Utah Digs Deep and Finds “Design Defect” Includes Pre-Construction Geotechnical Reports

Kyle Rice | White and Williams

The Supreme Court of Utah recently found that an incorrect pre-construction geotechnical engineering report is a “defective design.” Thus, actions arising from an incorrect geotechnical report are appropriately governed by Utah’s Economic Loss Statute (Statute), Utah Code Ann. § 78B-4-513(1).

Hayes v. Intermountain GeoEnvironmental Servs. No. 20190764, 2021 UT 62, 2021 Utah Lexis 144, arose out of a suit filed by homeowners Kim and Nancy Hayes (the Hayeses). The Hayeses’ home was part of the Quail Hollow subdivision in Layton, Utah, which was developed by K.C. Halls Construction, Inc. (K.C. Halls). Prior to construction, K.C. Halls contracted with Intermountain GeoEnvironmental Services, Inc. (IGES) for a geotechnical report of the planned development to comply with the requirements of Layton City. The report found that “the subject site is suitable for the proposed construction” and made recommendations to ensure foundational integrity for future construction. The Hayeses ultimately purchased a lot from an agent for K.C. Halls and hired Bob Stevenson (Stevenson) to construct the home. About 14 months after the completion of construction, the Hayeses noticed cracking in their foundation walls.

After discovering the cracking in the foundation, the Hayeses filed suit against K.C. Halls, Stevenson and IGES for damages. The counts against IGES included negligence, negligent misrepresentation and negligent infliction of emotional distress, focusing on the allegation in each count that IGES’s report incorrectly stated the property was “safe and suitable” for residential construction.

IGES moved to dismiss the complaint, alleging that the Hayeses’ negligence claims were barred by both the common law economic loss rule and Utah’s Economic Loss Statute because the Hayeses were seeking compensation for purely economic losses and the case was an action related to “defective design.” The district court granted the motion and its ruling was subsequently affirmed by the court of appeals. The Hayeses petitioned for certiorari, which was granted to address whether the court of appeals erred in its interpretation and application of the Statute by holding the Hayeses’ tort claims “amounted to an ‘action for defective design and construction as that term is used in the [S]tatute.’”

The court began with an analysis of the economic loss rule. The economic loss rule places limits on tort claims for purely economic losses by creating a “fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.” The common law economic loss rule was first adopted in Utah in American Towers Owners Ass’n, Inc. v. CCI Mechanical, Inc., 930 P. 2d 1182 (Utah 1996).

The court noted the exception to the common law economic loss rule regarding an independent duty of care. If a duty of care exists independent of any contractual obligations, the economic loss rule is excepted, and a tort claim may be brought. The court further noted that after the court’s adoption of the common law rule in 1996, in 2008 the Utah legislature codified the economic loss rule with respect to actions “for defective design or construction.” The Statute does not contain the same exception as the common law rule regarding an independent duty of care.

Given the statute, the threshold question was whether to apply the statutory or common law economic loss rule to the Hayeses’ claim—that is, whether IGES’s geotechnical report was a “defective design.” If the report qualified as “defective design or construction,” the Statute applied. If the report was not “defective design or construction,” the Statute did not apply. If the Statute did not apply, the Hayeses argued the claim was subject to the common law exception to the economic loss rule involving the violation of an independent duty of care.

To determine whether this action was subject to the Statute, the court analyzed what constitutes a “defective design.” The court noted while the Statute governs defective design and construction claims, it never actually defines the word “design.” The Hayeses argued the appropriate definition would be based on those found in the dictionary, such as “to make or draw plans for something” or “a drawing or set of drawings.”

The court found that while the ordinary meaning of a word is “powerful evidence,” it must consider the meaning intended in the context of the statute. If words are used in a “technical sense,” they must be construed within that technical context. As such, the court stated that the term “design” must be interpreted within the realm of construction or engineering.

Analyzing the legislature’s use of the term “design professional” in other statutes and after considering the definition for an “engineering design” utilized by The Accreditation Board of Engineering & Technology, the court defined the term broadly and agreed with the finding of the Court of Appeals that “[a] geotechnical engineer is often an essential participant on the design team.” The court further noted the geotechnical report was “an integral part of the structural design of the building’s foundation.” Although the court acknowledged that IGES failed to identify the structural instability in the soil in their geotechnical report, which resulted in the structural instability of the home, given that the building would not have been constructed in the manner it was but for IGES’s report, the court found the IGES report was foundational to the design of the building. As a result, IGES’s work was structural, which was a defective design, and the action was appropriately governed by Utah’s Economic Loss Statute.

