In the annals of construction disputes, it is a blip, not a blast.
After a Flatiron Construction-Zachry Group joint venture struck out on most of its arbitrated claims against engineering firm partners on the I-85/385 design-build interchange project in Greenville, S.C., and had others dismissed in court, the contractors had one more source from which to try to cover unexpected project costs: a contractor protective professional policy. Flatiron-Zachry filed a lawsuit last October in San Antonio federal court to try to force payment from Steadfast, a subsidiary of Zurich American Insurance Co.
The insurer has been unwavering, only not in the way the contractors wanted. It refuses so far to cover the claim, based on an examination of court records.
Disputes such as one over costs on the I-85/385 Interchange in South Carolina are starting years after completion of construction.
Photo Courtesy South Carolina DOT
The lawsuit is the most recent chapter in a costly decade-long trend in fixed-price design-build infrastructure projects that has amounted to a blast—creating a hole in profits and financial results for some of the largest U.S. contractors.
As with similar disputes, the combination of the Greenville interchange’s original suit by the contractors against their design partners in state court, the arbitration, and now the federal insurance claim litigation, is likely to take as long or longer to conclude than the construction work itself. What is happening says much about risk and project delivery in the last 10 years.
Unlike legal tussles that commonly arose in the 1970s and 1980s on traditional design-bid-build projects—where the dispute pitted the contractor against the owner and its designers—the Greenville interchange battle has developed in the newer age of design-build, which now accounts for a large part of all infrastructure work. On many design-build projects, the prime contractor, often in a joint venture with engineers, fixes a firm guaranteed price based on 30% to 50% of the design by the owner. The lower that percentage, the greater the likelihood of trouble.
Insurers and brokers say professional insurance was not meant to make up for any type of project loss and covers a very specific field of causes that trigger payouts.
Large design-build infrastructure projects in the last decade have consistently produced losses or overruns for their teams. According to a 2021 study of hundreds of infrastructure projects by major surety Travelers, the degree of design risk taken by the contractor on those projects is closely associated with poorer profit margins.
Construction firms have been trying to make up losses or overruns with either lawsuits against their engineering partners or claims under professional insurance policies. Most suits begin in the late phases of construction, says a Georgia Dept. of Transportation survey of 21 states completed in late 2019.
But the litigation often arises from work done before the construction, such as setting of quantities or design matters related to subsoil conditions. Although project joint venture teaming agreements carefully divide up roles, the messy disputes that follow the marriages of convenience reveal something that may not have been apparent: the haste by the teams, and the narrow scopes and compressed timeframes that lead engineers to produce low estimates for a competitive guaranteed price.
That has opened doors for contractors to make claims to trigger insurance coverage accusing engineers not of making simple mistakes, but of professional negligence. Attorney David Hatem, who represents engineers, says the trouble with that is there is not much established legal precedent of the standard of care for design work done for an infrastructure design-build proposal.
Partly as a result, lawsuits stand out for their complexity, costs and searing criticisms by contractors of their joint venture design partners. In the Greenville interchange project case, Flatiron-Zachry alleged that design partner Civil Engineering Consulting Services and its subcontractors failed to properly design a mechanically stabilized wall—one of dozens of other deficiencies delaying completion and adding to costs (see story below).
In another design-build lawsuit, involving a much-publicized public-private partnership program created to fix or rebuild dozens of Pennsylvania bridges, a joint venture of Walsh Construction Co. and Granite Construction claimed that design firm HDR erred badly by failing to properly assess quantities and by a decision to base its estimates on employing soldier piles (see story, bottom). The contractors’ claims have tried to define the negligence, but they have often failed in court, insurance professionals and attorneys say.
“A lot of contractors will throw anything out there to see if it sticks,” one insurance broker observes. Some reports suggest that what has been happening has brought the professional insurance market for large infrastructure design-build projects to a near crisis. What is clearer is that costs for that coverage have risen and are heading higher.
For years, some designers and attorneys have spoken up to say that the pattern—a money-losing or otherwise troubled project with lawsuits sometimes starting or ramping up during design before a shovel even hits the dirt—is unsustainable.
