It is estimated that annual contractors professional liability (CPrL) premiums are now in the $300 million range and growing at a rate of about 15 to 20 percent each year. There continue to be approximately 15 domestic and foreign insurers willing to offer various forms of CPrL coverage.1
Major markets include the following.
Zurich Construction
Zurich Environmental
AIG/Lexington Insurance Company
XL Environmental
ACE Environmental Risk
CNA/Victor O'Schinnerer
Others include the following.
Markel Underwriting Managers/Evanston Insurance Company
Arch Insurance
RA&MCO
Liberty International Underwriters
Beazley Syndicate
ACE Ltd.
Travelers
In addition, there are some other fringe players. Insurer appetite varies dramatically. For example, one insurer may only offer CPrL to environmental firms, while another only offers it to construction managers, design-build firms, and other non-environmental construction firms. Still others offer coverage solely to smaller or middle-market specialty trade contractors. In addition, some insurers may only be willing to take an excess position; however, most will offer terms on a primary basis. With so many differences in risk appetite and coverage, it becomes increasingly difficult to navigate through the marketplace.
There are two additions to the market for 2008. One is Great American Insurance Company. GAIC enters the market promising a differentiated product offering. As for their professional liability products, they are combined with contractors pollution liability (CPL) but they do provide an option to add first-party "protective" coverage for the professional liability coverage part. It was introduced in April 2008. Another insurer who expects to launch their product offering in summer, 2008 is Catlin US/Catlin Syndicate. Specifics about the program are yet to be released but expect a full array of professional liability products for architects, engineers and contractors, as well as project specific capability.
Contractors Professional Liability Highlights
Combining all domestic and foreign markets, the available capacity for CPrL remains approximately $150 million each claim/aggregate limit, with the maximum limit any one insurer can offer remaining at $25 million on each claim/aggregate. The major insurers continue to have access to the reinsurance marketplace for facultative capacity above the $25 million. Tracking somewhat with the architects/engineers market segment, CPrL is seeing rate decreases of up to 10 percent, provided the risk/exposure base and loss history remains static.
Market Trends
There are two reasons motivating CPrL buyers: contract requirement and asset protection. Contract requirements for CPrL are on the rise. Although it is difficult to apply a percentage increase, it is certain that there has been a dramatic increase in the number of owners or general contractors (GCs) requiring CPrL coverage. This is a factor of an increased awareness of exposures, more so than any changes in the marketplace. Owners and GCs increasingly recognize the professional liability exposures they face and try to transfer that exposure via CPrL requirements. As for asset protection, this can be further broken down into several factors, all driving contractors to purchase CPrL to finance professional liability loss. In general, they include:
An increase in education or awareness on the issue
Availability of coverage—insurers catering to all types and sizes of construction firms
Softening of the standard casualty lines making funds available to purchase CPrL
Increasing interest in construction management at-risk and design-build
The recent trend in the construction industry to create a collaborative construction team is increasingly exposing contractors to professional liability, sending them into the marketplace looking for CPrL. programs such as Leadership in Energy and Environmental Design (LEEDS) and other green building initiatives, advancement in Building Information Modeling (BIM), and Private Public Partnerships (P3) programs are all pushing contractors to enter the process earlier so owners and design professionals can capture their professional construction expertise. This is a prudent and common-sense approach to construction; however, it increases a contractor's professional liability risk.
Another example that supports the collaborative construction team trend is the continued push for fast-track delivery systems or methods. The infrastructure in the United States serves as a prime example. Since the collapse of the I-35 bridge in 2007, much attention has been given to the disastrous conditions of our nation's bridges. Barring the lack of funding, restoring these bridges will be a priority for many agencies in many states. Furthermore, it is highly likely that these projects will be constructed under some type of fast-track construction or delivery method in which the contractor will be tapped for expertise and exposed to professional liabilities unlike in the past. Trends like these will continue, creating new professional liability exposures for all types of contractors.
