How Will COVID-19 Impact the Design & Construction Industries?

These are unsettling times indeed.

Many insureds are concerned with how COVID-19 will impact their business—and understandably so.  There’s nothing scarier than the unknown, and we’re all in the dark right now with respect to what the near future holds for the design and construction industries.  Utmost in our minds are the types of claims that may be asserted against the design community as a direct result of COVID-19.  I can’t help but parallel this to an earthquake or hurricane that devastates entire communities. If a design professional designs to the current and appropriate standard of care, can he/she be held responsible for unpredictable events of a magnitude never seen before?  Could an insured predict the shut down of entire nations, thus impacting the ability to obtain construction materials causing significant construction delays?  We have many questions, but few answers. It will likely take the courts’ interpretations of actual losses before we get those definitive answers.

I’m reminded of the saying, “The best defense is a good offense.”  We cannot control the past, but we can certainly adopt best practices and a strong offense moving forward to protect ourselves in the future.

Most of you know Tim Corbett of SmartRisk. His ideas, insights and opinions with respect to risk management within our design community are respected and highly valued. In the below article, Tim shares his thoughts and advice as we face a very uncertain time. 

Most importantly, take care of yourselves, take care of your families and stay positive.

Sue Harker
All Risks, Ltd. National Specialty Programs
Program Manager, Architects & Engineers

 

Coronavirus Pandemic - Need More Toilet Paper?

Timothy J. Corbett, BSRM, MSM, CERG, LEED GA

From Disneyland to the U.S. Supreme Court, from Wall Street to Dodgers Stadium, nearly every facet of American life fell into turmoil with the coronavirus outbreak causing sweeping closures and economic disruption.  Restaurants in major cities and regions including McDonald's and Starbucks have moved to "take out and delivery" models to facilitate social distancing among customers.

Last week Congress passed an $8.3 billion emergency spending plan to address public health needs arising from the crisis.  As companies locked their offices and sent employees to work from home, fears of a recession rose in step with the number of U.S. infections, which jumped to more than 1,300 on Thursday, March 12, 2020.  The concerns were reflected in U.S. stock markets, with major indexes now in bear-market territory - down at least 20% from a recent high.

About the need for excessive amounts of toilet paper - we’ll address that topic in a moment.  Let’s first address some real concerns related to the pandemic for design and construction professionals.

Supply Chain and Material Delays
Chinese government containment efforts and quarantines have slowed or shut down factories in dozens of the country’s cities and provinces, leading to forecasts of a sharp falloff in production.  For commercial builders that rely on Chinese made goods or materials, this could mean delays, higher material costs and potentially slower project completions.  U.S. builders look to China for everything from steel and stone to millwork and plumbing fixtures, according to accounting firm, Marcum, that provides services to building and construction clients.

Estimates indicate that nearly 30% of all U.S. building product imports come from China, however some American construction firms rely on China for up to 80% of their materials, because of the lower cost.  Supply shortages have already impacted one of the country's largest homebuilders, Toll Brothers, which announced last week that shortages of lighting fixtures and small appliances would delay the sale of homes.  It is recommended developers and builders seek alternative suppliers in the U.S. or in countries that haven’t been negatively impacted by major supply chain interruptions.

Coronavirus and Contractual Risk
While the coronavirus pandemic was unforeseeable, design and contractors may still be contractually responsible for delays or cost overruns on current projects.  Design, construction and project owners will be reviewing contracts to see what contractual rights and duties exist in light of the conditions caused by the virus.  There are many terms that will be relevant to those discussions, including the various contractual terms relating to the schedules, substantial completion, delays, consequential damages and other contractual provisions.

The following identifies potential problems driven by the coronavirus and examples of contract language for your information and consideration.

Contracts and Special Circumstances
It is recommend you know exactly what is in each contract, and taking special note of any force majeure provisions that apply to liability as well as allow work to be suspended or terminated when certain extenuating circumstances arise.  Whether something qualifies as a force majeure event will vary by jurisdiction and contract, but force majeure will almost certainly apply in some coronavirus-initiated situations.

  • FORCE MAJEURE -  Client and Consultant will be free from any liability to one another for delays in delivery or failure to perform due to the failure, fault, or bankruptcy of a third party, acts of God, acts of default of any carrier, acts of any governmental authority, suspension of any shipping facility, wars, riots, revolutions, acts of terrorism, strikes and other labor disputes, port congestion, fires, floods, perils of the sea, sabotage, nuclear incidents, earthquakes, storms, epidemics, or any other contingency of any similar nature beyond the control of either party.  The foregoing will apply even though any of such causes exist as of the date of this Agreement or occurs after performance is delayed for other causes.

Indirect Damages
Consequential damages are defined as "indirect expenses" such as loss of profit or the loss of use of a facility that can be remotely connected to a failure by a design professional.  A firm could be held responsible and could be sued for damages grossly exceeding the cost of repairing the actual damage.  Some client agreements specifically state you will be held responsible for consequential damages.

  • CONSEQUENTIAL DAMAGES - Neither the Client nor the Consultant shall be liable to the other or shall make any claim for any incidental, indirect or consequential damages arising out of, or connected in any way to the Project or this Agreement.  This mutual waiver includes, but is not limited to, damages related to loss of use, loss of profits, loss of income, loss of reputation, unrealized savings or diminution of property value and shall apply to any cause of action including negligence, strict liability, breach of contract and breach of warranty.

Cost Estimates
The services of a design firm routinely include the preparation of construction cost estimates.  However clients have used cost estimates as definitive pricing and budgets and seek to hold consultants responsible if the construction costs exceed the cost estimates.  It is important to protect yourself when providing such estimates and limitations in their use, including not identifying them as cost estimates. 

  • OPINIONS OF PROBABLE COST – When required as part of work, the Consultant will furnish opinions of probable cost, however does not guarantee the accuracy of such estimates and shall be held harmless and not liable for any inaccuracies.  Opinions of probable cost, financial evaluations, feasibility studies, economic analyses of alternate solutions, and utilitarian considerations of operations and maintenance costs prepared by the Consultant hereunder will be made on the basis of Consultant experience and qualifications and will represent Consultant judgment as a qualified design professional.  However, users of the probable cost opinions must recognize that the Consultant does not have control over the cost of labor, material, equipment, or services furnished by others or over market conditions or contractors' methods of determining prices or performing the work.

Toilet Paper Buying Behavior
The trend hard to understand is the panic buying of toilet paper.  I can understand water, canned food, dry goods, but toilet paper?  Grocery stores have empty shelves and have had to implement restrictions on the number of rolls people can buy to two, adding to the hysteria.  Many people are trying to find ways around the restriction to buy more than the quota.  Trying to understand this behavior - read several articles on the psychology behind the TP panic buying.  Reasons provided by psychologist, “people see others buying lots of toilet paper, they think they must know something I don’t, I better buy more.”  Let’s call that the sheep mentality - following the sheep in front over a cliff.  Another comment from psychologists, “something dangerous is coming, but all we can do is wash our hands, the action doesn't seem proportionate to the threat.  This gives individuals some sense of control.”  Buying excessive amounts of toilet paper give them a sense of control?

Suggested practice - if you see someone with a shopping cart full of toilet paper – perfect situation for applying social distancing.

NOTICE: This article is for informational purposes only and should not be construed as legal advice. Please consult with a legal professional in your area for advice regarding your firm’s individual circumstances. 

 SmartRisk is a leading risk and performance management consultancy for design and construction professionals. Through firm specific risk assessments, training and consulting, services focus on improving overall performance, profitability and reducing insurance costs through tailored risk management solutions.

Legal Disclaimer: Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.