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Construction designers facing increased risk liability

Construction industry designers are exposing themselves to increasing levels of liability for the output of building designs with significant implications for coverage under professional indemnity insurance.

It is imperative the risks they are accepting in contracts and subcontracts are fully understood. Extensive negotiation on design risk allocation at the pre-contract stage often results in a form of compromise wording.

Design requirements are at the heart of any construction contract, and the precise formulation of applicable standards is crucial to evaluation of risk. Recent court rulings have demonstrated a blurring of lines between the traditional reasonable skill and care vs. fitness for purpose acknowledging that different standards can apply to various aspects of design under a single contract. Consequently, designers need to show caution in relation to provisions in appointment documents and standard form contracts, that impose liability for plans initially developed by the employer or third parties.

It is advised that where possible, contractors and consultants exclude fitness for purpose obligations and consider inclusion of contract terms defining the output of building design, with reference to intended maintenance procedures.

Where exclusion of fitness for purpose obligations cannot be agreed, policyholders should talk to their brokers and insurers to obtain clarity about the extent to which any onerous contractual obligations are covered by their professional indemnity insurance.

A contractor or professional with design responsibility should exercise reasonable skill and care to ensure liability will not arise unless they have acted negligently. Express contract terms often impose more onerous fit for purpose type obligations, providing a warranty that the works will conform to specified employer requirements. Liability arising from a higher contractual standard than that imposed by ordinary common law, including certification of compliance with specified design, warranting fitness of purpose etc, will usually fall outside the scope of cover under professional indemnity insurance.

Industry standard forms address the issue in different ways, with JCT contracts requiring reasonable skill and care, whilst all FIDIC contracts impose some degree of fitness for purpose obligation.

Design and construction contracts for energy or infrastructure projects typically include output specifications capable of measurement through testing, as compared with the performance standard ordinarily assumed by an architect or other professional designer in the real estate development sector.

There has been an increase in professional indemnity disputes based on a distinction between preparation and implementation of design, with reference to the scope of ‘professional activities’ defined in the policy and declared in the proposal form.

Construction contracts often require completed works to deliver a specified minimum ‘design life’. Depending on the words used in the contract, several discrete obligations may be separately imposed and cumulatively applied to the design life and quality of particular components within a complex structure.

W Denis has a specialist professional indemnity team and if you wish to discuss your professional indemnity insurance or would like a quotation, please contact Daniel Moss at daniel.moss@wdenis.co.uk or on 0044 (0)113 2439812

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