Professional Liability Insurance Requirements
Another trend affecting CPrL coverage is the owner's or general contractor's requirement for a contractor to purchase CPrL, regardless of whether or not the firm is providing professional services. Many public/private owners and GCs need to reassess their requirements for construction managers, design builders, and/or general contractors. While no one is advocating that owners or GCs should completely remove the professional liability insurance requirements from the contract, perhaps concessions on coverage or limits can be made. Examples of considerations may include the following.
Is it necessary to require $10 million of professional liability insurance from a firm performing agency construction management on a $50 million project?
Is it necessary to require the design professional under a design build contract to have specified or dedicated project limit and overlook the $25 million the design builder purchases?
Is it appropriate for an owner to request $10 million in professional liability from a general contractor/developer when they are not in a contractual arrangement with the design professional or providing any environmental services?
This is a difficult topic because liability cannot be capped, and owners have a right to protect their assets and their projects. To the other extreme, there have been many projects where the owner is content to rely on the $1 million professional liability coverage from the prime design professional on project costs of $250 million and higher. To address liability appropriately, the solution lies somewhere in-between, and should be determined on a project-by-project basis, based on the level or type of professional services being offered by the construction firm.
In 2007 there was improvement in the availability of CPrL coverage. Continued and sustained improvement will depend on continued education of the exposures and a better understanding on the level of coverage offered in the CPrL marketplace. Unnecessary CPrL insurance requirements lead to an increased cost of the project with no added protection. Contractors that secure CPrL coverage even though they are not providing professional services question the value of the CPrL program. Prudent contractors are aligning themselves with CPrL insurers now and buying the coverage on a practice or blanket program. This allows them to bid projects with CPrL requirements with efficiency, allocate costs, and protect the organization. This allows the contractor to avoid the "fire drill" that occurs when faced with a CPrL insurance requirement that cannot be negotiated out of the contract.
Rate Adjustments
The CPrL marketplace is now experiencing a softening of the rates. Toward the end of 2007, we began seeing rate decreases of up to 10 percent, as long as the firm remained static and experienced no changes in loss history. Rates will continue to decrease in 2008. However, for construction firms with significant claims activity or change in operation, project type, or delivery methods offered, rate increases will occur. Increases will vary based on the insurer.
Despite the modest rate decrease, we have seen premiums continue to rise due to the increase in revenue or exposure base of many contractors. In many cases, contractors are experiencing revenue growth, on average, of 25 to 40 percent. Naturally, this will have a significant impact on the overall cost of the CPrL program, but the factor to focus on is the rate change.
Project Professional Liability
Owners of construction projects, architects, engineers, design-builders, general contractors, and insurance brokers still experience the same issues and frustrations in attempting to secure project professional liability insurance. Insuring professional liability on construction projects is still an extremely difficult task to accomplish. Furthermore, projects involving the construction of commercial condominiums or other "habitational" buildings present even greater issues.
The project professional liability policy will typically provide the broadest coverage for all entities on a construction project as long as it is structured properly, the operative phrase being "structured properly." On any given project, there can be a variety of contractual arrangements with those providing professional services. In most instances, the lead design professional will hold contracts with the entire design team. In these cases, the policy structure is simple—all entities are named accordingly. However, in other instances, it may not be that simple.
Perhaps the owner is contracting directly with the fire protection engineering firm? Maybe the general contractor is contracting with the MEP contractor—who happens to be providing the design on that work as well. It is imperative to have a clear understanding of the contractual arrangement for professional services to ensure proper coverage is provided. All entities performing design services or professional services should be named to the policy to optimize coverage.
When structuring the program, consideration should be given to the various "insured-versus-insured" exclusions attached. While coverage may be secured naming the owner, general contractors, and the design team, the "insured-versus-insured" exclusion may preclude those entities from the original intended coverage. Also, keep in mind there are separately insured project exclusions that exist on contractor's and design professional's professional liability policies. Some are as broad as excluding coverage regardless of whether or not the project policy "covers the claim." It is excluded for the mere fact that a project policy exists.
This may be a significant drawback to project policies—rather than having various limits under all contractor and DP policies, there is a single limit with the project policy. In addition, the practice programs of the many design professionals covered under the project policy will have a project exclusion, making the project policy the only policy for the project. Lastly, there is a greater potential of exhausting the limit of liability in the event of a claim since coverage is extended to numerous insureds under the policy. The concern here would be that defense costs may reduce the limit of liability remaining for compensatory damages.