Because the loss was encompassed within the Statute, the common law exception for an independent duty of care did not apply. The court noted that the only possible exception to the Statute involves a claimant in privity of contract “based on an intentional or willful breach of a duty existing in law.” However, since the Hayeses were not in privity with IGES, the exception did not apply.

The Hayes case demonstrates that subrogation professionals must always be mindful of economic loss issues when evaluating claims and determining recoverable damages. It is particularly important to analyze any relevant statutes in the state of loss to ascertain whether an economic loss issue may arise, even where it is not facially apparent that it will affect the claim.

Senate Bill 49 Establishes Lien Rights for Registered Design Professionals

Rick W. Grady and Allen L Rutz | Vorys Sater Seymour & Pease

On July 1, 2021, Governor DeWine signed Senate Bill 49 giving lien rights to Ohio architects, landscape architects, professional engineers, and professional surveyors (design professionals) beginning September 30, 2021.  The lien rights are limited to:

  • Commercial real estate projects,
  • With a written contract signed by the design professional and project owner,
  • Only to the extent of the project owner’s interest in the property, and
  • Only in the amount due the design professional under the contract.

In addition, only the design professional named in the contract – whether an individual, partnership, corporation, or association – has lien rights.  Lien rights are not available to an employee or agent of the design professional and, unlike mechanics’ liens, lien rights are not available to lower tier design professionals not in privity with the project owner. 

The design professional’s lien is junior in priority to any other valid liens (regardless of recordation date) and all previously recorded mortgages and liens. Any person with an interest in the commercial real estate may substitute financial security (e.g., a bond or escrow account) for the lien, in the amount of the lien.

To perfect the lien, the design professional must file a notarized affidavit with the county recorder. The design professional must then serve the lien affidavit on the project owner and the property owner (if different) within 30 days. Failure to properly serve the lien affidavit may result in a court considering equitable remedies for the failure. Following perfection, the design professional must commence proceedings to enforce the lien within two years, or within 60 days of receiving a Demand to Commence Suit. Otherwise, the lien is extinguished by operation of law.

Once the lien is satisfied (i.e., paid in full) the design professional must record a written release within 30 days. When a claim is satisfied or extinguished, any person with an interest in the property may record an affidavit stating that the claim was satisfied or that the lien was released by operation of law. This is true regardless of whether the design professional records a release. However, the fact that the lien is satisfied or extinguished does not affect any other right or action by the design professional. For example, the design professional may still bring a claim for breach of contract.

Not All Design-Build Projects Are Created Equal

Nicole Markowitz and Richard Robinson | Peckar & Abramson

As the need for faster and more efficient construction increases, design-build agreements are growing in popularity. Design-build projects may account for 44% of nonresidential building in the United States this year. However, contractors who venture into a “design builder” role may unexpectedly become liable for design errors/omissions that are not covered by their insurance policies.  In turn, they may expose themselves to liability and insurance risks that are neither insured nor managed.

In this article, we’ll discuss how the contractor who becomes a design-builder, or performs design-related work through subcontractors, faces potentially unmanaged risk.  We will also explore indemnity, warranty, and insurance traps by paying attention to contract language in both traditional design-build and design-assist scenarios.

Contractors Acting As Design-Builders Face Design Liability From Inherent “Holes” in Insurance Coverage

Under the design-build arrangements most commonly used in the United States, the contractor is obligated to provide design services for the project. The inevitable question that follows is “how are design builders managing that risk?”  Often the answer lies in the two most common risk management approaches contractors employ – subcontracting and insuring.  But are those risk management tools working as expected?

Contractors may have licensed design or engineering professionals in-house or contractors may subcontract design services through a licensed design-professional. In both situations insurance for the risk is central, either to protect the contractor from errors by its in-house designers or to ensure that funds are available in the event of design errors when subcontracting design services.   There may, however, be significant gaps when relying on such insurance in these situations beyond the limitations commonly known about such insurance policies, such as “claims made” limitations, coverage amounts, and deductibles.

