FM Dallas

by Vail Marston

Insurance for Integrated Product Delivery

It’s a great title for a short piece, unfortunately a more appropriate moniker would have been that “there is no off the shelf insurance product for IPD delivery methods.”  Specific insurance doesn’t exist for several reasons not the least of which is that Professional Liability carriers have not had sufficient demand for a customized product because there have not been enough projects delivered via IPD.

Let’s start with the definition adopted by the AIA / AIA California Council in their 2007 Guide:

“Integrated Project Delivery (IPD) is a project delivery approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and maximize efficiency through all phases of design, fabrication, and construction.  “IPD principles can be applied to a variety of contractual arrangements and IPD teams can include members well beyond the basic triad of owner, architect, and contractor. In all cases, integrated projects are uniquely distinguished by highly effective
collaboration among the owner, the prime designer, and the prime constructor, commencing at early design and continuing through to project handover.”

The two key elements in IPD being [1] collaborative design process [2] sharing of financial rewards [or lack there of – the so called "pain share / gain share.]  I am going to assume that the reader has a basic level of knowledge regarding the IPD process.  For my purposes, I will focus on the IPD where the Design Professional is sharing in the risk and reward of project success.

The major issues related to insurance are as follows:

1.  The DP [design professional] may find themselves being contractually subject to situations where they are assuming responsibility for areas traditionally outside their purview.  For instance, “contractor means / methods.”  In short, this is hardly considered professional in nature and therefore typically excluded from the professional liability policy [because it is more aptly covered by a General Liability policy.]  In the same vein, the contractor’s involvement in parts of the design development could subject them to professional liability exposures that are not covered by their traditional insurance programs.  [Thus the contractor will likely have the need for "contractor's professional liability" which already exists as a fairly mature insurance product utilized by Design Builders.]

2.  Most DP’s maintain General Liability coverage as part of a “commercial package policy” or “business owner’s policy” [CPP or BOP.]  While most CPPs automatically cover the DP for the “products / completed operations” exposure, many BOP’s do not cover the completed operations exposures.  [Although it should be noted that the larger national providers typically include completed operations coverage.]

a.  Most of these coverage forms are extremely inexpensive from a General Liability perspective because the underwriters assume that you have no exposure for “off your premise” operations.  Typically, anything you do off premise would be considered “professional in nature” and therefore covered by the Professional Liability policy.

b.  Relying on the concept that “no good deed goes unpunished” I can tell you that even broaching this subject with your General Liability carrier [that being that you plan on assuming [or sharing] in the risk associated with traditional Contractor responsibility] will lead to:

i.  Non-renewal

ii.  or Significant increased in cost coupled with the inclusion of auditable General Liability class codes for that policy.

c.  Interestingly enough, the vast majority of [current] General Liability programs for DP’s are not auditable and renew automatically.

3.  Thus, without notifying the insurance company in advance of your intentions to engage a IPD collaboration, the insurance company is likely [unintentionally] assuming the risk for exposures that they have not contemplated nor for which they have been compensated in the form of premium charges commensurate with “new” exposures.

4.  Nothing agreed to “contractually” by the DP will do anything to expand the coverage included via the Professional Liability policy.  In fact, the small amount of “contractual liability” coverage that does exist under such policies is limited to such liability that would have been attached to the DP in the ABSENSE of any contact.  [IE – negligence.]

Most DP’s are sometimes frustrated by the insurance industry’s slow [or more perhaps methodical] approach to change.  What is sometimes forgotten, however, is that insurance is one of the few industries that never really knows “their TRUE costs of goods sold” until long after they have collected their premiums.  The industry has always used the past to predict the future.  Radical change [into the future] does not fit well into this model and becomes difficult to “price.”  That said, maybe the simplest approach would be to invite the carrier to the table along with the interested parties and tie the insurance company to a “pain share / gain share” along with the balance of the IPD team.  Without question, open communication amongst the stakeholders will ultimately yield lower frequency of claims and disputes as the “esprit de corps” attitude fostered via the IPD concept should result in efficient problem solving for the “good of the project,” and less finger pointing. The good news is that before 2010 is complete at least 2 [if not 3] major professional liability carriers will address the IPD insurability issues with either [1] a stand-alone insurance product [blending project policy and OCIP programs] with amendments addressing the concerns above or [2] a IPD series of policy endorsements to attempt to close the insurability gaps the currently exist.  Hopefully, with anticipated economic recovery, there will be robust demand for these new products.

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