Project‑Based IPD Insurance Coverage

The shared-risk/shared-profit collaborative nature of Integrated Project Delivery results in many aspects of the relationship being defined contractually. But it is unclear how courts will construe the provisions of multi-party agreements with extensive waivers of rights, unusual limitations on risk, and blurring of responsibilities. The delivery system, with its emphasis on contractual liability rather than negligence liability, means that case law proves of little value. With so many unknowns in the legal treatment of collaboration in design and construction, the insurance coverage options are difficult to define and price.

The involvement of multiple parties in the design phase should result in a level of responsibility for the collaborative parties that cannot be assigned or allocated only to the credentialed design professional on an IPD undertaking. Contractors and construction managers will have a more extensive involvement in the design aspects of projects; they are likely to face significantly increased exposure to design-related claims brought by their clients and third parties.

Design-build subcontracts not only expose the design-build system provider to a level of design risk but also could be construed by courts to expand the risk of the design team even with a reduction in authority and control. While the goal of IPD is to have the parties share risk as a way to protect project-based interests, currently available professional liability insurance coverages are not productively aligned with the interests of the parties.

This misalignment can best be solved by having a project-based policy that cultivates the commonality of interests and the focus on successful completion of a project. Victor and CNA have responded to this gap by developing professional liability exposure coverage for all project members providing design or design and construction services through a multi-party agreement on a project basis.

IPD team coverage is available in two forms

Project specific insurance is intended to cover the design exposure under one policy that responds in place of the individual policies of the prime design firm, subconsultants and other parties with design responsibilities.

Depending on the type of IPD project, the coverage’s “named insured” could include the owner, the design team and the construction entity.  This would accommodate the Single Purpose Entity concept as envisioned by The American Institute of Architects where the owner actually sets up a separate legal entity that includes the architect and the construction manager for a project.  Until now no professional liability policy could insure the Single Purpose Entity and its owners.

The project specific coverage for this unique form of integrated project delivery would, however, only protect against claims and pay on behalf of the named insureds when the professional liability claim is a true “third-party” situation – no claims from any entity within the design or construction process would be subject to coverage.

On an IPD project with a multi-party contract, broader coverage for the IPD design and construction team is available. Coverage can be for all design team members with subconsultants specifically included by endorsement. The project-specific policy also can extend to the design liability of the construction team entities.

The underwriting process is highly project-specific

The underwriting process will evaluate the design team, the contractor and the owner.  The form of contract will be examined closely to determine if enforceable waivers of claims and consequential damages and limitations of liability are included. Internal contractual indemnity provisions, mandatory dispute resolution techniques and the details of any incentive compensation plans also affect risk and will be evaluated.

Initially the coverage will be offered only those design teams where the prime design firm is a CNA insured with ten years of documented loss experience. The prime and all first tier consultants must carry at least $ 1 million per claim and aggregate limits of professional liability insurance on a practice policy.

The minimum limits available will be $1 million per claim/aggregate with a maximum of $5 million per claim/aggregate. The self-insured retention of the design team would be a minimum of $25,000, the prime design professional’s practice policy deductible or a set amount of between one-quarter and one-half percent of the project construction values.

Factors recognizing the use of Building Information Modeling, the type and form of contract, the jurisdiction and other local legal issues and the likelihood of increased exposure during the post-construction period also affect the premium. On SPE IPD projects the cost will be reduced by a factor to recognize that the coverage is limited to third-party liability.

As with all project-specific coverage, there is both a period for the policy term during which the professional services are provided and an extended reporting period during which claims related to the services provided during the policy term could be brought.  Basically the inception period for the policy starts in the design stage and the policy term concludes with the project completion.

The maximum extended reporting period is five years with the absolute maximum time period for the design services and extended reporting period limited to ten years.  The policy is subject to an annual audit during the design and construction phase so that the premium will be charged based on the revised estimated construction values on an annual basis.  A final audit will be conducted prior to execution of extended reporting period based on the final construction values for the project. The coverage will be offered on an Excess and Surplus lines basis through CNA’s Columbia Casualty operation.

Not all projects types are insurable

The coverage provided by the project–specific IPD insurance will be offered for projects with construction values between $10 million and $200 million. While this project-based coverage will not be available on extremely large or high-risk projects, it will respond to the need for a dedicated policy to cover the design exposure on projects such as office buildings, public and private educational and healthcare facilities, and certain residential, commercial, and mixed-use projects, for example.

Some project types will be excluded. The loss record for project types such as convention centers, stadiums, correction facilities, resort projects, condominium or residential tract developments and some other make them difficult projects to insure on a project-specific, team coverage basis.  In addition, large airports or other public transit facilities, major highway or bridge projects and power plants and other utility projects—such as those that will increasing be accomplished through public-private partnerships represent significant risks that are not easily covered.

The coverage will be available for projects located internationally with billings adjusted according to exposure factors related to the level of services being provided and the impact of the geographic, environmental and legal systems of the specific country.

These innovative insurance options are intended to enable the use of Integrated Project Delivery by aligning coverage with the shared design risks of the participants and needs of the project.

Victor and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability,  Business Owners, and Cyber Liability Insurance Programs to address the challenges that architects face today and in the future.