Although Professional Liability policies are at times called “E&O”, or errors and omissions, policies, often professional liability policies do not insure against all defects or deficiencies in the designer’s work.  Instead, the policies are drafted to insure against a finding of liability on the part of the designer, and that liability is based on the failure to meet an applicable standard of care.

Implicit in this critical distinction is the potential for errors to have occurred, but if those errors were not within the designer’s standard of care, there would be no liability. And since the insurance covers “professional liability,” not merely an error, there could be no insurance coverage.

Architects often assert that their standard of care is not one of perfection, specifically stating that errors are permissible to a “reasonable” degree.  Where courts embrace that standard, there could be an error, but no liability for that error and therefore no insurance coverage.

A design build contractor, however, may be fully liable nonetheless if it accepts a different standard.  When that occurs, the two most common mechanisms of risk management anticipated by design-builders, assuming that the risk was shifted to the designer or through insurance, may not function as expected.  In turn the design-builder may face an unmanaged risk.

Design-Build Insurance Solution 

Contractors in design-build agreements may encounter difficulty negotiating contract language to address this problem.  What, then, is a contractor to do?

In those situations, contractors in design-build projects are encouraged to consider Contractors Protector Professional Insurance (“CPPI”).  In general, CPPI coverage is intended to directly insure the design builder from design risks, including some described here, however such policies need to be carefully analyzed since holes can exist in CPPI coverage was well.

A well-developed CPPI policy can offer various avenues of coverage.  First, CPPI provides standard professional liability coverage.  Depending on the wording of the policy, the gaps described in this article can be mitigated.

Second, CPPI provides mitigation, or rectification, coverage. With mitigation coverage, if the contractor/design-builder learns of a design error during construction, it can proactively correct that error or omission prior to the assertion of any claim by the owner. Contractors should be aware that many carriers require immediate notification and may require carrier approval before any money can be spent to mitigate the design errors or omissions.

Lastly, CPPI provides protective coverage.  Protective coverage supplements the design professional’s professional liability insurance coverage by providing direct benefits to the contractor/design-builder for any downstream claims for costs above what will be paid by the design professional’s liability insurance.

Contract Wording Can Create Problems For Contractors Acting as Design-Builders 

When contractors assume design-build obligations, careful attention to contract language is needed to see where exposure for design liability may exist.  For example, two widely used design-build forms include either “design” or “design services” in the definition of the design-builder’s “Work.” Design-build forms created by large institutional or public owners often include similar language. In such cases, warranty and indemnity provisions may be the culprit in creating unmanageable liability for the contractor.

Warranty Problem 

If a contractor’s “Work” in a design-build agreement includes design services, and if the design-build contractor agrees to warrantee that the “Work” will be free from any defects or deficiencies,” a trap could be created.  Another equally dangerous way that such a provision might be phrased is for the design-build contractor to guarantee that it will correct “Defective Work.”  Either one of these provisions could be interpreted to impose the warrantee or guarantee on all defects in the design, and, as discussed above, insurance policies may not cover all defects or errors. Instead, they may only cover the defective work or design errors/omissions if the error was outside of the standard of care for the architect hired by the contractor.  In turn, the contractor may face exposure to uninsured liability.

Warranty Solution 

During contract negotiations in a design-build agreement, a best practice is for the contractor to insist that its warranty of the “Work” be defined to include construction labor and materials but not design services. The contractor can also provide the owner with a separate and insurable standard of care for design services performed by its architect, which would be separate from the warranty. Experienced construction counsel could be of help in making certain that contract language, which protects the contractor, is included prior to execution of a design-build agreement.

Indemnity Problem 

Indemnity clauses are common in construction contracts, typically to trigger insurance coverage for bodily injury and property damage claims, but too often they are drafted more broadly than is necessary for that purpose. For example, when a contractor must indemnify an owner against claims “that may arise from the performance of the “Work,” and “Work” includes design services, the contractor can be seen as effectively providing the owner with complete protection against design errors and omissions by its architect. As  described above, the architect or design-builder may not be insured under its professional liability coverage to the same extent required by such a broadly drafted indemnity clause.  In fact, this is exactly why designers often refuse to accept such broadly drafted indemnity clauses.

