Designed to fail

22nd July 2014
Hiscox

Categories:

  • Executive insight
  • US design professionals face growing liability for big-ticket public construction projects

    Architects and engineers in America face an unwelcome new scenario on large public infrastructure projects, as a result of the rise of public private partnerships (PPPs). Building contractors now control these projects, instead of the design professionals. This shift in power has meant design professionals are now shouldering more of the liability – whether or not it was their mistake.    

    Although in his 2009 inauguration speech, President Obama, stated: “We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together,” only an estimated $126 billion has been authorised for infrastructure projects – which is a fraction of the $3.6 trillion that The American Society of Civil Engineers (ASCE) estimates needs to be spent for the country’s infrastructure to “reach a state of good repair by 2020”.

    In the absence of sufficient public funding, state and local governments have increasingly turned to public private partnerships (PPPs) to fund infrastructure projects.

    Although already commonly used in the UK, Europe and Australia, PPPs are relatively new in the US. Their introduction has brought about fundamental change in how big construction projects are managed.

    PPPs shift the role of the architect from being the owner’s agent-advocate to a developer’s subcontractor. This in turn, creates a different dynamic in the relationship between the lead contractor and the architects and engineers. Typically, the project approach becomes more adversarial.

    This loss of control has implications on an architect’s or engineer’s own liability and insurance cover. As well as traditional professional negligence insurance products, liability for contractors and design professionals may well be wrapped up under an insurance policy such as owner protective project insurance (OPPI), or a contractor protective professional indemnity policy (CPPI).

    Under a CPPI, an architect may, for example, pick up liability for a case that is not their fault under a general rectification clause. Historically, a design professional would not have expected to pick up costs related to a construction problem unless it was their own fault.

    Brokers and insurers will need to work with their US design clients to mitigate the risks they face when embarking on a PPP project.  It’s critical that responsibilities are fairly and equitably apportioned between the parties from the outset of a project, not when problems arise during construction. The relative youth of PPP in the US means there is not a defined area of case law for professions to fall back on which leads to the problems of unequal risk sharing.

    Architects and engineers will have to adapt to the new relationship with contractors in PPP. It’s important for the insurance industry to ensure that design professionals understand their greater potential liability in these projects, and therefore buy cover that reflects their true exposure. The London Market can play a leading role in helping them to successfully balance the new opportunities on offer with the changing risk.

    Miriam Goddard is Head of Professions within the Hiscox London Market Casualty team.

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