Sound alternatives to the project policy continue to be the owner's protective or contractor's protective policies. The "protective" policies continue to gain momentum as the pricing of project professional liability insurance remains high and the benefit of the protectives are effectively communicated. Offered to owners of construction projects (owner's protective), design/builders, and general contractors (contractor's protective), the protective policy provides first-party indemnity for damages that the named insured incurs as a result of negligence of the design professional, which are excess of the design professional's professional liability insurance.
The "protective" sits excess and difference in conditions (DIC) of the design professional's professional liability insurance, and there is a minimum insurance requirement placed on the design professional by the insurer offering coverage. This requirement varies greatly on the type of project and the design team performing services. Furthermore, the underlying design professional's professional liability policy must be exhausted before the policy will provide the indemnity.
There are only a few insurers offering protective policies, and not all offer them to both owners and contractors. Coverage terms and conditions vary greatly, so it is imperative that a sound understanding of the contractual relationship between the named insured and the design professional exists prior to pursuing the coverage.
Currently, there are two insurers willing to entertain either project professional liability or protective professional liability without insuring the construction firm's practice program. They are Zurich and AIG/Lexington. To a lesser but notable extent, Liberty International Underwriters is underwriting CPrL on a project basis, but is very selective in its approach. All other insurers, except CNA/Schinnerer, will offer some level of project professional liability to their clients as long as they insure them on a practice basis. CNA/Schinnerer will not offer project professional liability—even to their clients for whom they write the practice program.
Combined Professional Liability and Pollution Liability Forms
When discussing "combined" policy forms, we are referring to a CPrL combined with contractors pollution liability (CPL). Some insurers only offer pollution liability arising from professional services. While that product has its place in the marketplace, any firm performing actual or physical work is not adequately insured for pollution liability under those forms. If contractors are performing actual work, confirm that the CPL component of coverage is purchased, and not just pollution liability coverage under the professional liability insuring agreement.
Combined CPrL and CPL programs were created to offer a cost-effective financing solution to those contracting firms that possess both professional liability and environmental liability exposures. Rather than purchasing two separate policies, this combined form offers the ease of providing both coverages without the issues of two premiums and two retentions.
Over the past 5 years, New Day has seen a dramatic increase in contractors buying the combined program versus two separate programs. The logic being that contractors shouldn't sacrifice one coverage for another because of cost. Instead, they can buy both under a combined program, increase the aggregate to twice the per-claim limit, and enjoy the benefit of both—and the flexibility in the use of limits.
Even though this trend will continue, what really drives the purchase is the individual construction firm's appetite for risk. Some may find this approach logical, while others want dedicated limits for each program to ensure claims under one don't deplete the available limits under another.
Pollution/Mold Exclusions
Some insurers continue to apply some form of a pollution exclusion, i.e., silica, lead, and asbestos, to their CPrL policies. This limits the effectiveness of the coverage since the intent of the exclusion is to exclude pollution conditions arising from professional services. With so many different activities being performed by construction managers, general contractors, design professionals, and specialty trades, there is a potential that pollution may result from professional services being offered. While there is no expected change from the markets in regard to CPrL programs structured with pollution exclusions, it would be prudent when pursuing CPrL coverage to ensure there is no such exclusion that restricts coverage.
Although mold and fungus concerns seem to have stabilized over the past few years, they are still an issue for many insurers offering CPrL. From one insurer's standpoint, mold is excluded, and there is no alternative to buy back the coverage. For others, it is fairly easily secured, provided the construction firm can evidence a mold prevention or water intrusion mitigation program. Most insurers will still offer up to $25 million, with additional limits available on a case-by-case basis.
2008 Expectations
In 2008 we continue to see an expanded need for CPrL. The underlying trend in construction—creating the collaborative construction team—will drive contractors to experience new and evolving professional liability risks they may not have experienced in the past. With programs such as LEEDS, a push for sustainable structures, advances in BIM, and the prevalence of P3 projects, contractors are searching the CPrL marketplace for the optimal solution to insure their unique professional liability risk.