Indemnity Solution 

A solution to the indemnity trap is to address it during contract negotiations. By removing design services from the definition of “Work,” and creating a separate indemnity of the Owner against design errors and omissions by the architect, the contractor optimizes the chances that there is parity between liability for a design error or omission and coverage under the architect’s professional liability insurance. As with the warranty trap, experienced construction counsel in the negotiation process can be helpful.

Design-Assist vs Design-Build 

Unlike design-build agreements where the contractor takes the reigns and leads the design and build process—and may carry the lion’s share of responsibility and liability—design-assist agreements can involve a more collaborative framework and do not carry the same level of potentially uninsurable liability.  Design assist is a collaborative model, in which the role of the contractor is one of assisting in the development of the design, but not assuming responsibility for the design.  However, a word of caution is advisable in regard to “design-assist,” because while the term is used with some frequency, it is often used inadvisably or without clear definition.

As a result of the potential cloud regarding the proper use of “design-assist,” contractors need to be wary of the risks posed by unfavorable contract language.  Loose or sloppy language from design-build agreements can find its way into design-assist agreements and create the same assumption of liability and gap in insurance coverage contained in the design-build agreement.  For example, if the owner’s architect for a design-assist project is not required to fully coordinate the work of the design-assist contractors, liability for coordination of design-assist services could arguably fall upon the contractor.

To protect against unexpected and possibly uninsured liability, contractors must strive for contract documents that are carefully drafted to outline and delineate the design liability for design defects/failures of each party involved in the design-assist process.  The contract documents must be clear that the contractor will not take on additional liability for their advisory involvement in the design process and that the risk of liability for design errors and omissions remains with the owner or its designer.

More specifically, in design-assist agreements, special care must be taken to ensure that the contractor: 1) does not inadvertently waive the owner’s implied warranty of the plans and specifications; and 2) requires that the owner’s architect assume responsibility for and coordinate the design services of all design-assist subcontractors.

Surety Solution 

Increasingly, subcontractor trades or crafts may assume design-build responsibility as part of their work.  Although designers do not often provide Performance Bonds, subcontractors commonly do.  A risk management technique for contractors facing potentially uninsured design risk is to mitigate that risk through the combination of imposing similar terms on a design-build subcontractor and requiring that the subcontractor provide a performance bond standing behind that obligation.

In other words, include similar warranty and indemnity obligations in the subcontract, coupled with a bond that would honor the subcontractor’s obligation.  Of course, the amount of the bond, duration and relevant terms should also be considered.


While both design-build and design-assist agreements present liability challenges, there are ways that savvy contractors can protect themselves from unexpected liability for design errors or omissions.  Most importantly, design-build contractors must be aware of the traps that may exist in relevant agreements, as well as the weaknesses that may exist in risk management strategies previously thought to be sufficient.

The Hidden Risk in Design-Build Project Negotiations: Copyrights

Anthony Chwastyk | Cohen Seglias Pallas Greenhall & Furman

Of the countless issues contractors face on a construction project, immediate problems like scheduling, workforce, payment, and materials supply often overshadow intellectual property concerns. But, they shouldn’t—especially for the design-build contractor. Given the resources the construction design process takes up, these builders need to protect investments from potential losses to the designer of record or the customer. Fortunately, copyright law provides mechanisms to address both of these risks.

The Designer Problem

A typical design-build project can create a unique risk for an architect or engineer seeking damages because of unauthorized use of drawings. U.S. copyright law gives ownership of a work to the author, including ownership of designs to the engineer or architect who prepared them. For a designer preparing plans as an employee of a design-build contractor, the designs would belong to the contractor. Sometimes, however, whether a designer qualifies as an employee is not always clear. Designers working as independent contractors, for example, would retain ownership rights to their designs unless the designer and design-build contractor agree otherwise. Regardless of the engagement, contractors would be prudent to secure such agreements

To prevent disputes about design ownership, contractors should require any professional providing architectural or engineering drawings to assign all their rights to the contractor. This critical measure removes any question of who owns the underlying work. For in-house designers, the employment agreement should have this provision. For outsourced work, the designer’s contract should have a similar provision, although some designers may resist, as standard design contract forms (such as those published by the AIA and EJCDC) often allocate intellectual property ownership to the design professional. By securing ownership for designs prepared, the design-build contractor ensures it can sell such drawings to clients and reduce the risk of ownership claims from designers.

