American Bar Association Forum on the Construction Industry

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5. 5 Withstanding the Tremors:

6. 6 “Structuring the Contractual Relationships Among the Design/Build Team Members” Bennett D. Greenberg, Esq., DBIA Seyfarth Shaw LLP Robyn L. Miller, Esq. DMJM H&N, Inc.

7. 7 NEW REALITIES IN DESIGN/BUILD CONTRACTING Design /Builder’s perspective Designer’s perspective

8. 8 MANAGING CLIENT EXPECTATIONS Design/Builder’s relationship with Owner Designer’s relationship with Design/Builder

9. 9 MANAGING THE DESIGN/BUILDER AND DESIGNER RELATIONSHIP Selection of Partners – Understanding and Appreciation of Different Cultures Tools for Identifying and Allocating Risks D/B Owner Agreement Risk Matrices Teaming Agreements

10. 10 DESIGN/BUILD BRIDGING Definition When used Pitfalls Best practices

11. 11 ESTABLISHING PRICE AND CONTROLLING PROJECT COST GMP v. Lump sum Use of contingencies Design/Builder and Designer’s role in pricing and cost control

12. 12 ROLES & RESPONSIBILITIES Pre-award Proposal responsibilities Design responsibilities Sharing of information & coordination of Design/Build proposal or bid

13. 13 Post-Award Design Development coordination Standard of care Performance specifications ROLES & RESPONSIBILITIES

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15. 15 Housekeeping Notes: 1) Topic is too broad to cover comprehensively in 45 minutes. If this subject is of interest to you, the paper goes into far greater depth. and this is a case where the Book may be better than the Movie. 2)Some of the slides have been modified , eliminated or reordered, so don’t be concerned if there is not a direct match between this presentation and the printed slides. Intro: I approach this topic in my role as project counsel or management consultant, reponsible for developing the project delivery approach, preparing front-end contracts, and developing the risk management and insurance program Housekeeping Notes: 1) Topic is too broad to cover comprehensively in 45 minutes. If this subject is of interest to you, the paper goes into far greater depth. and this is a case where the Book may be better than the Movie. 2)Some of the slides have been modified , eliminated or reordered, so don’t be concerned if there is not a direct match between this presentation and the printed slides. Intro: I approach this topic in my role as project counsel or management consultant, reponsible for developing the project delivery approach, preparing front-end contracts, and developing the risk management and insurance program

16. 16 DEVELOPMENT OF RISK MANAGEMENT AND INSURANCE STRATEGY Process commences during project delivery selection Performed in conjunction with qualified insurance broker Strategy based on analysis of threshold issues Housekeeping Notes: This is more than a 45 minute topic. Material in paper that I won’t touch on here. Some change and rearrangement in the slides.. But content is all there somewhere. When we serve as Project Counsel or consultant, we begin structuring the risk management and insurance program in conjunction with selection of the project delivery system We retain qualified broker Create strategy based on threshold issuesHousekeeping Notes: This is more than a 45 minute topic. Material in paper that I won’t touch on here. Some change and rearrangement in the slides.. But content is all there somewhere. When we serve as Project Counsel or consultant, we begin structuring the risk management and insurance program in conjunction with selection of the project delivery system We retain qualified broker Create strategy based on threshold issues

17. 17 TYPICAL THRESHOLD INQUIRIES Project Size Jurisdictional Legal Constraints Owner's Risk Profile Project Risk Requirements (lenders, rating agencies, public stakeholders, etc.) Design/Build Methodology Structure of Design/Build Entity Pre-existing Practice Policies Availability and Cost of Insurance Products in the Marketplace

18. 18 THE PROJECT RISK MATRIX Identify risk factors Assign contractual, insurance, process and other remedies for each risk Dress rehearse before project commencement

19. Matrix is useful: Comprehensive Checklist To dress rehearse the job To “sell” the project to stakeholders, lenders and rating agenciesMatrix is useful: Comprehensive Checklist To dress rehearse the job To “sell” the project to stakeholders, lenders and rating agencies

21. 21 STRUCTURING THE DESIGN/BUILD INSURANCE PROGRAM

22. 22 TRADITIONAL INSURANCE FORMAT Owner Builder’s Risk Loss or damage to building during construction Environmental Coverage Contractors Insurance Worker’s Comp.-- Work related injuries General Liability -- 3d party personal injury / property damage Automobile Misc. Bonds Bid --Secures bid Payment-- Secures lower tier payments Performance-- Secures Contractor performance

23. 23 Contractors Insurance Worker’s Comp.-- Work related injuries General Liability -- 3d party personal injury / property damage Automobile Misc. Bonds Bid --Secures bid Payment-- Secures lower tier payments Performance-- Secures Contractor performance Owner Builder’s Risk Loss or damage to building during construction Environmental Coverage Wrap-up- (Worker’s Comp, GL, Excess) WRAP-UP INSURANCE FORMAT

24. 24 TYPICAL DESIGN/BUILD SETTING Contractor-led design/build Design/builder provides indemnities, guarantees and warranties for construction and design Design/builder passes design obligations to architect/engineer subcontractor Design/builder relies on architect/engineer’s professional liability practice policy to cover negligent errors and omissions

25. 25 TYPICAL DESIGN/BUILD SETTING---QUESTIONS??? Is this insurance structure adequate? In particular, what policies respond to design risk? Builder’s Risk? Commercial General Liability? Professional Practice Policy? How can this structure be improved?

