Major markets include:
- Zurich Construction
- Zurich Environmental
- AIG/Lexington Insurance Company
- XL Environmental
- ACE Environmental Risk
- CNA/Victor O'Schinnerer
Others include:
- 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.