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.
Acknowledgment
Special thanks to Joe Reynolds, assistant vice
president of R-T Specialty, LLC's Environmental and Construction
Professional Practice, for his contributions to this article. He is
available at .
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.