Design Liability Exposures in Off-Site Construction a Schinnerer School of Risk Management Webinar

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Design Liability Exposures in Off-Site Construction A Schinnerer School of Risk Management Webinar

Design Liability Exposures in Off-Site Construction

Presented By Frank Musica Victor O. Schinnerer & Company, Inc.

Agenda

• Why is off-site construction becoming a major change in the design and construction industry?

• What are some of the practical challenges in moving to a decentralized construction process?

• What are some key legal and insurance issues affecting design firms involved in off-site construction?

Use and Growth of Off-Site Construction

Definition of Off-Site Construction

Off-site construction is the planning, design, fabrication and assembly of building elements at a location other than their final point of assembly onsite. And integrated planning and supply chain optimization strategy characterizes off-site delivery Definition by the Off-Site Construction Council of the National Institute of Building Sciences

Benefits of Off-Site or Modular Construction • Better quality control • Faster construction • Improved labor productivity • More efficient use of on-site space • Increased safety during construction • Capability of decreasing waste • Mitigation of contractual and site risks

McKinsey & Company Report

• Modular construction can deliver projects 20 to 50% faster than traditional methods and carries a potential cost savings of up to 20%. • The challenges are in design, manufacturing, technology, logistics and assembly and the ability to integrate “product” assemblies with on-site construction activities. • The goals are to achieve repetition and scale which usually means housing or hotel projects and accessibility to site from production facility. (In Finland, Sweden, and Norway 45% of housing construction is produced off site.)

McKinsey & Company Report

The maturing of digital tools has radically changed the modular construction proposition • Coordination of the design information directly with the processes within the production facility. • Use of BIM to directly reach global supply chain infrastructure for ease of ordering, tracking and manufacturing. • The optimization of the logistics of just-in-time delivery onsite from the production facility. • Mining advanced analytics to optimize productivity onsite.

McGraw-Hill Construction Report

Prefabrication and modularization: • Is currently being used by 90% of engineers and 76% of architect on some projects. • And 99% of engineers and 98% of architects expect to be doing some prefabrication and modularization on at least some portion of their projects. • For architects, opportunities seem to be in hotels, K-12 schools and multifamily housing. • For engineers, commercial warehouses and manufacturing buildings seem to be target markets.

Practical Challenges to Decentralized Construction

Design Firm Concerns

For the design firms modular construction requires: • Different design thinking to account for production efficiencies, opportunities to develop standardization to offer mass customization, and ease of transport and assembly. • Increased design fees since modular projects currently tend to take longer to design so that they can align with the manufacturing process. • Design decisions must be “frozen” before production; clients must act on design recommendations early so that changes are minimized.

Design Firm Concerns

For the design firm modular construction requires: • Libraries of modules for the manufacturing process – potentially accelerated and simplified through automated design (Through the use of modular libraries, design time can be reduced by 15% rather than extended.) • Knowledge of code requirements such as state modular or industrialized building controls, approval, and labeling procedures. – Has the state amended the building code for modular units? – Is there a separate compliance procedure?

Design Firm Concerns

For the design firm modular construction requires: • An understanding with the client of the design firm’s role in monitoring the quality and timeliness of production. • A role that might extend beyond normal evaluation services: – Does the manufacturing process meet quality standards as determined in the contract for construction? – Are there any delay issues in the production that might affect timely delivery? – Who coordinates if several facilities are creating interrelated elements of a project?

Key Legal and Insurance Issues

Legal Issues

• Different applications of building and safety codes – Different rules for manufactured or mobile – State specific modular building standards • Legal codes or doctrines that may apply: – Application of the UCC – Products liability law – Different statutes of limitations and of repose • Additional considerations related to design and contractor insurance coverages, liens and transfer of title.