The CPrL marketplace will be ready to respond. With a broadening of the market, expansion in coverage, and a softening of rates, CPrL programs will be much more attractive to construction firms who never contemplated coverage in the past or thought it was too expensive. Estimated premiums for 2008 will be in the $300 million range, with estimated growth rates of 15 to 20 percent.
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 This article is based on the New Day Market Update 2008, with its permission.
It is estimated that annual contractors professional liability (CPrL) premiums are now in the $300 million range and growing at a rate of about 15 to 20 percent each year. There continue to be approximately 15 domestic and foreign insurers willing to offer various forms of CPrL coverage. 1
Major markets include the following.
Others include the following.
In addition, there are some other fringe players. Insurer appetite varies dramatically. For example, one insurer may only offer CPrL to environmental firms, while another only offers it to construction managers, design-build firms, and other non-environmental construction firms. Still others offer coverage solely to smaller or middle-market specialty trade contractors. In addition, some insurers may only be willing to take an excess position; however, most will offer terms on a primary basis. With so many differences in risk appetite and coverage, it becomes increasingly difficult to navigate through the marketplace.
There are two additions to the market for 2008. One is Great American Insurance Company. GAIC enters the market promising a differentiated product offering. As for their professional liability products, they are combined with contractors pollution liability (CPL) but they do provide an option to add first-party "protective" coverage for the professional liability coverage part. It was introduced in April 2008. Another insurer who expects to launch their product offering in summer, 2008 is Catlin US/Catlin Syndicate. Specifics about the program are yet to be released but expect a full array of professional liability products for architects, engineers and contractors, as well as project specific capability.
Contractors Professional Liability Highlights
Combining all domestic and foreign markets, the available capacity for CPrL remains approximately $150 million each claim/aggregate limit, with the maximum limit any one insurer can offer remaining at $25 million on each claim/aggregate. The major insurers continue to have access to the reinsurance marketplace for facultative capacity above the $25 million. Tracking somewhat with the architects/engineers market segment, CPrL is seeing rate decreases of up to 10 percent, provided the risk/exposure base and loss history remains static.
Market Trends
There are two reasons motivating CPrL buyers: contract requirement and asset protection. Contract requirements for CPrL are on the rise. Although it is difficult to apply a percentage increase, it is certain that there has been a dramatic increase in the number of owners or general contractors (GCs) requiring CPrL coverage. This is a factor of an increased awareness of exposures, more so than any changes in the marketplace. Owners and GCs increasingly recognize the professional liability exposures they face and try to transfer that exposure via CPrL requirements. As for asset protection, this can be further broken down into several factors, all driving contractors to purchase CPrL to finance professional liability loss. In general, they include:
The recent trend in the construction industry to create a collaborative construction team is increasingly exposing contractors to professional liability, sending them into the marketplace looking for CPrL. programs such as Leadership in Energy and Environmental Design (LEEDS) and other green building initiatives, advancement in Building Information Modeling (BIM), and Private Public Partnerships (P3) programs are all pushing contractors to enter the process earlier so owners and design professionals can capture their professional construction expertise. This is a prudent and common-sense approach to construction; however, it increases a contractor's professional liability risk.
Another example that supports the collaborative construction team trend is the continued push for fast-track delivery systems or methods. The infrastructure in the United States serves as a prime example. Since the collapse of the I-35 bridge in 2007, much attention has been given to the disastrous conditions of our nation's bridges. Barring the lack of funding, restoring these bridges will be a priority for many agencies in many states. Furthermore, it is highly likely that these projects will be constructed under some type of fast-track construction or delivery method in which the contractor will be tapped for expertise and exposed to professional liabilities unlike in the past. Trends like these will continue, creating new professional liability exposures for all types of contractors.
Professional Liability Insurance Requirements
Another trend affecting CPrL coverage is the owner's or general contractor's requirement for a contractor to purchase CPrL, regardless of whether or not the firm is providing professional services. Many public/private owners and GCs need to reassess their requirements for construction managers, design builders, and/or general contractors. While no one is advocating that owners or GCs should completely remove the professional liability insurance requirements from the contract, perhaps concessions on coverage or limits can be made. Examples of considerations may include the following.
