Contractors not buying into professional liability Ames & Gough survey finds as many as 50% of contractors not covered

Contractors, project owners, and project finance professionals are increasingly interested in the niche market of contractors’ professional liability insurance (CPLI), according to a recent survey of insurers writing the business. Yet, less than half of all contractors in need of the coverage are buying it.

The “Contractors’ Professional Liability Insurance Market Survey,” conducted by Ames & Gough, found that most insurers offering CPLI believe as many as 50 percent of contractors needing coverage don’t buy it because they don’t clearly understand the risks and coverage would respond to those risks.

“As the delivery systems for providing design and construction services change, contractors are increasingly taking on risks that some might have previously considered to be the domain of architects and engineers,” said, Dave Collings, partner at Ames & Gough, who headed up the survey. “Whether it be the increased use of design-build, expansion of construction management approaches, or the burgeoning utilization of building information modeling (BIM), contractors must be evaluating their risks in a new way.”

Ames & Gough is a Washington, D.C.-based insurance broker and risk management consultant specializing in serving design and construction professionals.

Size and scope of the market

Ames & Gough asked the participating insurers about the size and scope of the CPLI market, contractor interest in the coverage, growth plans and profitability.

Most insurers responding to the survey were unsure of the market’s size by premium volume, but estimates ranged from $250 million to $1.1 billion in premium.

While most survey participates were not willing to provide detailed information on their premium volume and market share, the survey concluded that Zurich lead the market by a wide margin, followed by Lexington and CNA.

Only one insurer writing CPLI reported that its CPLI book was not profitable, and most expressed interest in growing their CPLI premium volume, according to the survey. The survey found most insurers expect the growth “to come from targeted marketing initiatives focused on particular market segments such as mid-size contractors or specialty subcontractors.”

The survey also found that approaches to developing premium for CPLI coverage varied widely. “Some charge only for specifically defined professional services while others base their premium on total revenues. In addition, many contractors provide incomplete revenue information to insurers frequently resulting in overpaying for coverage,” the survey said.

“I think underwriters are still feeling their way through the process,” Collings said. Pricing will evolve as the market better understands what the exposures are and contractors better understand how to communicate with underwriters, he said.

Collings also told Insurance Journal that there doesn’t seem to be any concern about available capacity for the market. “Policy limits available from insurers exceed $100 million, far more than all but the world’s largest contractors’ purchase,” the survey said.

Collings noted that while there are probably 10 insurers aggressively chasing CPLI business, not all will quote the same contractor. “Most insurers are interested in limited segments of the market,” the survey said. “Depending on the size and type of firm, as few as three insurers may be interested in providing coverage for a given contractor.”

The survey also found that a number of insurers offer multiple options for providing higher limits for specific projects, which is contrary to current perception. However, most insurers will only offer project-specific coverage if their insured is working on the project.

Most risky contractors

The survey concluded that insurance underwriters consider architect or engineer-led design-build projects to be the most risky “professional” exposure for contractors, followed closely by construction management at-risk. “The problem is not so much with the definitions … but with the many complex service delivery variations owners create to meet their needs,” the survey said.

“The main concern that underwriters have is that it is very difficult to distinguish what’s considered ordinary construction means and methods and true professional services,” Collings said. “For some reason, it’s difficult for contractors to fit their exposures into the ways that underwriters underwrite this stuff.”

For example, some projects can start as CM at-risk and then be converted to design-build when the guaranteed maximum price is developed (by assigning the prime architect’s contract to the lead contractor just prior to the start of construction). “This, in turn, affects underwriting and pricing of CPLI,” the survey said.

Collings noted that in CM at-risk projects there may be an entity that looks like a general contractor, but could also provide an additional layer of professional services. “So if there’s a delay, cost overrun or a problem with the project it can be difficult to distinguish,” Collings said. “It’s easier to differentiate when you’ve got a contractor doing construction and you’ve got a design firm doing design and design related services,” Collings added. But when large contractors “mix” services it makes it difficult to separate the risks in an underwriting world, he said. “They like to draw this line and say, ‘it’s ordinary construction means and methods, not professional, I’m not going to cover it,'” he said. “That’s easy to say from an underwriting point of view but when you get to the practicalities of a $100 million contractor doing many different things and delivery projects in many different ways to meet the owner’s needs, it becomes difficult to separate that out.”

The survey also found there is a wide variance in the quality of coverage provided. Collings noted that some insurance companies exclude cost overruns and delays, which is a significant risk in construction. But he added there are other insurance companies that have no exclusions for delays, or cost overrun; some even take a middle of the road approach. “So there’s quite a wide variance in quality of coverage.” Collings added that it’s a struggle for everyone involved — the contractors, underwriters and insurance brokers.

Copies of the survey are available by e-mailing dcollings@amesgough.com

Topics Trends Carriers Underwriting Contractors Construction