As the contractor’s professional liability insurance market has grown, so have the claims. CPL Policy limits are also climbing, the average now double what it was just five years ago. Contractors pay a lot for these policies, and owners increasingly require them. Here’s what’s behind the flight to CPL, and the trends in coverage.
Contractor professional liability insurance arose in the 1990s to help cover risks from prime contractor design errors. As projects grew in complexity, contractors found themselves involving more third parties in making design decisions. Similarly, with more design work on their shoulders when working on design-build and other collaborative delivery methods, contractors created new risks. Simply adding an endorsement to the architect’s policy to cover these types of design errors grew less effective and fell out of favor.
The CPL Numbers
As of May 2017, the CPL capacity in the U.S. was $300 million and growing. The upper policy limits are growing as well, from one million to two million and even five million dollars. The bigger the project, the greater the limits, with $25 million common on projects having values of at least $500 million. However, the claims are also climbing.
Insurers report 20 percent year-over-year increases in professional liability claims, and the claim sizes reach eight-digit sums.
However, these CPL statistics don’t seem troubling to the insurance industry. Insurers are offering a broader range of coverage and are further expanding coverage types. They are even including other types of coverage in the CPL policies to improve value, for instance, by adding pollution coverage.
The Design Risk Landscape
Contractor risk goes up as they take on more design work. Even a simple thing like suggesting a change in lumber sizes for supporting loads can open up liabilities. And design-build, whether self-performed design is included or not, ramps up the risk exponentially. By far, the biggest risks come from errors and omissions as they drastically increase costs at all levels of the project.
The new risks for contractors come primarily from delegating design to others and making design decisions and design errors themselves. In the first instance, a contractor might hire a consultant to design a building system. However, should the system fail, or fail to meet specifications, the costs often come back to haunt the contractor. Alternatively, a contractor might come up with their own design for part of a structure based on their knowledge and skills acquired on other projects. If that design fails to perform as specified, though, they can become liable for redoing the work.
Insurers report 20 percent year-over-year increases in professional liability claims, and the claim sizes reach eight-digit sums.
Another way design participation comes back to haunt contractors is when a design element results in either bodily injury or property damage. These may happen during and even after construction is finished. For instance, wet lumber may contribute to mold growth which makes building occupants sick. Or, if a contractor doesn’t catch mistakes made by subs, and a portion of a building fails because of it, the contractor could find they’re on the hook for repairs and delays.
How to Get Coverage
You can get professional liability coverage in several ways. You can add it to your general or umbrella liability policy, get it as a stand-alone policy, or buy it specifically for a project.
If you add it on to your general or umbrella policy, it’s usually on “an occurrence” basis. You can get higher limits at a lower cost this way. On the other hand, you’ll face more restrictions on what it will pay for.
When you buy the policy stand alone, it covers your own damages and those of the people you hire. These policies will also cover any in-house design mistakes, design delegation, and faulty subcontractor work under a construction management contract. Pollution coverage also figures in here.
In the case of large and complex projects, you might find yourself faced with accepting a professional liability policy purchased by a project owner. This coverage may be valuable if you and subcontractors are named, there is no “insured versus insured” exclusion clause and there is a document specifying how the premiums will be shared.
General Design Risks
One key aspect to keep in mind on design-build projects is that you might face risks if the design side isn’t adequately covered. If the designer you hire doesn’t have enough professional liability to cover all the damages, you’ll likely have to make the work good. Keep in mind design professionals don’t always carry high enough limits to cover all risks. Without a professional liability policy covering subcontracted design professionals, you might consider “protective indemnity coverage” for established losses you might face due to poor design.
You’ll have other notable considerations when considering covering yourself for design errors. The design side policy will only cover losses stemming from negligence. Their work only has to stay above a certain level of care. Therefore, you end up with all risks that don’t arise from negligence. The design professional’s policy pays based on “claims made and reported.” If they drop their policy before the claim gets made, there is no coverage.
If you liked this article, here are a few eBooks, webinars, and case studies you may enjoy:
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