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New approaches to building projects, as well as new techniques, are leading to increased demand for professional liability insurance for contractors, say many observers.
While such coverage for architects and engineers has been around for many years, it is only in recent years that professional liability coverage for contractors has been developed, and observers describe it as a still-evolving field.
Ten or 15 years ago, people would shake their heads at the idea of professional liability coverage for contractors, asking, “How could they be held liable for professional risk when they don't provide professional services?” said Jeffrey M. Slivka, chief operating officer at Bordentown, N.J.-based New Day Underwriting Managers L.L.C.
But that is no longer the case. Observers say there has been a blurring of the once-sharp lines between contractors and architects and designers. Increasingly, contractors are being drawn into the design process, which exposes them to possible liability.
Observers generally describe the market, which is estimated to be about $350 million in annual premiums, as competitive, with claims falling within the low-frequency, high-severity arena.
Traditionally, said Mr. Slivka, under the “design-bid-build” method, a project would be designed, bids put out, and the project built. “The demarcation lines of exposure were pretty well segregated,” said Jeffrey Coe, Atlanta-based national practice leader for Marsh USA Inc.'s design industry group.
But to decrease the amount of time involved, under the “design-build” concept, the construction may begin while only 20% of the building has been designed, which cuts back significantly on the amount of time it takes, said Mr. Slivka.
There may be only one contract, with one entity responsible for designing and building the project. Contractors may now take the design responsibilities in-house, and even subcontract them out to design firms, said Mr. Coe. “At a minimum, they have vicarious liability exposure.”
Two new approaches that have emerged from this approach are integrated project delivery, in which teams work together; and building information modeling, which involves computer-developed 3-D models of projects (see related story).
Contractors professional liability insurance “fills a tremendous void that is becoming increasingly more apparent to contractors and construction management firms in their insurance programs,” said Richard Hartman, vp, architects and engineers professional liability for Arch Insurance Group Inc. in New York.
Contractors' biggest exposure is for claims filed against them for project delays and cost overruns. But traditional general liability insurance offers coverage only for bodily injury and property damage, and does not cover financial or economic losses, he said.
“The contractors themselves are starting to realize the changes in these project delivery methods is exposing them more and more” to professional liability risks, said Mr. Slivka.
Furthermore, owners are beginning “more and more to require the coverage,” said Michael Davis, Philadelphia-based product management director for construction professional and pollution lines for Zurich North America.
“It's a snowball effect,” said Mr. Davis. The exposure generates policies over time, “and then as more contractors are buying it, it's become less of a rare thing but more commonplace. Then owners start saying, "Why doesn't my contractor carry that?'” It then becomes a competitive advantage for the insurers that offer it, he said.
Cady Sinks, Chevy Chase, Md.-based assistant vp at Victor O. Schinnerer & Co., said the application count at her firm was up 13% for the January-to-September period this year compared with the same period a year ago, while new business premiums were up about 40%, “so we're seeing a really good increase over our 2010 numbers.”
How much the overall market will continue to grow, however, depends on the overall economy, said Keith Jurss, Chicago-based senior vp of professional liability for the national construction practice of Willis North America.
Meanwhile, any contractor whose work is more than 25% residential is going to find obtaining coverage “pretty challenging,” said Matt Gough, senior vp and partner with Washington-based broker Ames & Gough. “It is not an area that a lot of insurers have healthy appetites for,” because of losses and the large number of dormant residential projects.
Contracts generally are individually negotiated, say observers. George Pigault, vp with Liberty International Underwriters, a unit of Liberty Mutual Group Inc., in New York, said, “There's less uniformity in the construction professional liability market” than perhaps in architects and engineers professional liability, “so certain carriers will respond differently to exposures within their policies.”
David Grigg, New York-based vp of construction professional liability for XL Insurance, a unit of XL Group P.L.C., said, “We have base forms,” but there is generally “quite a lot of tailoring in those base forms to meet the particular requirements of our individual contractor accounts.”
Observers generally characterize contractors' professional liability as low-frequency, high-severity.
“The coverage is generally viewed more as a cat cover,” said Mr. Grigg.
“When something goes awry, it's generally pretty bad,” said Mr. Coe.
The market is segmented, with some insurers focusing on large contractors and others on the small or midsize markets. Zurich, for instance, will offer up to $50 million in coverage, said Mr. Davis. Liberty Mutual offers coverage for mid-market firms typically in the $5 million to $10 million range, Mr. Pigault said.
While insurers generally will not provide more than $50 million of capacity individually, much higher towers can be built through excess layers, observers say.
Mr. Slivka said there are about six to eight insurers “who have been doing it for some time and know what they're doing.” Then, “you have a handful that get into it and think they know what they're doing,” but there is a “lack of commitment, and they either get out or pull back.”
Mr. Hartman noted the contractors professional liability market is in marked contrast to the longer-established architects and engineers market, in which some 50 insurers participate.
Mr. Grigg said in terms of rates, “The professional lines generally throughout the last few years have held up better than many property and casualty product lines.” While there has certainly been price softening, “it's a product line which has held up pretty well.”
“I would like to see some rate increases, but I think the competition's preventing that from happening,” said Mr. Jurss. Unless there has been a significant loss-adverse scenario, most business “tends to be pretty flat and, in most instances, declining,” he said.
Mr. Coe said he anticipates the market will remain competitive “as much in terms of coverage and terms” as in pricing.
Observers say the market is still developing. “It's a relatively new area of professional liability,” said Mr. Slivka. Claims are being paid, but “you still don't have the number of claims to bring some certainty to the insurance and the price of the insurance.”
For general liability or workers compensation lines, for instance, “you've got so much data, those lines of insurance can bring some certainty to pricing.” But in this area, “there's not a lot of data when it comes to claims information.”