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.