Last month, KDA Architecture agreed to pay $1.7 million to settle a lawsuit filed by the Yakima School District in Washington over water and mold damage.
The alleged design flaws were related to a nearly 750-foot blue wall, constructed of stainless-steel shingles and porcelain tiles that cut through the center of the high school campus. Shortly after completion of the $83 million project, the water-resistant barrier within the wall melted when internal temperatures exceeded the 180-degree limit set by the product manufacturer.
The barrier manufacturer recommended replacing the melted product with a higher heat capacity barrier and leaving space between the barrier product and the seals to keep the temperature down.
According to the lawsuit, KDA’s decision to tuck the higher-capacity product behind the melted areas and only replace tiles at the base of the wall led to the retention of moisture and formation of black mold. Extensive repairs to the school were completed in 2017, including mold removal, repainting and replacement of insulation, cement siding and tiles, at a cost of more than $500,000.
According to Michael Muglia, National Underwriting Director, Professional Liability, Burns & Wilcox, Detroit/Farmington Hills, Michigan, “Manufacturers of products used in design and construction include specific instructions on how to use their products. As a risk transfer strategy, architects should follow manufacturers’ recommendations.” Following these recommendations, he explained, creates the potential to transfer all or part of liability to the manufacturer in the event of a product failure.
Construction: great risks, rewards for workers and employers alike
The construction industry plays a significant role in both the economies of the United States and Canada. According to the Associated General Contractors of America, the industry employs more than 7 million workers, features more than 680,000 employers, and creates around $1.3 trillion in structures annually. The Canadian construction industry employs more than 1.1 million workers, according to BuildForce Canada. In 2018, the nation’s estimated construction output was valued at $291.2 billion and is expected to reach $304.6 billion by 2023.
Despite a growing workforce, accidents on construction sites can also lead to property damage and project delays. One recent incident illustrated these risks.
On February 29, a construction crew working on a Stanford University housing project partially sheared off the top of a fire hydrant with a forklift, struck the hydrant, releasing 4,500 gallons of water per minute for an hour while California Water Service and local firefighters struggled to locate the hydrant valve.
The flooding caused major damage to the structure, washing out areas around the garage’s retaining wall. Authorities stated that construction would be shut down for days until the water was fully pumped from the site, a thorough safety inspection was performed and extensive repairs were completed. Flooding also led to the temporary evacuation of guests from their rooms at the nearby Stanford Park Hotel.
Nicholas Freeman, Associate Managing Director, Burns & Wilcox Brokerage, Dallas, Texas, underscored the need for contractors to check with local authorities and utilities and have a plan mapped out for all contingencies. “We all work to prevent accidents, and with proper supervision and planning you can, most of the time. Accidents do happen but there are ways to mitigate their fallout.”
Steven Hrab, Manager, Construction, Burns & Wilcox, Toronto, stressed the need for general contractors to do their research on any subcontractors they hire. “Knowing subcontractors’ experience in similar builds, loss history, years in business and what types of insurance they carry is very important,” he said.
Although some general contractors may be tempted to hire less experienced subcontractors in an effort to save money, Hrab cautioned against this practice, which, he said, increases potential for accidents and subsequent losses.
Clear roles and pre-planning are essential
All parties involved in construction projects—architects, designers, engineers and contractors alike—are best served if each has clearly-defined duties and responsibilities codified in insurance coverage tailored to each party’s particular risk profile.
Freeman asserted that contractors working with architectural firms should employ a commonsense approach, actively identifying and troubleshooting problems encountered during the construction process.
Also essential, Freeman said, is consulting with experienced insurance brokers and agents to explore a range of Commercial General Liability (CGL) and Architects and Engineers Errors & Omissions (E&O) Insurance products, as well as Excess/Umbrella coverage to meet the demands of a company’s role in each project, including considering liability limits to mitigate particular risks.
“Do your research,” Freeman recommends, when considering which experienced insurance professional to consult. “There are differences between insurance brokers and agents and some have more expertise than others. You want to make sure you are in good hands and are getting the appropriate coverage.”
Assembling appropriate coverage for construction
For licensed architectural firms, interior designers, landscape designers, engineers and other design and building professionals, an Architects and Engineers E&O Insurance policy serves as the cornerstone of insurance coverage, according to Muglia. Such coverage helps mitigate liability resulting from design errors, omissions, professional negligence or other design-related risks. Customized policies can include coverage for pollution risks, mold remediation, project-specific coverage, increased liability limits and risk assessment.
Muglia identified coverage with limits sufficient to cover legal defense as a key component of Architects and Engineers E&O Insurance, along with Faulty Workmanship coverage, which helps fill in coverage gaps in General Liability Insurance policies. Faulty Workmanship coverage is often combined with Contractors Protective coverage, he noted. “When combined with Faulty Workmanship coverage, Contractors Protective can provide coverage for the vicarious liability a general contractor assumes in connection with supervision of a specific project.”
According to Freeman, effective coverage for contractors starts with a robust CGL Insurance policy, which provides coverage for third-party property damage and bodily injury claims. Based on analysis, project requirements and the recommendations of an experienced insurance broker or agent, he said, investing in additional liability coverage through a combination of Umbrella/Excess coverages may be warranted.
General contractors who subcontract work should also consult with their insurance brokers and agents on the need to invest in Faulty Workmanship and Owners and Contractors Protective coverage.
“The liability imposed on a contractor often extends to subcontractors who perform services on their behalf,” noted Muglia. “Understanding contractual liability exposures, and confirming subcontractors have liability policies in place naming the contractor as an additional insured, should be confirmed before anyone arrives at the jobsite.”
Rectification Expense coverage is another consideration for general contractors, Muglia said. This coverage provides coverage to address any potential or actual problems identified on a project as they are found that could lead to damage or liability claims once the project is completed; This often reduces the overall correction expense.
Rising liability costs and geographic inconsistencies add complexity, risk
Contractors and other construction professionals are facing increasing costs due to litigation, according to Freeman. “The number of accidents is not significantly increasing,” he said. “What is increasing are the amounts being paid out as a result of those accidents.” Consequently, he explained, previously adequate liability coverage limits may need to be increased going forward.
Another means of being proactive in mitigating risk, Freeman added, is enlisting the services of either a full-time risk manager or a risk management consultant to identify vulnerabilities and develop strategies to address them. He noted that all insurance brokers and agents are not created equal in terms of their ability to provide expert insights and resources to support risk assessment and mitigation strategies.
Support for navigating the inconsistencies between different regions of the United States and Canada is another benefit of consulting experienced insurance brokers and agents, Freeman said.
Meeting the minimum liability insurance requirements for a project may be a deciding factor for an owner or general contractor awarding a contract—that does not mean that that amount of coverage fully protects you.
States and cities may have legal and regulatory issues that impact coverage, he explained. “A contractor in Missouri might have a different set of circumstances or considerations than one in New York, California or Colorado.”
A knowledgeable insurance broker or agent can take into consideration geographical and other factors to guide a contractor regarding not only what types of coverage are needed, but also what exclusions may be present and what liability limits are advisable.
Freeman warned against investing in only the type or amount of CGL Insurance required by the owner or general contractor of a given project. “Meeting the minimum liability insurance requirements for a project may be a deciding factor for an owner or general contractor awarding a contract—that does not mean that that amount of coverage fully protects you.”