The UCC and Construction

Is a contract for the design and construction of off-site modules a purchase of materials or supplies or a construction subcontract? • The provision of service – governed by the contract. • The purchase of components – governed by the Uniform Commercial Code version adopted by the state. – Is there an enforceable contract involving the transaction in goods? – What implied warranties apply to the transaction? - Implied warranty of fitness for a particular use - Implied warranty of merchantability

Professional Liability Insurance Coverage of Exposure for Negligent Performance

III. DEFINITIONS Wrongful act means an error, omission, or other act that causes liability in the performance of professional services for others by the Insured or by any person or entity, including joint ventures, for whom the Insured is liable. Professional services means those services that the Insured performs for others on behalf of a Named Insured in the Insured’s practice as an architect, engineer, interior designer, land surveyor, LEED® green building program consultant, landscape architect, construction manager, scientist, or technical consultant.

Professional Liability Insurance Exclusion of Product Liability Exposure

IV. EXCLUSIONS The Insurer will not defend or pay under this Policy for any claim: I. Sale or Distribution of Goods arising out of any actual or alleged sale or distribution of goods or products by the Insured, or by others under license from the Insured. This exclusion does not apply to furniture, furnishings or equipment created or modified specifically for a client in connection with the Insured’s professional services for that client or to software created or modified specifically for a client in connection with technology based services for that client;

Applicability of Products Liability Law

• Products liability broadly refers to the legal responsibility for injury or damage resulting from the use of a product. • Construction modules, assembled into a structure and affixed to estate, might be considered as products: – Tangible personal property – Distributed commercially for use or consumption • Product liability applies strict liability in tort – liability in the absence of the proof of failure to meet the standard of care – and not liability based on negligent performance. • Professional liability insurance does not cover strict liability.

Scenarios for Design Firms

The insurance coverages and the exposures – both professional and business – differs depending on the role of the design firm in the design and production of off-site building components. The more the firm becomes involved in the actual production, the more likely it will have greater exposure. If the designed elements are produced for the commercial marketplace, they may be considered products.

Scenarios for Design Firms

Designing Modules for a Specific Project • Should be classified as a professional service even if there is more detail as to construction means, methods, techniques, sequences and procedures. • Exposure should be similar to any project design and should be within the scope of professional liability insurance coverage.

Scenarios for Design Firms

Designing a Prototype for Multiple Projects • Should be classified as a professional service if fee is for one-time design of prototype. • Exposure could be minimal if each project has a separate designer-of-record. • Exposure could be significant if negligent design of prototype causes repetitive damage on multiple projects.

Scenarios for Design Firms

Creating a Performance Specification for a Module • Should be classified as a professional service. • Exposure could be minimal if contractor/producer is responsible for independent design based on the concept of delegated design authority. • Exposure increases if duty includes verifying that module meets stated performance criteria – can be dependent on state licensing law.

Scenarios for Design Firms

Designing a Module with Royalty Payments when Used on Separate Projects • Royalty payment could cause module to be considered a product with product liability implications. • Professional liability coverage could be compromised. • Exposure could be based on strict liability in tort with implied warranties of fitness for use and merchantability.

Scenarios for Design Firms

Involvement in the Design, Production, and Sale of Units for Projects by Others • Professional liability insurance could cover separate design liability claim but not product liability claim. • Exposure could be based both on strict liability in tort for a product design and governed by the state version of the Uniform Commercial Code.

Scenarios for Design Firms

Summary of Exposure Control and Insurability Design firms should avoid product liability and UCC application if they want exposure to be limited to professional liability for the design of the modules. Contracts should state that professional services are being provided. Fee should be based on design services and normal evaluation of the work and not on production or sale.

Design Liability Exposures in Off-Site Construction

• Recognize that modularization and prefabrication will become increasingly important on many project types because of cost and time demands. • Understand that contractors/producers will have an increased role through delegated design and design-assist. • Through contracts and scope definitions either remain as service professionals or make an affirmative decision to become involved in the actual production of modular elements. • Check your insurance coverages for responsive protection.