Despite a myriad of challenges ranging from supply chain disruptions, labor shortages, and inflation woes to the latest coronavirus scares, total US construction starts still rose by 10 percent in September 2021, 1 with recent forecasts estimating another 3.7 percent growth in 2022. 2
The introduction of new construction materials coupled with a renewed emphasis on modular building, artificial intelligence, 3D printing, and wearable and drone technologies is not only expected to ease existing cost burdens but also speed construction processes while completing projects on time and within budgets. Another boost is expected to come from President Joe Biden's $1.2 trillion infrastructure spending plan, which "will deliver $550 billion of new federal investments in America's infrastructure over 5 years, touching everything from bridges and roads to the nation's broadband, water and energy systems." 3
However, there is a downside. The current optimism should also be tempered in at least the near term by the effects of an environment filled with greater governmental scrutiny and regulatory guidelines as well as double-digit increases in insurance premiums experienced in many lines of business, tighter underwriting standards, and new exclusions covering the scope of communicable disease exposures. Even though these factors are slightly less impactful on the contractors professional liability (CPrL) insurance products, they'll influence CPrL nonetheless.
When it comes to monoline CPrL, there has been more change than you may realize over the past 18 months. The following are a few areas to pay attention to.
For the most part, coverage offered by the 30 or so CPrL insurers has and expects to remain fairly consistent; however, there are a few changes that some insurers have made worth noting. Of course, COVID-19 or communicable-disease-related exclusions are the topper. While many of us are over or past the exclusion that was added by many (not all insurers added such an exclusion), some of us were surprised to learn that many insurers incorporated a communicable diseases exclusion baked into their forms many years ago—we never felt the impact of that exclusion until COVID-19.
My guess is those exclusions will go the way of the ol' Y2K exclusion for those of us old enough to remember that one! The other coverage impact worth noting is rectification or mitigation coverage. Due to the increased claims activity, especially in the areas of larger civil design build projects, insurers have seen an uptick in sizable and fairly common engineering errors. In many instances, first-party rectification/mitigation coverage is the first coverage up! As a result, this coverage may circumvent (unintentionally) coverage offered under other coverages such as project-specific professional liability or commercial general liability insurance. While it is still offered, underwriters are taking a close look at project types, client experience, contracts, and delivery methods. So, expect more scrutiny, especially on project CPrL placements.
The last coverage item worth mentioning is faulty work coverage. This coverage continues to gain ground for obvious reasons. While still offered on a select basis and primarily to smaller specialty trades, it is growing, and no CPrL insurers, to our knowledge, offering faulty work have exited or restricted the coverage. Albeit we only know of four or five insurers offering this, it can be a valuable add-on to a specialty trade contractor performing a high volume of work more so than professional liability insurance.
Speaking of project placements, they are getting tougher and more expensive to deliver, and some project types, like habitational, are nearly impossible to secure. While capacity remains fairly high—in the neighborhood of $200 million under practice programs—project placements are the cause of angina for most of us. To compound that issue, more insurers are taking the approach of "if you ain't my client, you ain't getting my capacity."
In other words, they are showing strong allegiance to their current buyers and will not offer capacity to those firms who are not currently purchasing from them—primary or excess. And, just because an insured may have other lines of insurance with that insurer, if that insurer isn't on the CPrL program, it may not count!
It's worth noting that some new capacity is coming in 2022, but we have yet to see what that will actually look like.
Although the market has stayed competitive, rates are nonetheless expected to rise (albeit modestly) by 2–5 percent for the first time in over 10 years. Increases likely will be most prevalent for contractors involved in higher professional risk delivery methods such as design build and engineering/procurement/construction. Those engaged in agency construction management methodologies could see rate hikes as well. Unlike in years past, construction firms are unlikely to see the increases waived regardless of their successful work histories or enhanced risk management practices.
What's behind the changes? As noted above, insurers are experiencing an uncomfortable uptick in design build claims on larger civil or infrastructure projects. The interesting thing here is that these are not new claims or different claims coming from unanticipated risk. After 10–15 years of aggressively offering coverage on design build projects, as an industry, we are seeing what impact the simple concept of beginning construction when design is 30 percent complete can have on a project and on CPrL insurance. These claims consist not only of third-party liability claims but rectification/mitigation claims. And those rectification/mitigation claims are being paid (in many instances but not all) much sooner than your typical liability claim.
Another influencer of rate is the global insurance market. It has faced an ever-increasing number of losses across the property and casualty marketplace, with reinsurers absorbing most of the payouts. Even though CPrL policies haven't been the primary drivers of loss, insurers who purchase reinsurance have not only been impacted by more restrictive terms and conditions but also by premium increases, which have been passed on to customers across all lines of business, including CPrL insurers.
Project coverage requires its own section or specific attention. This is an area of CPrL that bothers me the most because there doesn't seem to be consistency in the industry (insurance requirements) centered around which entity should hold the "primary named insured position," especially when you enter the realm of public-private partnerships or integrated project delivery or the more common design build delivery method. In other words, and only in my opinion, many of the insurance requirements I've reviewed for these larger projects are requiring the prime architect/engineer (A/E) to also be named on the policy as an additional named insured with the design builder as the primary named insured.
With no disrespect to the A/E, that does a few things to the design builder—the entity that is the one obligated to the owner for both design and construction (keep that in mind). When these requirements are enforced, they can potentially have a negative impact in a few ways.
- It voids the design builders protective indemnity (PI) coverage under their CPrL because of the insured versus insured exclusion (IVI) typically found in many if not all of these policies. Remember, to trigger PI coverage, the design builder, in many policies, must make a claim against the A/E. If there is an IVI exclusion, they may be barred under the policy from doing so.
- It could limit the design builder's recovery under the liability coverage for the same reasons noted above and may force the design builder to pursue recovery from the A/E's practice program (which may or may not exclude claims under which they are a named insured under a project policy).
- Rectification/mitigation may become the insurance solution for design or engineering errors. As a result of providing such coverage to the A/E firm, costs can skyrocket.
Staying with insurance requirements, insurers are now starting to question or at least suggest they limit their offering to the limit required by contract. In the past, if a contract required $10 million in CPrL insurance and the insured was interested in $20 million, the insurer would offer if they had the capacity. Side note: just because the contract requires a certain amount of insurance doesn't mean that the insured's liability is capped at the amount. So, it's common to see a request for higher limits on larger and more complex projects. While this can simply be achieved via excess insurers, in many instances, it is prudent to put such coverage with one major insurer to avoid conflict among multiple insurers who sit excess.
Although it was mentioned above, it's worth noting again as capacity is being cut back a bit on projects. While limits of $100 million-plus are still available to some clients, many insurers are only offering $10 million or $15 million as opposed to the previously available $25 million or $50 million. This presents a bit of a dilemma, as contracts are requiring higher limits, not lower. Further compounding the issue, most insurers only want the excess position versus a primary position. So, you have a reduced number of insurers willing to entertain the primary position only to be further reduced by client loyalty (as noted above), project type, and the structure of insurance requirements.
Lastly and probably most importantly, when it comes to project placements, the cost or premiums are going up because of the factors discussed above. And, keep in mind, in some cases, costs or premiums on larger projects can be as high as 40–50 percent of the limit purchased based on the players involved and loss history of the team, project type, complexity of design, and so on. In addition, when rectification/mitigation is provided, the total cost of the program is often driven up.