Contractors Professional Liability—A Market Update
Jeff Slivka | May 10, 2014
The contractors professional liability (CPrL) market continues to expand—in both coverage and the number of insurers willing to offer such coverage. In addition, the number of contractors purchasing CPrL has increased over the past year as construction professionals become more educated on the risk and the potential resulting claims and face contractual arrangements they may not have faced in the past. It doesn't hurt that the cost of CPrL for your average contractor is much less expensive than it was 3 years ago.
Basically speaking, CPrL provides coverage for damages arising out of acts, errors, and omissions from professional services performed by or on behalf of any construction firm, be it by a general contractor, design-builder, construction manager (at-risk or agency), or specialty subcontractor. In addition to third-party liability, some CPrL programs offer first-party coverage, such as "protective" coverage or mitigation of loss (MOL) coverage (also known as rectification). Protective coverage indemnifies the named insured for costs it incurs, excess of the design professional's (DP's) professional liability insurance, that the named insured is legally entitled to recover, as a result of negligent acts, errors, and omissions committed by DPs under contract with the named insured.
Whereas contractors protective coverage supplements the DP's professional liability insurance, MOL or rectification essentially replaces the DP's insurance solely with respect to the costs incurred by the named insured to remedy design errors discovered during the course of construction that would otherwise result in professional liability claims if not corrected.
Trends
Below are a few major trends and observations associated with CPrL insurance.
- Insurers continue to expand into this area of insurance. Over the past year, 3 new markets began offering a CPrL-type product on a primary basis, bringing the total of domestic insurers to about 15 with an additional 5 or 6 foreign insurers offering this product. Expect to see another 2 to 3 insurers develop CPrL programs in 2014, but all will focus on the small- to middle-market contractors. For larger construction firms, the same markets will exist as in 2013, for both primary and excess positions.
- Coverage expansion continues with the offering of such supplemental coverages as crisis management coverage, building information modeling extra expense coverage, disaster response expense, corporate reputation coverage, and bankruptcy of DP coverage.
- Expect "new and improved" forms. Nearly every major insurer has plans to "reinvent," expand, revise, update, or modify its policy forms in 2014. While, on one hand, this is good news, on the other hand, it is getting more and more difficult to track the changes, differences, and enhancements to these programs. Also, expect to see insurers creating enhanced forms that specifically address the unique professional risk associated with integrated project delivery (IPD) and public-private partnerships (P3).
- Rectification and mitigation of damages coverage is becoming more prevalent. Several insurers now offer such coverage, bringing the total to seven. In addition, excess insurers are more willing to follow this first-party coverage in the event that higher capacity is needed. Expect the number of insurers to expand in 2014, but, in addition and most importantly, expect insurers to build "bench" strength in their claims departments, as these coverages are very different from typical liability claims and can present unusual circumstances for some. Lastly, look for rectification/mitigation to be offered more as a supplemental coverage part than as a sublimit of the liability coverage.
- Project professional liability coverage is still scarce, with only three or four insurers willing to offer project coverage (with the ability to include protective and rectification/mitigation coverage) on a primary basis for large ($500 million or higher) projects. Coverage issues continue to exist with certain project delivery methods like IPD and P3 when the DP becomes part of the primary named insured and when DPs are part of a joint venture created to pursue a project. For smaller ($100 million and less) projects, several newer markets are beginning to respond to meet this need. Expect to see an increase in the number of insurers offering project coverage on smaller projects, especially when the need is merely driven by a contractual obligation. Expect this trend to continue with a slight change in program structure to address the different contract obligations that may arise over the year.
- Speaking of contractual obligations, the number of entities requiring project CPrL continues to rise. Unfortunately, some of the requirements are focused on insuring the DP or the design team, leaving the contractor to look to its practice program or other alternatives to finance losses associated with its professional liability. In 2014, look for this trend to continue, with one exception: owners will realize it's more prudent to insure the project against all professional liability than just against design liability.
- Project policy terms and extended reporting period (ERP) provisions may expand. Currently, all markets offer a 10-year maximum total program—policy term (construction period) plus ERP. However, there is an increasing demand for ERPs to match a state's statute of repose. Look for a number of markets to begin offering 10-year ERPs regardless of the construction duration.
- The number of both first- and third-party claims increased by 20 to 30 percent compared to last year, as reported by a few major CPrL insurers. This should be no surprise, as buyers of CPrL continue to increase, rectification/mitigation-type claims have a shorter payout period, premiums and self-insured retentions have shrunk, and coverage over the past 3 years has expanded greatly. As more buyers enter the marketplace, as new liability arises, as the first-party coverages become more prevalent, and as the market for CPrL matures, expect to see an increase in claims activity in 2014. To see examples of lawsuits, settlements, claims, and incidents, please visit New Day's blog.
- One claims trend that became prevalent in 2013 is the late reporting of claims by insureds. Regardless of the reason for the late reporting, insurance buyers should understand and comply with the claims-reporting provisions in their policies to avoid unnecessary denials of coverage. Insureds need to ensure that procedures are in place to report potential errors, problems, and claims as well as claims that may only appear to be general liability claims.
- Rates continue to hold relatively flat for just about every size contractor, provided that project type, revenue, delivery method, and claims history remain static. Some insurers are beginning to push for rate hikes, with a desire to see 3 to 4 percent rate increases. However, such increases are beginning to invite competition from the newer or more aggressive insurers.
- The trend toward combining the CPrL with contractors pollution liability (CPL) continues, mostly in the middle ($50 million to $250 million) and small ($50 million and below) markets where they need to leverage premiums, but some larger ($500 million and above) contractors take advantage of the combined CPrL/CPL as well. In addition, the pollution-type coverages (such as pollution legal liability for an insured's locations, nonowned disposal site coverage, emergency response costs coverage, and transportation coverage) available under combined forms are just as broad as, if not broader than, under monoline CPL programs. Expect this trend to continue in 2014, taking a larger bite out of the environmental insurance market's CPL premiums.
- When it comes to underwriting information (contracts, loss runs, financials, etc.), insurers began requiring ALL information prior to binding. While this is nothing new, the trend for 2014 will be for underwriters to hold steadfast to that condition. It would be prudent to get all the information to the underwriter prior to binding.
A Look Ahead
With an expanding market, look for 2014 to bring continual coverage expansion and for rates to be flat to slight 1 to 2 percent rate increases. In addition, with the expansion of the rectification and mitigation of damages coverage, now, more than ever, attention should be given to the quality of claims personnel within the insurer offering such coverage. Education on the key issues (exposures, claims, coverage, program structure, contract specifications, etc.) will continue to play a key role in the development of this line of insurance. And lastly, let's hope for some relief in the project CPrL arena. It's not expected, but we can hope. At a minimum, let's work to clean up some of those contract specifications to ensure the project is insured, rather than certain aspects or portions of it.
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