Finally, the worst seems to be over and the marketplace is demonstrating sustainable growth, especially within the construction sector.
Earlier this year, The American Institute of Architects predicted an 8 percent growth in commercial construction spending for 2015, primarily based on the ongoing demands of the hotel and retail industries. This coincides with the findings of the 2015 Dodge Construction Outlook, which estimated that “total U.S. construction starts for 2015 will rise 9 percent to $612 billion, a larger gain than the 5 percent increase to $564 billion estimated for 2014.” It also includes a 15 percent increase in commercial building and 9 percent advance in institutional building.
However, these predictions parallel other industry trends, such as the lightening-quick advancement of technology, which are rapidly re-shaping the professional liability underwriting marketplace as well as the latest risk management strategies. For example, as BIM and lean construction become industry standards and LEED gains greater traction annually, issues are constantly arising that challenge previously established exposure models, while accenting professional liability coverage gaps.
The Expanding CPrL Marketplace
The contractors professional liability (CPrL) market continues to expand, with 16 carriers now representing the domestic marketplace and five to six foreign carriers offering the product. CPrL is ideal for covering the damages arising out of the acts, errors and omissions of professional services performed by or on behalf of any construction firm, be it 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 damages (MOD) coverage (i.e., rectification). Protective coverage indemnifies the named insured for the costs incurred in excess of the design professional’s professional liability insurance and as a result of negligent acts, errors and omissions committed by design professionals under contract with the named insured.
Subsequently, rectification and mitigation of damages coverage has become far more prevalent throughout the marketplace. In fact, seven carriers now offer such coverage, while showing a greater willingness to follow this first-party coverage in the event that higher capacities are needed. Going forward, it can be expected that carriers will build “bench” strength in their claims departments because these coverages can vary quite dramatically from typical liability claims as well as the circumstances from which they arise.
2015 Trends and Conditions
As for 2015, many carriers are looking to revise, improve or update their CPrL policy forms. This is somewhat of a bleed over from 2014 as carriers finalize their existing coverage grants and receive legal approval on new forms. Furthermore, these coverages are growing with the provision of supplemental insurance for crisis management, BIM, disaster response, corporate reputation and design professional bankruptcies.
Contractual obligations also remain the major driver for purchasing both practice and project programs; however, for larger firms, asset protection is an even bigger driver. The number of entities requiring project CPrL from the construction professionals continues to rise, but unfortunately many requirements still appear a bit antiquated. This is because some insurance specifications are focused on insuring the design professional or the design team, leaving the contractor to look to its practice program or other alternatives to finance losses associated with its professional liability. However, this mindset is changing, with more owners realizing that it’s much more prudent to insure the project (meaning, insure all professional liability risk) rather than design liability only.
When it comes to CPrL claims, some major carriers are claiming as much as a 20 percent increase over last year, which isn’t surprising given that the number of CPrL buyers continues to increase and coverage terms expand. However, the severity of claims has become a greater concern, with some carriers reporting significant claims with a specific uptick in the areas of data centers, health care and habitational projects over the past year.
Although some larger ($500 million and above) contractors have taken advantage of combined CPrL and contractors pollution liability (CPL) policy coverages, the market has witnessed a progression toward this trend toward mostly in the middle ($50 million to $250 million) and small ($50 million and below) markets, where there is a direct need to leverage premiums. In addition, the pollution-type coverages (such as pollution legal liability for an insured’s locations, non-owned disposal site coverage, emergency response costs coverage and transportation coverage) available under combined forms are just as broad, if not broader, than under monoline CPL programs.
CPrL Expectations for 2015
With an expanding market, look for 2015 to bring continual CPrL coverage expansions and for rates to be flat or to rise slightly by 1 percent or 2 percent. 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 carrier offering such coverage. As a result, 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 among insurers. This includes relief in the project CPrL arena, where detailed contract specifications are needed to ensure entire projects are insured, rather than just certain aspects or portions of the work.