26. 26 BUILDER'S RISK INSURANCE Some basics: Covers direct physical loss to the structure, as well as building materials, whether incorporated into the structure, stored on-site or in transit. Covers “all risks” except those specifically excluded “Delay in completion” endorsement Does not insure loss due to errors or omissions in design, BUT….

27. 27 BUILDER'S RISK INSURANCE "Ensuing Loss" from defective design or workmanship

28. 28 BUILDER'S RISK INSURANCE Facts: Prior to substantial completion, roof system subjected to significant water infiltration during a "horizontal wind-driven rain." Insulation below roof was soaked and had to be replaced, and other structures below the roof were damaged. Failure due to design error and deficient workmanship. Result: Policy did not pay " cost of making good design error," i.e., replacing the defective roof, Policy did pay ensuing loss, such as replacement of the insulation and all other damaged work.

29. 29 BUILDER'S RISK INSURANCE Importance of “Ensuing Loss” coverage for design risk Policy is primary Supports contractual waiver of subrogation

30. 30 COMMERCIAL GENERAL LIABILITY (CGL) Some Basics: Covers bodily injury and property loss exposure Operates on "occurrence basis" May include “completed operations” coverage Carried by contractors and architect /engineer

31. 31 CGL AND DESIGN RISK Standard policy doesn’t exclude design But…design normally excluded by endorsement For years, most common endorsement was ISO Form CG 22 43: This insurance does not apply to "bodily injury", "property damage", "personal injury", or "advertising injury", arising out of the rendering of or failure to render any professional services by you or any engineer, architect or surveyor who was either employed by you or performing work on your behalf in such capacity. Professional services include: (1) the preparing, approving, or failing to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings and specifications; and (2) Supervisory, inspection, architectural or engineering activities. Not thought to preclude “incidental design”

32. 32 CONTINUUM OF CONTRACTOR DESIGN ACTIVITIES

33. 33 CGL AND DESIGN RISK Harbor Ins. Co. v. Omni Construction Co. Facts: Property damage to adjacent property during excavation Caused by subs error in design of sheeting and shoring system Omni paid repair cost and sought recovery Carrier denied coverage due to “professional service” exclusion in CG 22 43. Rulings: District Court: Exclusion does not apply to engineering within “normal means and methods” Court of Appeals: Reversed … All professional services excluded…even those within means and methods!

34. 34 CGL AND DESIGN RISK Response to Harbor v. Omni CG 22 43 only to be used for A/E CGL policies Two new endorsements issued: ISO CG 22 79 – Preserves coverage for design incidental to “means and methods” ISO CG 22 80 - Preserves coverage for all engineering, architectural, surveying service for project being built Almost has broad as unendorsed policy Is this sufficient for Design/Builder?

35. 35 CGL AND DESIGN RISK Limitations of all CGL Policies Only covers third-party claims for "bodily injury" and "property damage“ No coverage for: Increased costs to complete the work Cost of repairing work rendered deficient by negligent design Economic loss, including the owner's consequential damages (such as loss of profits), resulting from negligent design

36. 36 PROFESSIONAL LIABILITY (PL) INSURANCE Some Basics: Provides indemnity and defense to the architect/engineer for claims by the owner, design/builder or third parties for damages caused by negligent errors or omissions in the performance of the insured's professional services Operates on “claims made” basis Covers economic loss

37. 37 LIMITATIONS OF PL PRACTICE POLICY Aggregate Limits Inadequate Limits Potential for Cancellation or Non-renewal No Direct Access to Policy for Design/Builder (or Owner) Deductible Responsibility Application to Design/Build Warranties

38. 38 DESIGN/BUILD PROFESSIONAL LIABILITY ISSUES Warranties and Guarantees PL coverage only responds to “breach of contract” or warranty claims to the extent the A/E would otherwise be liable for failure to meet the standard of care (i.e. negligence) Design obligations contained in integrated design/build warranties that are not tied to standard of care are not insurable and generally not bondable