One of the most forthright comments on the situation came in an American Bar Association journal article written in 2019 by Jamie Peterson, HNTB managing counsel and business integrity director. He noted what happens once the “inevitable design-stage changes” are made on projects with a contract that allows no price or schedule adjustment. “The design-build contractor frequently repackages its loss as a professional negligence claim against its designer” and its professional insurance carriers, Peterson wrote.
Flatiron-Zachry’s Multiyear Effort to Collect on Interchange
Alleged wall design flaws were a focus of the contractors’ claims against their design partners on Greenville interchange.
Photo: Scott Crosby, scottschoice.com
Flatiron-Zachry filed its breach-of-contract lawsuit in state court over the I-85/385 Interchange project in Greenville, S.C., against Civil Engineering Consulting Services in early 2019. The suit also named as defendants the CECS subcontractors, designers Stantec and TYLin. The contractors and CECS had signed a teaming agreement in 2012 and won the design-build contract in 2014. In its claim,
Flatiron-Zachry accused the transportation and environmental design firm of misdesigning many interchange elements, including mechanically stabilized walls that the contractors claimed had improper backfill requirements, and one that lacked proper shoring.
After more than a year of pleading in state court and 245 docket entries, the judge ordered arbitration. Only one count in the lawsuit survived after arbitration, and that met the fate of all the others. "All lacked merit and some were voluntarily withdrawn," reports Ross Ginsburg, whose firm represented Stantec. "The remaining ones were dismissed on Stantec’s motion for summary judgment." Attorneys for CECS could not be reached for comment.
After the proceeding, Flatiron-Zachry, which also declined to comment, shifted its focus last year to its own professional insurance policy, claiming the JV had met all conditions for triggering coverage. It sued Steadfast Insurance for coverage in Texas state court in San Antonio. Steadfast’s parent, Zurich, declined to comment.
This story was updated Feb. 10 to correct information about the joint venture's claims against the designers, including ones that were not rejected in arbitration but were withdrawn or dismissed by the court.
Hatem says more disputes are likely. “Absent fundamental improvements in public owner procurement and contractual approaches, there is no legitimate or credible reason to believe that the problematic claims on those types of projects will abate,” he states.
Problems can occur if the contract language in the pact signed between contractors and designers has a standard-of-care that is higher than the common-law standard of care.
But there are many other technical details in professional insurance policies. The insurance can be purchased by designers on an annual or a project-specific basis. Because it is “claims-made” coverage, setting the period that the policy covers is crucial. Linking it to the date of the joint-venture’s teaming agreement can be a good idea because that is when the professional services of the designer may begin.
As important as the period covered is the dollar limit placed on any policy coverage, which can be set in two ways: as an aggregate of all claims for all projects during the policy period, or as a limit on an individual claim. Under a policy covering a period of one year, claims on different projects could burn through the limit.
If dollar limits are applied to costs of defense in addition to any settlements or payouts, and if a dispute drags out with numerous court pleadings and legal maneuvers, the cost of paying lawyers and expert witnesses can eat up much of the claim limit. The insurance premium cost is sometimes based on a percentage of the policy limit, which can be up to 20%, so a $10-million limit could cost $2 million depending on many variables—a big expense no matter the type of project delivery system used.
Jeff Slivka, president of wholesale brokerage RT Environmental & Construction Professional, says costs also have been driven up by claims that can stretch for three to seven years after a project is completed.
Insurance and risk complications elevated by the growth of design-build for buildings have long been recognized. For the most part, those risks are under control as more building developers and owners began using the method in the 1980s, with insurance available and subject to normal market cycles and variations in pricing.
But the situation is different on infrastructure projects, with numerous variables that can add dramatically to costs. The International Risk Management Institute began noting the sector’s complicated risk picture in the early 2000s. The National Academy of Sciences in 2015 warned that designers face potential liability during the proposal process on design-build projects when they are involved as a subcontractor. The Design-Build Institute of America (DBIA) also has offered much guidance on managing risks and insurance.
“Costs of professional insurance have been driven higher because claims can be made and related legal issues stretch out for years after construction.”
Jeff Slivka, president, RT Environmental & Construction Professional
But such efforts have not stopped infrastructure project disputes. In an article posted last year on the International Bar Association website, four authors said they had observed disputes between contractors and their design subcontractors over what constitutes a change to design services, what responsibilities designers have in coordinating with third parties and how those firms should properly substantiate claims regarding scope changes.
