Since Zurich is the originator of this coverage, and up until last year
the only one to offer it, this product is most commonly connected to the
company. However, today there are now two markets offering Contractor's
Protective—Zurich and Catlin USA.
After broking various Contractor's
Protective policies ranging from the simple and complex to the small and
large while working with numerous retail insurance brokers specializing in
construction, I have found that a large number of professionals actually
have limited contractor's professional liability and risk management insurance
expertise. But the good news is that the industry overall has come a long
way in its understanding of contractor's professional liability insurance
issues. However, this knowledge must be constantly updated since there seems
to be a new delivery method or fresh twist introduced to this coverage on a
While I will never proclaim to be an expert (according to
some business management gurus, an "expert" is a person who has made every
possible mistake in a narrow field, and even though I have made some big
ones, I still haven't made them all), I can tell you that there are several
misperceptions or misunderstandings that have led to a distorted view of
contractor's protective insurance. As a result, a better understanding of
both its benefits and drawbacks are required.
let's consider a basic overview of contractor's protective. When many
insurance professionals request contractor's protective coverage, it usually
means they are looking for a true professional liability product with an
additional coverage part: contractor's protective. Protective coverage is a
first-party coverage that indemnifies the named insured, excess of the
design professional's professional liability insurance, for costs the named
insured incurs, and is legally entitled to recover, as a result of negligent
acts, errors, and omissions of design professionals with which the named
insured holds a contract.
In addition, it also affords a
difference-in-coverage (DIC) above the underlying professional liability
policy and extends coverage to the named insured in the event the underlying
policy is deficient in coverage. Such deficiencies may include exclusionary
language for mold or other pollution conditions, habitational exclusions,
cost overrun exclusions, or quantity estimating exclusions that may exist in
a design professional's practice program. Essentially, the protective
supplements the design professional's professional liability insurance
program by providing direct benefits to the named insured, the contractor
(a.k.a. design-builder), for the costs incurred above what the design
professional can provide via insurance proceeds of its professional
liability insurance. As a result, this is much different than the typical
liability coverage offered in a professional liability policy.
One of the best and most oversimplified examples used
to illustrate the value of protective coverage includes a contractor, who
contracts with a design professional (DP) to provide the prime design of a
mixed use retail/condominium project. The contractor carries a $5 million
contractor's professional liability (CPrL) program including protective
coverage. Unfortunately, the design professional designs the project with
the improper sized rebar, which is not discovered until after extensive
construction work has been completed.
After further inspection, it is
then determined that the cost to demolish and rebuild would be approximately
$3 million, which is significantly less than the costs associated with
proceeding with altered design. Since the contractor is ultimately
responsible for the design aspects of the project, and most design build
contracts are guaranteed maximum price, the contractor has little or no
recourse with the owner but to absorb the additional costs involved with
demolishing the original structure and starting construction anew.
Therefore, one of the few options remaining to the contractor includes
looking to the design professional, and subsequently the design
professional's professional liability insurer, for the repayment of these
additional costs. The claim is then made against the design professional's
professional liability insurer, which carries a liability limit of $1
million per claim/aggregate. The DP's policy would pay $1 million (provided
such policy does not exclude coverage and the limits are intact—not reduced
by previous claims) and the protective coverage would then pay $2 million.
However, there is an aspect of protective coverage that is often overlooked.
It is an excess coverage. Therefore, the protective coverage will not
respond until the coverage applicability of the underlying DP's policy is
determined. In other words, it may take years to settle the claim under the
DP's policy and, until then, the protective coverage will not respond. Even
so, the value of such coverage is undeniable.
important and usually misunderstood aspects of contractor's protective
include the following.
Self-Insured Retention (SIR)
coverage usually, but not always, carries a self-insured retention. The
self-insured retention only applies in the event the underlying DP's
professional liability insurance is not available as a result of previous
claims, exclusionary language, canceled policies, and so forth. In the event
the underlying DP's policy is intact, the SIR does not apply.
Insurance Requirements (MIR)
Typically, insurers offering protective
coverage require contractors to work with design professionals that have a
minimum of $1 million in professional liability insurance. This affects
coverage in two ways: (1) no SIR will apply in the event the MIR is met at
the time of claim and (2) during such circumstances, the insurer will agree
to waive subrogation rights against the DP. If not, the insurer may
subrogate back against the design professional for expenses incurred.
However, many insurance professionals often mistakenly believe that the
protective coverage applies excess of $1 million if stated in the policy as
the MIR. In reality, the MIR is just that, a minimum. So, if the design
professional is carrying $5 million in limits, which are intact at the time
a claim is made by the contractor, then the protective will sit the excess
of the $5 million.
Contractor's Pollution Liability (CPL) Endorsement
True CPL can be provided on a blanket basis. This includes coverage
for mold liability, pollution conditions arising from physical operations,
or the transportation activities performed by or on behalf of the named
insured as well as the cleanup efforts or liability associated with
challenges confronted at designated or nonowned disposal sites (NODS).
The overriding concept of contractor's protective that
many risk managers have come to appreciate is that it provides a supplement
to the insurance available under the design professionals' professional
liability policy—putting the negligent design professional's insurance on
the line rather than replacing it. This not only preserves the contractor's
future insurability, but also enables the firm to additional funds in that
Since the value of the protective coverage is
proportional to the amount of design/build activities a contracting firm
provides, not all construction companies need contractor's protective
coverage. However, please note that the inverse of this axiom also holds
true. In other words, if a firm is involved extensively in design/build
efforts, and this can include prime design activities or even design/build
contracts with lower tier specialty subcontractors, then that company should
certainly consider contractor's protective coverage as a method of insuring
against the devastating costs associated with design errors, demolition, and
the reconstruction of the original structure.