The Customer Problem

Typically, the design-build project delivery method involves a contractor working with a customer through the design process, which often begins before the customer hires the contractor.

Savvy consumers like to perform due diligence before committing to a builder for their projects. Naturally, this pre-hiring vetting process will require the builder to share all kinds of drawings, plans and designs. In doing so, a contractor runs the risk that an owner will take those designs and hire another contractor to complete the project using those plans. Underhanded as that may seem, it has happened on more than one occasion to design-build contractors.

Thankfully, copyright law affords protection to design-build contractors in these situations. Copyright protection attaches the moment the author creates the design, so the “underhanded owner” has no right to use those designs without the contractor’s permission. To safeguard this interest, design-builders can officially register designs with the U.S. Copyright Office. This simple and affordable process involves only an application, a nonrefundable fee, and a submission of a copy of the work to the Library of Congress. Doing so satisfies a requirement for bringing a copyright infringement lawsuit in which the design-builder can seek statutory damages and attorneys’ fees.

Design-build contractors can further protect their designs used to pitch a client by attaching to them the “©” symbol, the word “Copyright,” or the abbreviation “Copr.” along with the year of publication and the owner’s name. This annotation puts others, including customers receiving these designs, on notice of the designs’ ownership and copyright protection.

Finally, design-builders can ask prospective customers, as a condition of showing any prospective designs, to sign a non-disclosure agreement to govern the negotiation process. Such an agreement should, at a minimum, require the customer to acknowledge that all designs and plans the builder prepares in the negotiation process belong solely to the builder and that the customer is not receiving any rights to those designs or associated copyrights. Further, the agreement should prohibit disclosing the designs to anyone other than the builder or other approved persons. The agreement should require that if the customer decides not to hire the builder, then the customer must immediately return all drawings to the contractor. If drafted properly, such an agreement provides more secure and clear ownership rights than a copyright registration but risks disrupting the trust relationship with the prospective client.

Successfully navigating copyright issues for design-build work depends greatly on properly prepared designer contracts and non-disclosure agreements. The stakes in play for such agreements demand design-builders work with knowledgeable legal counsel to get the terms right. The lawyers at Cohen Seglias have experience in preparing such contracts and counseling on copyright issues in the design-build context.

Design Immunity Does Not Shield Public Entity From Claim That it Failed to Warn of a Dangerous Condition

Garret Murai | California Construction Law Blog

Readers of this blog are familiar with the concept of the design immunity defense.

Codified at Government Code section 830.6, it provides in pertinent that a public entity is not liable for an injury caused by a plan or design of a public improvement where the plan or design has been “approved in advance . . . by the legislative body of the public entity or by some other body or employee exercising discretionary authority to give such approval or where such plan or design is prepared in conformity with standards previously so approved” if the trial or appellate court finds that there “is any substantial evidence upon the basis of which (a) a reasonable public employee could have adopted the plan or design or the standards therefor or (b) a reasonable legislative body or other body or employee could have approved the plan or design or the standards therefor.”

In the next case, Tansavatdi v. City of Rancho Palos Verdes, Case No. B293670 (January 29, 2021), the 2nd District Court of Appeal examined whether the design immunity defense also serves as a defense to a claim that a public entity has a duty to warn of a dangerous condition on public property.

The Tansavatdi Case

In March 2016, Betty Tansavatdi’s son was killed by a semi-trailer while waiting at a stoplight on his bicycle at the corner of Hawthorne Boulevard and Dupre Drive in Rancho Palos Verdes, California. Tansavatdi’s son had intended to go straight through the intersection on Hawthorne Boulevard while the semi-trailer had intended to turn right onto Vallon Drive.

The stretch of Hawthorne Boulevard leading to Dupre Drive did not have a bicycle lane although other stretches of Hawthorne Boulevard had bicycle lanes.

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In March 2017, Tansavatdi’s mother filed suit against the City of Rancho Palo Verdes alleging a single cause of action for dangerous conditions on public property. Tansavatdi alleged that the City had created a dangerous condition and failed to warn of a dangerous condition.

The City later filed a motion for summary judgment arguing that it was shielded from liability under the design immunity defense of Government Code section 830.6. The City also claimed that the design immunity defense shielded it from liability from Tansavatdi’s claim that the City failed to warn her son of a dangerous condition through the placement of signs or other warnings.