Not everyone is happy with the options in professional insurance. William E. Reifsteck II, an AECOM director of project management in California, is blunt. “I was never a big fan of professional liability insurance,” he says.
His concerns include a false sense of security created when a policy is purchased, when in reality the coverage is insufficient. While a project owner may initially be pleased to see the designer protected by a $2-million-limit policy that would cover losses if a building canopy collapses, the reality sometimes falls short, says Reifsteck.
“It’s typically a practice policy and covers all different claims that year, and the legal fees eat up the value of the policy because it’s self-consuming,” he notes. “There’s not always that much there. I’ve been in situations where a second company making a claim doesn’t have coverage at all and owners are shocked.”
Reifsteck also notes that many design-build projects with which he has been involved have completed on time and budget without legal disputes. He adds that DBIA programs and materials have a lot of information on constantly evolving risks, contract language and insurance options.
One of the most important aspects of professional insurance is to avoid cross-lawsuits within a project team. For this reason, a feature of most policies is the “insured versus insured exclusion,” which prohibits one insured party from bringing a claim against others insured under the same policy. “Although the additional insured(s) could be stated under the engineering firm’s project-specific” policy, according to the Georgia DOT report, it is important to know that this exclusion still applies to all insureds.
The state of professional insurance coverage today looks very different depending on which part of the construction market you are talking about.
Losses continue to pile up for insurers on policies for design firms on both corporate and project coverage, according to insurance broker AON in a report covering the last portion of 2022. Insurers are skittish about claims costs and two carriers, Lexington (AIG) and Swiss Re, have decided for now to exit the market for primary professional liability coverage, the analysis says.
But Dan Knise, a principal at broker Ames & Gough, says there is an important difference between professional insurance coverage for big projects and companies and for the rest of the market.
“On a run-of-the mill design-build project for a $25 million to $50 million office, you don’t see a lot of contractor claims,” he says. The issue of claims “is highly concentrated in large infrastructure and engineer-procure-construct projects” that involve the largest engineering and architecture firms. “Those are the companies driving increases,” Knise contends. He says he sees the cost increase mainly in the “high end market, which is clearly impacted by claims related to large design-build and engineer-procure-construct work.”
Task Force Meetings of 2022
Last year, about three dozen design firm and insurance professionals began a collaboration to try to resolve problems they saw emerging with design-build infrastructure risks. The effort was organized by Hatem, the attorney who says the cost of changes on complex design-build projects “should be borne by owners.” Since its launch, the task force has developed some useful recommendations.
Acceptance of alternative project delivery methods, and the willingness of insurers to underwrite coverage in them are “promising developments.”
David Hatem, attorney
Greater use of progressive design-build, where design is advanced further before a project price is negotiated by the owner and design-build team, emerged as a potential solution. Hatem says that Amtrak and the Federal Transit Administration are open to alternative project delivery methods that include progressive design-build and construction manager-general contractor approaches, “both of which serve to reduce the concerns associated with fixed-price contracting and imbalanced risk allocation with conventional design-build.”
Cautiously, and prudently, some insurers are “showing signs they may accept these approaches,” says Hatem. He adds that he has seen a modest increase in the “availability and capacity of project-specific professional liability insurance on infrastructure projects," terming it another “promising development.”
Can these hoped-for changes be made before very many more planned infrastructure projects are priced? The answer to that question is far from clear. But the last things construction needs are more insurance claims and lawsuits.
—with Scott Van Voorhis
This story was updated Feb. 10 to reflect that the Greenville interchange contractors joint venture not only lost claims against the designers in arbitration but also lost on other claims dismissed by the court, according to the attorney for the designers.
Walsh-Granite Lawsuit Against HDR Cited Standard of Care and Quantities
What is the standard of care in the proposal stage of a design-build project? That issue was at the heart of the $64-million lawsuit filed by a Walsh Construction and Granite Construction joint venture against its design partner on the Pennsylvania Rapid Bridge Replacement Project in 2017. At that time the project was considered one of the most innovative P3 programs ever used by a state.
Although the federal lawsuit and countersuit were eventually dismissed—and there is no way to know if a settlement was reached or what it entailed—the legal contest illuminates the still unsettled professional practice issues that may play a role in dozens of large-scale design-build infrastructure projects.
