The $2.2 billion Transbay Transit Center construction project in downtown San Francisco is under intense public scrutiny for cracked support beams that closed the centerpiece of city infrastructure just weeks after it opened. An investigation will determine if the cracks are related to fabrication, installation or design, and if one or more specific parties are at fault.
The transit center, which opened Aug. 12, was already marred by rising costs, 50 percent higher than original projections, and a project completion date that had been delayed by two years.
Beam manufacturer Herrick Corp, engineering firm Skanska USA and general contractor Webcor/Obayashi have all been scrutinized for their role in the project. Investigations will determine who is at fault; in the meantime, contractors and firms operating in the construction industry should make sure they have proper insurance coverage, said Nicole Greene, Associate Vice President, Professional and Executive Liability Center of Excellence, Burns & Wilcox, Corporate Headquarters.
It is common when a lawsuit is filed for an end client to name all parties involved in a construction project since determining fault can be a complex process, Greene said.
“Defense costs will be incurred regardless if the party is negligent, so for this reason alone, all three parties should consider purchasing specialty insurance policies,” Greene said. “A Professional Liability policy will provide financial protection for any negligent acts, errors and omissions arising out of professional services provided to third-party clients.”
A Professional Liability policy will provide financial protection for any negligent acts, errors and omissions arising out of professional services provided to third-party clients.
The exposure for contractors can vary from one case to another. Debate over the responsibility for a parking garage partial collapse at California University of Pennsylvania has cost the institution around $900,000 in lost revenue and legal and consulting fees. A contractor involved in the project is also being sued.
Contractors involved on the same project can even sue each other. One Louisiana contractor was awarded more than $62 million from a federal jury from another general contractor for defaulting on a contract in the construction of an Iowa-based fertilizer plant.
In the San Francisco case, Skanska USA filed a lawsuit against Webcor/Obayashi in May, claiming incomplete or shoddy construction instructions compromised the integrity of the project. Given the complexity of the project, Greene indicated it is still too early to tell which parties contributed negligence that caused the project to fail. For now, all parties involved will be put on notice of the claim.
Potential exposure for parties sued in the Transbay Transit Center case is high, so the involved parties should have a level of coverage that will protect the business interests, said Laura A. Bates, Corporate Vice President, Atain Insurance Companies.
“That’s a dangerous game to play and is often the reason why a contractor goes out of business. They are often unaware of the length of time that clients can file suit after a project is complete.”
We commonly see where some firms have too little insurance.
Professional design/contractor policy helps limit liabilities
A Professional Design/Construction policy provides financial protection against alleged professional negligence and also includes coverage for bodily injury and property damage that arise directly from the professional’s negligence, Greene said. Construction projects that have structural or other issues often can lead to lawsuits of at least $1 million. Another adverse outcome for a defendant is negative press, which can hurt the brand and future revenue opportunities.
Brad Pitt’s Make It Right Foundation is facing such a brand challenge. The foundation is suing a New Orleans-based architect for perceived faulty design in new home construction following Hurricane Katrina. That lawsuit came after Pitt’s foundation was named in a class-action lawsuit for the same project. The situation with Make It Right shows why nonprofits involved in construction projects should also carry Directors & Officers (D&O) Insurance, which can help protect executives and board members, Greene said.
A D&O policy can cover legal fees, damages and public relations costs that can be particularly helpful if an officer is a public figure.
Companies involved in the transporting of materials can also carry Installation Floater/Builders Risk property coverage that can pay for the cost of replacement products, lost revenue over a defined period of time and other costs.
Endorsements available to contractors and construction companies
Endorsements are forms that are attached to an insurance policy that amend the policy in some way. It can add, remove or alter the scope of how coverage responds. A First Dollar of Defense Endorsement policy, for example, alters the policy’s deductible language to not apply to defense costs, only to damages. Which means the insurance carrier is paying the “first dollar” to defend the claim. Defense costs will include the cost of forensics, investigation and litigation without drawing from the policy’s limits, ensuring there is money to address the indemnity damages, Greene said.
Another example is Defense Outside the Limits coverage, where defense costs do not erode the policy limits. This ensures the limits of the policy for indemnity payments are preserved if negligence was present.
A third endorsement common with construction projects is Rectification coverage, also referred to as “mitigation of damages.” This endorsement provides first-party coverage for costs a contractor incurs in correcting a design defect found during the construction phase, Greene said. It allows an insured party to report a design defect to the insurance carrier without waiting for a suit to be filed.
“Rectification helps to minimize costly construction delays and incurred cost overruns by keeping the projects on schedule and uninterrupted,” Greene said. “And it will help resolve conflicts faster and without creating animosity between the insured and their client.”
Defense Outside the Limits, First Dollar Defense and Rectification endorsements are not automatically included in a Professional Design/Construction policy, but are generally available and usually will come with additional costs.
Limits often set by hiring party in construction project
Any organization hired to work on a construction project is often required by the project owner to carry a minimal amount of liability insurance, but the range can vary significantly, Bates said. Common policy limits purchased for professional policies are $1 million per claim and $1 million per the policy aggregate, she said, but higher limits can be purchased.
“Often carrier capacity will require up to $5 million on the primary policy but excess limits can be purchased through additional carriers to stack the limits in an effort to meet higher contractual requirements,” Bates said.
Carriers also will offer a maximum limit of $5 million as a way to more effectively manage their portfolio, she said. This will spread the risk among multiple clients, minimizing the liability a carrier has for one catastrophic loss.
“The (engineering firms or contractors) can choose if they want to take on a project based on the limits set,” Bates said. “It’s a risk-reward scenario.”
Insured parties will usually purchase a Professional Design/Construction policy on an annual basis, no matter the length of the construction project. Coverage is renewed annually to meet the contractual requirements.
The impact of legal issues
Courts will determine who is at fault in the San Francisco and New Orleans cases based on what evidence is uncovered by one or more investigations by third-party engineering firms or contractors considered to be experts. Legal teams for both the plaintiffs and the defense will conduct their own independent reviews of the evidence and will likely call in expert witness testimony to support their findings, Greene said.
“In addition, each party’s policy coverage could potentially cover the cost of the inspection as part of the cost of defense, presuming the policy language covers that aspect,” Greene said.
Greene said that the intent of an insurance policy is to make the injured party whole again prior to loss occurring. If individual employees or the employer are sued, the Professional Design/Construction policy and any endorsements are likely to respond, depending on the definition of “insured” in the policy language.
“Anyone can be sued or even held criminally responsible for gross negligence, therefore purchasing the right insurance policies with applicable coverage enhancements is critical,” Greene said.
Given the complex landscape of the construction field and the ever evolving exposures companies face today, insured should review their insurance policies every year with their insurance brokers and agents.
Beyond coverage, the insurance company’s claims counsel’s experience should also be evaluated prior to purchase. For example, does the carrier employ in-house counsel or use a third-party administrator? An experienced insurance broker can help when vetting out the selection of the right insurance carrier and policy.
As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.
This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent to review your Commercial General Liability (CGL), Professional Design/Construction or any other related policies to ensure you have proper protection.