In support of its motion, the City submitted the declaration of Nicole Jules the former Deputy Director of Public Works and Supervising Civil Engineer for the City. Jules had testified that there had never been a bicycle lane at the stretch of Hawthorne Boulevard leading to Dupre Drive, although other sections of Hawthorne Boulevard had bicycle lanes, because the City wanted to retain on-street parking for the benefit of an adjacent park. In her declaration, Jules stated that the stretch of Hawthorne Boulevard leading to Dupre Drive met or exceeded all applicable government standards and was reasonably approved.

The City also submitted the declaration of Rock Miller a traffic engineering expert. Miller stated that plans for the stretch of Hawthorne Boulevard leading to Dupre Drive were reasonable and in full compliance with applicable guidelines. He also stated that available collision data at the intersection showed that the accident was the only serious accident from 2006 to 2017 and had an “extremely good” collision record.

In opposition, Tansavatdi submitted the declaration of Edward Ruzak a traffic engineering expert who stated that the intersection constituted a dangerous condition due to the absence of a bicycle lane that would direct riders to the left of the right-turn lane. He also stated that Hawthorne Boulevard was heavily used by bicyclists, that the risk of serious collisions was significant, including a steep downgrade in the stretch where the accident occurred, and he faulted the City for failing to provide “warnings or positive guidance regarding the proper and safe use of [the road]” in the absence of a bicycle lane.

The trial court granted the City’s motion for summary judgment concluding that the City had shown entitlement to design immunity as a matter of law. The trial court did not address Transavatdi’s claim that, irrespective of whether the City established design immunity, the City was liable for failing to warn of a dangerous condition. 

Transavatdi appealed.

The Appeal

On appeal, the 2nd District Court of Appeal explained that while a public entity may be liable for injuries caused by a dangerous condition on its property, Government Code section 830.6 provides that a public entity may avoid liability by raising the defense of design immunity, which requires the public entity to show: (1) a causal relationship between a plan or design and the accident; (2) discretionary approval of the plan or design prior to construction; and (3) substantial evidence supporting the reasonableness of the plan or design.

The Court of Appeal further explained that the first two elements – causation and discretionary approval – involve factual questions to be resolved by a jury unless the facts are undisputed. However, the third element explained the Court – the existence of substantial evidence supporting the reasonableness of the plan or design – is a legal matter for the court to decide.

The Court of Appeal found that the City had carried its burden as to each of the three elements. As to causation, the Court held that the plans for Hawthorne Boulevard, while it included markings for “BIKE LANE & ARROW” along portions of Hawthorne Boulevard, it included no such markings for the area where the accident occurred, and that Transavatdi had failed to show that the lack of such markings where the accident occurred was an inadvertent omission.

As to discretionary approval, the Court of Appeals held that the City had carried its burden. A private engineering firm had prepared the plans and submitted them for approval to the City and the City did in fact approve the plans submitted.

Finally, as to substantial evidence supporting the reasonableness of the plan or design, the Court of Appeal explained that “[g]enerally, a civil engineer’s opinion regarding reasonableness is substantial evidence to satisfy this element,” and that here, Jules and Miller, both traffic engineers, opined that the plans were reasonable and in full compliance with applicable guidelines.

However, the Court of Appeal held that it was error for the Court not to consider Transavatdi’s argument that, irrespective of whether the City established design immunity, the City was liable for failing to warn of a dangerous condition. Citing Cameron v. State of California (1972) 7 Cal.3d 318, 327, the Court of Appeal explained that the California Supreme Court has held “that a public entity may be held liable for failure to warn of a concealed dangerous condition even if that dangerous condition was covered by design immunity”:

Thus, under Cameron, the city’s entitlement to design immunity for its failure to include a bicycle lane at the site of Jonathan’s accident does not, as a matter of law, necessarily preclude its liability under a theory of failure to warn. Because it appears the trial court did not consider appellant’s failure to warn theory, we deem it advisable to allow the trial court to consider the failure to warn theory in the first instance.


So there you have it. Design immunity does not in and of itself shield a public entity from a claim that the public entity failed to warn of a concealed dangerous condition, even if that dangerous condition was covered by design immunity.