definition of “professional services”
– Quality Assurance/Quality Control
– “Construction Management”
– Construction Means/Methods Design
• Insured v. Insured Exclusion
• Per Claim SIR Amounts, Allocation and Funding
16
D-B and P3s
Project Participant Coverage Expectations: P-S PLI
• Project Owner
– No Restriction in Coverage Scope Than Traditionally Afforded
Under P-S PLI
– Professional Liability “Coverage” for Design-Builder, As Well As
All Design Professionals
• Separate or Combined Policy
• Protective Coverage (OPPI, CPPI) v. P-S PLI
• Indemnification Coverage
– Avoidance of Duplicative Coverages and Unnecessary Premium
Costs
– Preserving Coverage for “Owner” Claims as Distinct from Design-
Builder Claims Against Design Professionals
17
D-B and P3
Project Participant Coverage Expectations: P-S PLI
• Concessionaire
– Same Expectations as Project Owner
– Consequential Damage Coverage for Economic Damage Due to
Performance Deficiencies and Delays
– Indemnification Coverage for Itself, the Project Owner, Lender
and Other Stakeholders
• Design –Builder
– Primary Coverage (at a minimum indemnification) for Claims by
Third-Parties Based on Self-Performed Professional Services
and for its Claims Against Design Professionals
– Ability to Assert, and Have Coverage for, Professional Liability
Claims Against its Design Professionals
18
D-B and P3
Project Participant Coverage Expectations: P-S PLI
• Design Professionals
– Professional Liability Coverage for Claims Arising Out of
Performance of Professional Services by Design Professional
and its Subconsultants
– Coverage for Claims by Third-Parties (Project Owner,
Concessionaire, Design-Builder, and Others)
– Coverage for Claims by the Design-Builder for Economic
Damages, Including Consequential Damages
19
P-S PLI, Project Delivery Methods and Risk
Allocation – Functional Alignment
– P-S PLI Not a Solution for Imprudent Risk Allocation
– Imprudently Underwritten P-S PLI Will Undermine and
Subvert Prudent Contractual Risk Allocation
20
Questions and Comments
Donovan Hatem LLP © 2014