Filed in U.S. district court in Pittsburgh in April 2017, the suit and a countersuit later filed were dismissed in November 2020 after a special master brought in to make rulings about standard of care issues had completed that work.
Walsh-Granite’s first formal filing in its lawsuit against HDR over the Pennsylvania Rapid Bridge P3.
*Click on the document for greater detail
The suit delved into details of the contractual agreement between Walsh-Granite and HDR. It focused on design quantity growth estimates prepared by the engineering firm, which had agreed in its contract to a $1-million fund in case the quantities exceeded those established during the proposal stage.
HDR was bound to observe a standard of care for its services that matched practices by members of the same profession on projects of similar size and complexity, Walsh-Granite argued. But the standard was also defined by the quantity matrix that HDR had prepared.
Beyond that, Walsh-Granite charged that HDR had improperly billed for more than $9 million in fees based on the extended time needed because of delays that the engineer had caused. The design agreement capped HDR’s delay damage exposure at 20% of its target price for basic design services. HDR never raised any objection to delivering its estimates on a “time is of the essence” basis, Walsh-Granite argued.
Even before Walsh-Granite had made its basic complaint and HDR had replied, the federal court judge, Nora Barry Fischer, required both sides to have the matter adjudicated through an alternative dispute resolution process as required by state law.
Nevertheless, the lawsuit docket in 2017 and 2018 filled with dozens of motions and pleadings. The most important one was HDR’s breach of contract and fraudulent misrepresentation countersuit against Walsh-Granite and its sureties, denying the contractors’ allegations and disputing the account of their dealings over the delay and quantities claim.
HDR stated in its counterclaim that by April 2018, Walsh-Granite was wrongfully withholding about $29.5 million in progress payments from the design firm and misrepresenting the values it used to justify the amount. HDR also sought an additional $1.8 million that the design firm said it spent analyzing the contractor’s quantity growth and delay claim.
One month later, attorneys for both parties in the dispute had a telephone conference with Judge Fischer to discuss which was dragging its feet in the trial’s important discovery phase and why no broad document exchange was made.
Adam Tuckman, an attorney for Walsh-Granite, made clear that the quantity growth documents he wanted access to in the discovery stage included items “coined during this litigation,” not just those prepared before the lawsuit or during the proposal preparation.
As often happens in civil lawsuits, lawyers for both sides implied that the other was being unreasonable.
One point of contention was the quantity estimates provided by HDR for hundreds of bridge structures that would be built or rebuilt in the Pennsylvania program. HDR’s design quantity growth matrix enumerated quantities for 31 materials. For example, the design firm estimated that 4.94-million lb of steel would be needed for framing superstructure bridge beams. Likely percentage increases and decreases for each material were given, most in the single digits.
To determine who was qualified as an expert witness to testify on HDR’s work and billings in the case required the special master. It took until July 2019 for the two sides to produce a five-name list of people who could possibly serve in that role and prepare a report on the subject. Judge Fischer made a selection in December of that year.
Each side filed motions asking the court to exclude the testimony of the opposing experts, four sought by the contractors and five by HDR.
One of those objections had major implications for the standard of care issue on which Walsh-Granite’s claim hinged. HDR filed an objection to the contractors’ choice of Kenneth O’Connell, a professional engineer licensed in 21 states with a PhD in civil engineering. He had stated in his expert testimony that HDR breached the standard of care by not taking into account superelevation in its calculation of roadway quantities and also in specifying soldier piles in preliminary design.
In support of its argument that O’Connell was not qualified, HDR noted that in his work experience he had never performed preliminary design services in the pursuit phase similar to those HDR had performed to win the project. The contractors argued that an expert’s qualifications do not need to be “identical,” as long as there is “relevant education or experience.”
The special master recommended against HDR on all seven of its objections, and, according to O'Connell, "refused to preclude any of my testimony based on my qualifications."
In fact, the special master recommended acceptance of O'Connell's expert testimony on 14 of the 15 HDR objections and the one instance where the special master recommended excluding testimony, O'Connell says "had nothing to do with my qualifications."
The special master did recommend excluding O'Connell's opinions for a small number of the billable hours involved in the case, but the exclusion was not based on O'Connell's qualifications. The case continued until it was dismissed in November 2020.
By Richard Korman
This article was corrected March 13 to more accurately reflect that HDR's objections to O'Connell's qualifications were rejected by the court.