39. 39 CAVEAT ON NEW AIA DESIGN/BUILD WARRANTY Former AIA design/build warranty “Construction will be free from faults and defects.” § 3.29 AIA Document A191-1996 (Part 2) § 3.29 No reference to Design responsibility New AIA design/build warranty “The Design-Builder warrants to the Owner that…, that the Work will be free from defects….” AIA Document A401 Exhibit A (2004) § A.3.5.1 “The term 'Work' means the design, construction and services required by the Design-Build Documents" AIA Document A401 Exhibit A (2004) § A.1.1.6 Clear reference to Design responsibility

40. 40 DESIGN/BUILD PROFESSIONAL LIABILITY ISSUES Warranties and Guarantees Integrated design/build warranties are not insurable or bondable Solutions: Differentiated warranty Create contingency for uninsurable “Gap” “Design/Builder warrants and guarantees that all materials and equipment incorporated into the Project under this Agreement shall be of first quality and new unless otherwise specified, and that all construction work will be free from faults or defects in materials or workmanship, and in strict accordance with requirements of the Contract Documents; provided, however, that all design services shall be performed in accordance with the standard of care set forth in Paragraph ___ of this Agreement.”

41. 41 ALTERNATE APPROACHES TO INSURING DESIGN RISK

42. 42 Four Alternates to Standard Professional Liability Practice Policy Project Specific Excess Project Professional Liability Policy Contractor Professional Liability Policy Owner’s Professional Protective Indemnity

43. 43 PROJECT SPECIFIC EXCESSDescription Preserves coverage for specific project Sits “on top” of practice policy and “drops down” if practice policy is exhausted

44. 44 PROJECT SPECIFIC EXCESSLimitations Only covers practice policy holder Subject to annual placement or renewal “Follows form” of practice policy

45. 45 PROJECT PROFESSIONAL POLICYDescription Single policy covering all professionals (including Owner’s consultants) Replaces practice policies Dedicated project limits Covers project duration plus 3 to 5 years Not subject to cancellation “No fault” among multiple insureds with possible responsibility

46. 46 PROJECT PROFESSIONAL POLICYMarket Experience

47. 47 PROJECT PROFESSIONAL POLICYLimitations for Design/Build

48. 48 CONTRACTOR’S PROFESSIONAL LIABILITY (CPL) Description Professional coverage for design/builder Vicarious claims due to sub’s performance Direct claims due to design/builder’s performance Broad definition of professional services Waiver of subrogation may be supported May be excess over A/E policy (must coordinate) Coverage trigger doesn’t mention negligence

49. 49 Contractor’s ProfessionalLiabilityCoverage Trigger The Company will pay on behalf of the Insured, Loss that the insured is legally obligated to pay as a result of Claims first made against the insured and reported to the Company in writing during the Policy Period for Breach of Professional Duty: 1. by the Insured; or 2. for which the insured is legally liable as a result of the performance of others . . . . Breach of Professional Duty means an error or omission or other act that causes liability in the performance or non-performance of Professional Services rendered to others by the Insured or others for whom the insured is legally liable. Contractor's Professional and Pollution Liability, Form 77396 (12/00), Cl1257, American International Specialty Lines Insurance Company. 

50. 50 OWNER’S ISSUES WITH LISTED ALTERNATIVES Insufficient limits Inadequate coverage Subject to exhaustion of limits Risk of cancellation or non-renewal No direct coverage as insured Extremely expensive Insufficient limits for catastrophic losses No direct coverage as insured

51. 51 OWNERS PROTECTIVE PROFESSIONAL INDEMNITY (OPPI) Description Owner is named insured Design professionals required to maintain practice policies with “Minimum Insurance Requirements” OPPI is excess of practice policies, drops down to SIR if practice policy exhausted No right of subrogation if Minimum Insurance Requirements are maintained

52. 52 BUSCH STADIUM OPPI

53. 53 BONDING THE DESIGN/ BUILD PROJECT

54. 54 PERFORMANCE BOND FORMAT Protects Obligee from default of Principal Surety performs or pays up to penal limit Surety has subrogation and indemnification rights against Principal

55. 55 UNDERWRITING CONCERNS Design Risk Sureties balk at taking insurable risk Sureties refuse design risk; integrated design & construction warranties Solution: Bifurcate warranty and bonding responsibility in Contract Limit design liability in performance bond form

56. 56 AGC APPROACH TO DESIGN/BUILD BONDING Warranty is for construction only Bonding requirement:

57. 57 AGC APPROACHTwo Design/Build Bond Forms AGC Document No. 470 AGC Document No. 471

58. 58 UNDERWRITING CONCERNSComposition of Design Build Entity “Bondability” Factors Financial strength Design/build experience Internal organization Specific team work history Track record of success Contractor-led Integrated design/builder Designer-led? Limited liability company? Project specific joint venture?

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