This is a difficult topic because liability cannot be capped, and owners have a right to protect their assets and their projects. To the other extreme, there have been many projects where the owner is content to rely on the $1 million professional liability coverage from the prime design professional on project costs of $250 million and higher. To address liability appropriately, the solution lies somewhere in-between, and should be determined on a project-by-project basis, based on the level or type of professional services being offered by the construction firm.
In 2007 there was improvement in the availability of CPrL coverage. Continued and sustained improvement will depend on continued education of the exposures and a better understanding on the level of coverage offered in the CPrL marketplace. Unnecessary CPrL insurance requirements lead to an increased cost of the project with no added protection. Contractors that secure CPrL coverage even though they are not providing professional services question the value of the CPrL program. Prudent contractors are aligning themselves with CPrL insurers now and buying the coverage on a practice or blanket program. This allows them to bid projects with CPrL requirements with efficiency, allocate costs, and protect the organization. This allows the contractor to avoid the "fire drill" that occurs when faced with a CPrL insurance requirement that cannot be negotiated out of the contract.
Rate Adjustments
The CPrL marketplace is now experiencing a softening of the rates. Toward the end of 2007, we began seeing rate decreases of up to 10 percent, as long as the firm remained static and experienced no changes in loss history. Rates will continue to decrease in 2008. However, for construction firms with significant claims activity or change in operation, project type, or delivery methods offered, rate increases will occur. Increases will vary based on the insurer.
Despite the modest rate decrease, we have seen premiums continue to rise due to the increase in revenue or exposure base of many contractors. In many cases, contractors are experiencing revenue growth, on average, of 25 to 40 percent. Naturally, this will have a significant impact on the overall cost of the CPrL program, but the factor to focus on is the rate change.
Project Professional Liability
Owners of construction projects, architects, engineers, design-builders, general contractors, and insurance brokers still experience the same issues and frustrations in attempting to secure project professional liability insurance. Insuring professional liability on construction projects is still an extremely difficult task to accomplish. Furthermore, projects involving the construction of commercial condominiums or other "habitational" buildings present even greater issues.
The project professional liability policy will typically provide the broadest coverage for all entities on a construction project as long as it is structured properly, the operative phrase being "structured properly." On any given project, there can be a variety of contractual arrangements with those providing professional services. In most instances, the lead design professional will hold contracts with the entire design team. In these cases, the policy structure is simple—all entities are named accordingly. However, in other instances, it may not be that simple.
Perhaps the owner is contracting directly with the fire protection engineering firm? Maybe the general contractor is contracting with the MEP contractor—who happens to be providing the design on that work as well. It is imperative to have a clear understanding of the contractual arrangement for professional services to ensure proper coverage is provided. All entities performing design services or professional services should be named to the policy to optimize coverage.
When structuring the program, consideration should be given to the various "insured-versus-insured" exclusions attached. While coverage may be secured naming the owner, general contractors, and the design team, the "insured-versus-insured" exclusion may preclude those entities from the original intended coverage. Also, keep in mind there are separately insured project exclusions that exist on contractor's and design professional's professional liability policies. Some are as broad as excluding coverage regardless of whether or not the project policy "covers the claim." It is excluded for the mere fact that a project policy exists.
This may be a significant drawback to project policies—rather than having various limits under all contractor and DP policies, there is a single limit with the project policy. In addition, the practice programs of the many design professionals covered under the project policy will have a project exclusion, making the project policy the only policy for the project. Lastly, there is a greater potential of exhausting the limit of liability in the event of a claim since coverage is extended to numerous insureds under the policy. The concern here would be that defense costs may reduce the limit of liability remaining for compensatory damages.
Sound alternatives to the project policy continue to be the owner's protective or contractor's protective policies. The "protective" policies continue to gain momentum as the pricing of project professional liability insurance remains high and the benefit of the protectives are effectively communicated. Offered to owners of construction projects (owner's protective), design/builders, and general contractors (contractor's protective), the protective policy provides first-party indemnity for damages that the named insured incurs as a result of negligence of the design professional, which are excess of the design professional's professional liability insurance.
