Expert Commentary

Owners Protective Professional—A Market Update

Owners protective professional (OPP) insurance is gaining strong momentum in the professional liability marketplace as a viable alternative to insure against design liability on construction projects. Owners are realizing the various benefits of purchasing excess insurance to protect against potentially catastrophic damages resulting from acts, errors, or omissions created by the design team.


Design and Professional Liability
June 2014

Basically, OPP—offered to owners of any construction projects that hold contracts with design professionals—provides first-party indemnity to the owner (insured) for damage incurred as a result of negligent acts, errors, and/or omissions of the design professionals the firm hires. It provides insurance protection to the owner/insured if damages exceed the professional liability insurance limits maintained by the design professionals under contract to the insured. Under an additional coverage part, defense expense is provided to protect the owners from actions against them that arise from design errors of the design professionals.

Trends

Below are some major trends and observations associated with the OPP product:

  • Insurers continue to expand into this area of insurance. In 2008, there were two insurers offering such coverage. Today, there are approximately eight offering OPP programs on a primary basis and an additional four or five that will entertain OPP on an excess basis. It is expected that a couple more will enter this segment in 2014. Even with only 8 to 10 insurers, expect the OPP market to become a bit more competitive.

  • Capacity of $10 million with any one of the primary markets is typical. Most primary insurers will also provide excess, making total capacity somewhere between $75 million and $100 million for an ordinary project. More complex projects may yield limits of between $25 million and $50 million. There is still a market or two that can offer $25 million on a primary basis if they are comfortable with the owner, design team, and project type.

  • While market expansion is a key factor in driving coverage and rates/premium, the OPP pricing is still driven by the cost of the underlying professional liability limits of the prime design professional involved. Owners can still see a savings of between 40 and 50 percent when compared to a primary project professional liability policy for the design team and secure a program that reserves the limit of liability for them rather than the design team. Of course, the reduction in cost is based on the fact that the OPP is an excess product.

  • Coverage continues to morph. Self-insured retentions only apply to the defense coverage part of the program, whereas, in the past, they applied to the indemnity coverage part as well. The definition of professional services has been expanded to track more closely with typical architect/engineer definitions such as the inclusion of building information modeling and technology services. Most programs are written on a non-auditable basis, but this is slowly changing to auditable programs with usually 10 percent leeway in construction values. On casino projects, there were three major changes—insurers applying a "gaming equipment" exclusion, removing coverage for economic damages resulting from the placement of equipment itself. In addition, third-party defense limits where reduced to $1 million. Lastly, on certain habitational projects, the third-party defense limit was reduced or eliminated.

  • Insurers are making appropriate changes to their policy forms to address the specific needs of design-builders, so much so that a few have developed specific OPP policy forms to address the fact that the design-builder is holding the contract for design with the owner rather than the prime design professional.

  • Insurers are still willing to add the excess contractors pollution liability (CPL) for the construction portion of the project at a very competitive price when compared to purchasing a project CPL program.

  • Although OPP is offered on a "blanket" basis to those owners with multiple projects, few owners take advantage of the blanket option and tend to insure on a project-by-project basis. Owners should investigate the various options available to them when dealing with multiple projects.

A Look Ahead

Considering the size of the construction industry and the expense associated with insuring the design team on a project basis, OPP is still an undersold or under-purchased product. It continues to become a much more cost-effective way for owners to align the design risk on a project and insure themselves accordingly for catastrophic loss. As the market continues to expand, we'll see an increased interest from owners. Simply put, for those agents and brokers out there with project owners, if you are not educating your owner clients about OPP, someone else may.


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