With the construction industry already facing a downturn, the contractors professional liability (CPrL) marketplace has undergone further changes since early 2020 due primarily to the nationwide effects of the coronavirus pandemic.1
Although the market has stayed competitive with over 30 insurers offering some form of CPrL insurance, rates are nonetheless expected to rise (albeit modestly) by 2 to 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 based on their successful work histories or enhanced risk management practices.
What's behind the changes? CPrL insurance has continually matured alongside the market's understanding of the frequency and severity of claims produced by specific project delivery methods. In addition, the global insurance market 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 onto customers across all lines of business, including CPrL insurers.
Evolving Terms and Conditions
As for the policies themselves, most insurers are offering first-party mitigation or rectification coverage without hesitation. However, several leading insurers are now modifying their mitigation wording to apply solely to the design/build agreements held between insureds and project owners as opposed to offering the coverage regardless of the type of delivery method. This is mainly due to the frequency of claims experienced between owners and design professionals involved in other delivery methods.
In addition, while most insurers initially held off, many are now adding communicable disease or COVID-19 exclusions to their policies. This is in contrast to some of the major markets that have either continued to underwrite these conditions rather than apply exclusionary wording or offered COVID-related coverage that includes escalated underwriting criteria and additional cost. But keep in mind that these are not blanket forms of coverage. To apply, in many instances, the COVID loss must result directly from the contractor's professional services and result from the negligence of the construction firm or any entity for whom they are liable.
Other CPrL advances involve the continued evolution of faulty workmanship coverage forms, which are now offered by four to five major markets with seemingly little to no change in appetite, rate, or coverage. However, this is likely to change over the next 12 to 18 months, given that many of these insurers are now experiencing a higher frequency of losses in this category. When it comes to severity, these same insurers would seem to have less of a concern as most claims are resulting in low six-figure payments. Even at those lower payments, it may be difficult for some insurers to sustain a profitable book without the faulty work coverage negatively impacting their overall CPrL book of business.
Enhanced Underwriting Scrutiny
Underwriters are asking for more information than ever before. In addition to the traditional criteria used to price the risks associated with a new or continuing CPrL program—such as project delivery method, project type, client's loss history, and revenue stream—underwriters are increasingly asking insureds for details on the following.
Pandemic or COVID response and awareness protocol
Updated water intrusion, mold remediation, and response plans—insurers concerned about dormant projects
Financials and the potential impact COVID-19 has had on the organization's payroll and ability to pay suppliers and subcontractors
It is reasonable to expect that this information will be subject to increased scrutiny, especially when compared to previous years.
The Need for Clearly Worded and Defined Contracts
Beware of poorly written, ill-defined contracts with wide-ranging exclusions. While some construction contracts might require the inclusion of insurance terms and conditions that are not even commercially available—such as the removal of insured versus insured exclusions—others may request caveats such as the need of the design builder (DB) to name as insureds the entire design team on a project policy as well as the DB. Although this may seem to make sense on the surface because the design team is carrying the highest professional risk, the reality is that clauses like this can greatly hinder the DB's ability to seek recourse under a project policy for the errors made by the design professional (DP). It could also drive the cost of the program substantially higher since the design risk would be insured on a primary basis.
Furthermore, when the DP or team is named in the policy, it can render the DB's protective indemnity coverage useless by virtue of the insured versus insured exclusions. Few markets are willing to offer a structure with both the DB and the DP named to the policy, and when they do, it is, in our experience, very costly, and that cost only increases when rectification or mitigation coverage is added to the program.
As the entity obligated to the owner/developer and contractually taking on the professional risk of the DP or design team, it is, in our view, the DB who should be required to carry the professional liability insurance for the project. This is only compounded when the DP is part of the DB via a special purpose vehicle or joint venture. In such cases, there may only be one option. This all should be understood by each party involved.
CPrL Project Placements
In a time of uncertainty, the only certainty often is change. Here are some changes in need of consideration in preparation for project CPrL placements.
Loyalty. Many insurers are providing their capacity (limits of insurance) to current clients/insureds. In other words, fewer project CPrL markets seem willing to offer terms if they do not participate in the insured's current practice program. This could be a real dilemma if it continues.
Capacity. While $100 million-plus is still available to some clients, many insurers are only offering $10 million or $15 million as opposed to previously available $25 million or $50 million max levels. This could present another dilemma as contracts require higher limits, not lower.