The "protective" sits excess and difference in conditions (DIC) of the design professional's professional liability insurance, and there is a minimum insurance requirement placed on the design professional by the insurer offering coverage. This requirement varies greatly on the type of project and the design team performing services. Furthermore, the underlying design professional's professional liability policy must be exhausted before the policy will provide the indemnity.
There are only a few insurers offering protective policies, and not all offer them to both owners and contractors. Coverage terms and conditions vary greatly, so it is imperative that a sound understanding of the contractual relationship between the named insured and the design professional exists prior to pursuing the coverage.
Currently, there are two insurers willing to entertain either project professional liability or protective professional liability without insuring the construction firm's practice program. They are Zurich and AIG/Lexington. To a lesser but notable extent, Liberty International Underwriters is underwriting CPrL on a project basis, but is very selective in its approach. All other insurers, except CNA/Schinnerer, will offer some level of project professional liability to their clients as long as they insure them on a practice basis. CNA/Schinnerer will not offer project professional liability—even to their clients for whom they write the practice program.
Combined Professional Liability and Pollution Liability Forms
When discussing "combined" policy forms, we are referring to a CPrL combined with contractors pollution liability (CPL). Some insurers only offer pollution liability arising from professional services. While that product has its place in the marketplace, any firm performing actual or physical work is not adequately insured for pollution liability under those forms. If contractors are performing actual work, confirm that the CPL component of coverage is purchased, and not just pollution liability coverage under the professional liability insuring agreement.
Combined CPrL and CPL programs were created to offer a cost-effective financing solution to those contracting firms that possess both professional liability and environmental liability exposures. Rather than purchasing two separate policies, this combined form offers the ease of providing both coverages without the issues of two premiums and two retentions.
Over the past 5 years, New Day has seen a dramatic increase in contractors buying the combined program versus two separate programs. The logic being that contractors shouldn't sacrifice one coverage for another because of cost. Instead, they can buy both under a combined program, increase the aggregate to twice the per-claim limit, and enjoy the benefit of both—and the flexibility in the use of limits.
Even though this trend will continue, what really drives the purchase is the individual construction firm's appetite for risk. Some may find this approach logical, while others want dedicated limits for each program to ensure claims under one don't deplete the available limits under another.
Pollution/Mold Exclusions
Some insurers continue to apply some form of a pollution exclusion, i.e., silica, lead, and asbestos, to their CPrL policies. This limits the effectiveness of the coverage since the intent of the exclusion is to exclude pollution conditions arising from professional services. With so many different activities being performed by construction managers, general contractors, design professionals, and specialty trades, there is a potential that pollution may result from professional services being offered. While there is no expected change from the markets in regard to CPrL programs structured with pollution exclusions, it would be prudent when pursuing CPrL coverage to ensure there is no such exclusion that restricts coverage.
Although mold and fungus concerns seem to have stabilized over the past few years, they are still an issue for many insurers offering CPrL. From one insurer's standpoint, mold is excluded, and there is no alternative to buy back the coverage. For others, it is fairly easily secured, provided the construction firm can evidence a mold prevention or water intrusion mitigation program. Most insurers will still offer up to $25 million, with additional limits available on a case-by-case basis.
2008 Expectations
In 2008 we continue to see an expanded need for CPrL. The underlying trend in construction—creating the collaborative construction team—will drive contractors to experience new and evolving professional liability risks they may not have experienced in the past. With programs such as LEEDS, a push for sustainable structures, advances in BIM, and the prevalence of P3 projects, contractors are searching the CPrL marketplace for the optimal solution to insure their unique professional liability risk.
The CPrL marketplace will be ready to respond. With a broadening of the market, expansion in coverage, and a softening of rates, CPrL programs will be much more attractive to construction firms who never contemplated coverage in the past or thought it was too expensive. Estimated premiums for 2008 will be in the $300 million range, with estimated growth rates of 15 to 20 percent.
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.