As the U.S. economy continues to grow, all signs point to a slow and steady recovery of the commercial construction industry as well. Last year, studies such as the “Commercial Building Construction Market Research Report” from IBISWorld predicted five years of “robust revenue growth for commercial construction companies,” while the American Institute of Architects (AIA) announced that several nonresidential commercial sectors were up, often at a double-digit pace from the year before. More recent AIA forecasts even project an 8% increase in 2015 commercial spending initiatives.
With the good comes the bad, however. While commercial construction liability has always been a concern to the discerning and conscientious contractor, many other liability issues have also entered the arena as the boundaries that commonly separated the responsibilities of contractors, architects and other building professionals are eliminated.
Today, contractors are drawn into the earliest stages of the project development cycle to capture their insights and experience. In such instances, the services of general contractors and design professionals have merged so intensely that, even if the general contractor and subcontractors do not perform design work, their “consultative advice” on constructability, sequencing and scheduling can be considered professional services and, thus, they may be liable if the proper precautions are not in place. As a result, not only has the contractors professional liability marketplace expanded to accommodate these changing circumstances, the number of contractors purchasing this form of coverage increased dramatically over the past year.
As commonly defined, contractors professional liability provides coverage for damages arising out of negligent acts, errors and omissions from the professional services performed by, or on behalf of, any construction firm, whether it is a general contractor, design/builder, construction manager or specialty subcontractor. In addition to third-party liability, some contractors professional liability programs offer first-party coverage, such as “protective” coverage or mitigation of damages (MOD) coverage (also known as “rectification”). These so-called first-party coverages have really gained attention over the past three or four years and are at the forefront of many conversations when talking about contractors professional liability.
The protective coverage indemnifies the named insured for the costs incurred in excess of the design professional’s (DP) professional liability insurance, that the named insured is legally entitled to recover, as a result of negligent acts, errors and omissions committed by design professionals under contract with the named insured. Whereas contractor’s protective coverage supplements the DP’s professional liability insurance, MOD essentially replaces the DP’s insurance solely with respect to costs incurred by the named insured to remedy design errors discovered during the course of construction or after completion, in some cases, that would otherwise result in professional liability claims if not corrected.
In addition to the reduction of contractors professional liability coverage costs for the average contractor over the past three years, new carriers have entered this marketplace offering supplemental policies that cover crisis management, building information modeling, disaster response, corporate reputation and bankruptcy of design professional.
Nearly every major carrier also has plans to reinvent, expand, revise, update or modify their existing policy forms and create enhanced forms. These new coverages are expected to specifically address the unique professional risk associated with integrated project delivery and public-private partnerships. Rectification and mitigation of damages coverage will also become more prevalent, with several carriers expected to build “bench” strength in their claims departments as these coverages differ from typical liability claims and can present unusual circumstances.
Project professional liability coverage is still scarce, with only three or four carriers willing to offer this form of coverage (with the ability to include protective and rectification/mitigation coverage) on a primary basis for large ($500 million or higher) projects. But several newer markets are beginning to respond to meet this need for smaller ($100 million or less) jobs. Furthermore, the number of carriers offering smaller project coverages is expected to rise, especially when the need is merely driven by a contractual obligation. This trend will continue, with a slight change in program structure to address the different contract obligations that may arise over the year.
[pullquote]Contractors and related interested parties would be best served by not only thoroughly understanding the latest variety of coverages, but also the driving forces behind their selection. [/pullquote]
Other new wrinkles include combining contractors professional liability with contractors pollution liability coverages for primarily the middle ($50 million to $250 million) and small ($50 million and below) markets. This would offer a cost-effective financing solution to contracting firms possessing both professional liability and environmental liability exposures. Simply put, contractors pollution liability insurance covers bodily injury, property damage, defense and clean-up as a result of pollution conditions caused by contracting operations performed by or on behalf of the contractor. Subsequently, this combined form of insurance offers the ease of providing both forms of coverage without the issue of two premiums, two retentions and differing terms and conditions.
Because of these benefits, over the past five years, the construction marketplace has seen a dramatic increase in smaller to mid-sized contractors buying the combined program instead of separate contractors professional liability or contractors pollution liability policies. In doing so, coverage is not sacrificed for cost and, through the use of a combined program, contractors can increase the aggregate to twice the per-claim limit, while enjoying the benefits and flexibility of both.
As for the industry itself, the number of entities requiring project contractors professional liability continues to rise. Unfortunately, some of the requirements 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. Going forward, this trend is also likely to continue with one exception: owners will realize it is more prudent to insure the project against all professional liability than just against design liability.
This year, the market is expected to expand with new coverage types that will be offered at the same rates or with slight 1% to 2% increases. As a result, contractors and related interested parties would be best served by not only thoroughly understanding the latest variety of coverages, but also the driving forces behind their selection. The rules for competing in today’s marketplace seem to be changing daily, with the risks even higher for contractors and construction firms that fail to realize the consequences of enhanced liability.