The state of the professional liability market for contractors includes both challenges and opportunities. While the market is generally stable, there has been a recent increase in the severity of claims which has increased the costs of settling them. Today claims regularly take one year or longer to finalize. Added pressure is placed on the market in the form of higher deductibles, with additional premium increases dependent largely on the project decisions made by contractors.
Demand is high for contractors’ professional liability with a robust market taking shape. More of today’s contractor submissions require certain types of coverage such as Errors and Omissions (E&O) Insurance based on owner requirements. Policies are available to address professional liability and pollution exposures, among other options. The contactor field is also positively impacted by new technologies like 3D modeling and virtual reality.
These opportunities exist in part because the world has changed since the COVID-19 pandemic. Consumer buying trends were already evolving away from the construction of shopping malls and movie theatres and toward constructing data, logistics and distribution centers, and life sciences headquarters. Finding the right policy to protect contractors operating not only in construction but other trades is as important today as ever before.
The current market status for specific policies varies and Burns & Wilcox professionals are identifying consistent trends including several below.
More demand for non-general contractor artisans
There is a noticeable uptick in market demand for artisan contractors, such as HVAC experts, painters, electricians, and more. They are more likely to purchase coverage because of owner requirements but an increase in claims has motivated many of these contractors to actively seek professional liability coverage on their own.
Exposure is an issue for this growing class of contractors. Faulty workmanship for installation and maintenance projects is a constant concern, so the market has identified the need for artisan contractors in many ways and has updated form language to help address the increased demand.
Pros and cons identified with different contractor delivery methods
The process for a traditional design, bid and build (DBB) delivery method provides contractors with more opportunities for transparency and a fair bidding process, placing the appropriate amount of responsibility on owners to make educated decisions. It also encourages contractors to only bid on projects in which they are highly qualified.
The drawbacks of the DBB process include longer timelines for completion and it often causes construction challenges.
Submissions for design, build and delivery (DBD) projects allow the contractors to work together with architects. They can bid on the project while design is ongoing which often leads to a lower cost for owners while identifying contractors as the one main point of contact. Some owners though remain less comfortable with this approach.
Keeping the construction manager involved in the bid from start to finish can help further strengthen relationships among owners, designers, and contractors. Communicating needs and expectations remains important so that the design phase remains on budget and on schedule. Having clear lines of communication also helps increase the chances that major areas of exposure are covered by appropriate policies.
Justifying the need for Environmental coverage
Every account has environmental exposure, even though many clients may not understand the potential threats that exist. Simply put, many contractors would benefit from purchasing a contractor’s pollution liability or contractor’s professional liability policy. Environmental-related claims are increasing for various reasons ranging from more stringent policy restrictions and carefully worded terms and conditions to social inflation.
Despite this, the environmental space has the capacity and plenty of aggregate limits. Rates have remained relatively steady and are affordable compared to other sectors. Still, the rising costs of other premiums may increase the chances that a client will pass on environmental coverage to “save” money. For many, the value is hard to gauge.
Brokers and agents should remind clients that the absence of loss does not mean the absence of risk. With environmental claims increasing, the likelihood that such policies are needed to protect your insured assets rises as well. One important feature to emphasize is that contractors’ pollution liability coverage often will provide extra protection that general policies do not offer since many professional liability policies have exclusions or limits. The result is a hard market in other professional liability sectors that leads to a soft Environmental market.
Professional lines are experiencing carrier churn
Numerous carriers are both entering and exiting the professional lines space, which is experiencing dealing with more risks from the residential subsector. Condominiums and apartments in particular are witnessing more active claims activity. Meanwhile, supply chain issues and labor shortages continue to stress the construction industry in general.
Premiums are mostly stagnant at 0 to 10 percent annual increases, although certain types of coverage, such as infrastructure, can be difficult to write. Brokers can better address contractor insurance needs when they have a picture of the full scope of services that the contractor offers, so more informed decisions aimed at protecting assets can be made.
One of the best ways to help a contractor understand the benefits of professional liability and related coverage is to provide examples of how peers dealt with unusual and/or costly exposures. By providing such claims examples, the potential for financial issues becomes real and relatable with more direct knowledge around the financial impact of exposures.
Here are three recent claims examples within the contractor sector:
- A contractor used unlicensed stock images in marketing materials that were discovered as copyright infringement. The client’s E&O policy provided the necessary coverage for advertising and media liability to help protect its interests against this charge.
- Accusations of budget and vendor mismanagement led to individual contractors being sued by a construction manager. While that situation is still pending, even a positive finding on behalf of the client won’t prevent frivolous costs from building up over time, which can be disastrous for a small business.
- A mechanical contractor installed an HVAC incorrectly in a senior living facility that thus far has caused an estimated $350,000 in mold damage and mitigation.
The second tip for brokers is to become extremely knowledgeable in specific classes of business or sectors within the contractor field. That can include both construction and artisan sectors, such as plumbers and electricians.
Third is having a clear understanding of your contractors’ arrangements. Brokers will need to know what a project is expected to entail after 30 or 60 days or what and where the next project is.
Finally, brokers should identify opportunities for additional coverage their clients need or may benefit from. One such option is cyber and privacy liability insurance which is required by carriers of most contractors and artisans working for general contractors. Cyber liability capacity is tightening and premiums are rising, but it is still an affordable and necessary policy given the increasing number of threats.
Other types of coverage may also be necessary, such as faulty workmanship. Additionally, Employment Practices Liability (EPL) policies for harassment and discrimination are in higher demand with claims growing. That uptick in EPL is not just limited to the contractor sector but many other industries as well. Contractors involved in building design might benefit from Manufacturing Directors & Officers.
Finally, Burns and Wilcox can package coverage for manufacturers and construction contractors in the site solution, professional liability and EPL spaces. Our professionals have the relationships, technology, and expertise to help brokers and agents get the support they need – no matter the status of the market.
Contributors: Derek Kilmer, Associate Managing Director, Broker, Professional Liability, Burns & Wilcox; Erica Rangel, Manager, Professional Liability, Burns & Wilcox; Gina Jones, Vice President, Director of Environmental Programs, Burns & Wilcox
This commentary is intended to provide a general overview of the issues contained herein and is not intended, nor should it be construed, to provide legal or regulatory advice or guidance. If you have questions or issues of a specific nature, you should consult with your own risk, legal, and compliance teams.