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Schinnerer’s new rectification coverage facilitates design-build leadership

As the market for the creation of capital assets moves increasingly toward design-build, many design firms have found themselves in the difficult position of being a subcontractor to a design-builder who often is a construction contractor. Serving their client—the design-build entity—and not the ultimate project client can create communication and ethical problems for the design firm. It also puts the firm at great financial risk through inappropriate subcontract provisions as well as through any design-builder allegations that any situation that causes it to experience a significant financial cost related to additional work or delays is a professional liability claim.

While design firms can attempt to protect themselves contractually, the solution in many cases is for the firm to lead the design-build process. Unlike true design-builders or contractors leading design-build projects, design firms rarely have the financial resources to absorb the risk of design-build leadership and, until now, the insurance coverage that could resolve design-build problems during the delivery process.

The Schinnerer program has once again developed a distinctive coverage for design firms. It is called rectification coverage: a mitigation of loss feature that allows architecture firms that lead the design-build process to report a design deficiency in their services. The addition of rectification coverage to the standard policy is unprecedented in the professional liability marketplace. The coverage enables firms to take the lead on design-build projects by mitigating their risk that a design problem will lead to a major financial loss. The coverage extends to any design defect caused by professional services in any part of construction or engineering works for any project upon which the policyholder is responsible for both design and construction.

Whether the architecture firm is the design-builder or is in a joint venture that is responsible for both design and construction, the normal professional liability coverage cannot respond. Insured parties are not allowed to bring a claim against themselves under professional liability insurance. Under American law, it creates what is denoted as a “moral hazard.” The designer-led design-builder faces the dilemma of paying for the correction of a design problem out of its own assets or continuing the project to completion. If the project is completed, the design deficiency might not cause a recoverable loss to the project owner. Or, if harm results from the design defect, the project owner can sue the design-builder for design negligence or recover contractually. The better solution, however, is for the professional liability insurance policy to provide rectification coverage.

More information on the new policy and examples of how rectification coverage will work is available.

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