Rising costs. CPrL coverage is rightfully expensive and likely to become even more expensive given today's uncertain economic climate. In addition, as mentioned above, when rectification/mitigation is provided, that oftentimes only drives the cost up as now the insurer is first in line on a claim but still may have recourse against the DP's professional liability policy in the end. When the DP is part of the primary named insured(s), that cost can dramatically rise because that ability to pursue the DP's professional liability is secondary to the rectification/mitigation coverage.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Footnotes
1 Thanks to Joe Reynolds for his contributions to this article.
With the construction industry already facing a downturn, the contractors professional liability (CPrL) marketplace has undergone further changes since early 2020 due primarily to the nationwide effects of the coronavirus pandemic. 1
Although the market has stayed competitive with over 30 insurers offering some form of CPrL insurance, rates are nonetheless expected to rise (albeit modestly) by 2 to 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 based on their successful work histories or enhanced risk management practices.
What's behind the changes? CPrL insurance has continually matured alongside the market's understanding of the frequency and severity of claims produced by specific project delivery methods. In addition, the global insurance market 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 onto customers across all lines of business, including CPrL insurers.
Evolving Terms and Conditions
As for the policies themselves, most insurers are offering first-party mitigation or rectification coverage without hesitation. However, several leading insurers are now modifying their mitigation wording to apply solely to the design/build agreements held between insureds and project owners as opposed to offering the coverage regardless of the type of delivery method. This is mainly due to the frequency of claims experienced between owners and design professionals involved in other delivery methods.
In addition, while most insurers initially held off, many are now adding communicable disease or COVID-19 exclusions to their policies. This is in contrast to some of the major markets that have either continued to underwrite these conditions rather than apply exclusionary wording or offered COVID-related coverage that includes escalated underwriting criteria and additional cost. But keep in mind that these are not blanket forms of coverage. To apply, in many instances, the COVID loss must result directly from the contractor's professional services and result from the negligence of the construction firm or any entity for whom they are liable.
Other CPrL advances involve the continued evolution of faulty workmanship coverage forms, which are now offered by four to five major markets with seemingly little to no change in appetite, rate, or coverage. However, this is likely to change over the next 12 to 18 months, given that many of these insurers are now experiencing a higher frequency of losses in this category. When it comes to severity, these same insurers would seem to have less of a concern as most claims are resulting in low six-figure payments. Even at those lower payments, it may be difficult for some insurers to sustain a profitable book without the faulty work coverage negatively impacting their overall CPrL book of business.
Enhanced Underwriting Scrutiny
Underwriters are asking for more information than ever before. In addition to the traditional criteria used to price the risks associated with a new or continuing CPrL program—such as project delivery method, project type, client's loss history, and revenue stream—underwriters are increasingly asking insureds for details on the following.
It is reasonable to expect that this information will be subject to increased scrutiny, especially when compared to previous years.
The Need for Clearly Worded and Defined Contracts
Beware of poorly written, ill-defined contracts with wide-ranging exclusions. While some construction contracts might require the inclusion of insurance terms and conditions that are not even commercially available—such as the removal of insured versus insured exclusions—others may request caveats such as the need of the design builder (DB) to name as insureds the entire design team on a project policy as well as the DB. Although this may seem to make sense on the surface because the design team is carrying the highest professional risk, the reality is that clauses like this can greatly hinder the DB's ability to seek recourse under a project policy for the errors made by the design professional (DP). It could also drive the cost of the program substantially higher since the design risk would be insured on a primary basis.
Furthermore, when the DP or team is named in the policy, it can render the DB's protective indemnity coverage useless by virtue of the insured versus insured exclusions. Few markets are willing to offer a structure with both the DB and the DP named to the policy, and when they do, it is, in our experience, very costly, and that cost only increases when rectification or mitigation coverage is added to the program.
As the entity obligated to the owner/developer and contractually taking on the professional risk of the DP or design team, it is, in our view, the DB who should be required to carry the professional liability insurance for the project. This is only compounded when the DP is part of the DB via a special purpose vehicle or joint venture. In such cases, there may only be one option. This all should be understood by each party involved.
CPrL Project Placements
In a time of uncertainty, the only certainty often is change. Here are some changes in need of consideration in preparation for project CPrL placements.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.