The North American Industry Classification System (NAICS) reports that there are around 1.3 million U.S. contractors with annual revenues of less than $5M. While virtually all are protecting their businesses with General Liability, Workers Compensation, and other insurance coverages, many have failed to consider purchasing professional/pollution liability insurance, even though both are not covered under a typical commercial general liability (CGL) policy.
Contractors often assume they don’t need professional liability coverage, especially if they don’t sign off on structural design or employ professional engineers or architects. But in reality, contractors are facing increased professional liability exposures as the traditional construction delivery model evolves and the lines of responsibility between contractors and design firms blur. There are an ever-increasing number of construction projects utilizing design/build as a project delivery method, forcing contractors to take on design liability, either directly or vicariously, which increases their professional liability exposure. And, this trend isn’t impacting only large scale projects. The increase in design/build as a means of project delivery is influencing the expectations of project owners for all types and sizes of builds. Owners are now looking for a single point of responsibility so that they have only one entity to deal with if a project issue arises, and most of the time, that entity is the contractor.5 Fortunately, professional liability insurance is available to address potential coverage gaps and help protect contractors from the risks that accompany industry changes.
WHAT IS CONTRACTORS PROFESSIONAL LIABILITY INSURANCE?
Contractors Professional Liability insurance covers contractors and building professionals for construction errors related to consult, design and building services not covered by the general liability policy. It can include coverage for mistakes or errors made by the contractor as well as those made by third-parties hired by the contractor like architects, engineers, or other vendors.2 This is important because contractors often hire third parties to address various aspects of a project such as engineering assessments or design as well as subcontractors with the special skills needed to handle electrical needs, plumbing, or drywall.2
WHY DO CONTRACTORS NEED PROFESSIONAL LIABILITY COVERAGE?
Designing and building a structure can be a complex process involving multiple parties, including designers, architects, building contractors, engineers, artisan contractors, construction managers, and other specialists.2 Construction mistakes associated with performing professional services can result in expensive delays, costly rework, budget overruns, and third-party bodily injury and/or property damage claims. Understanding and anticipating these potential risks can be the difference between a profitable project and one that is tied up in expensive litigation for years.1
It's not uncommon for contractors to think their general liability insurance provides coverage for rework or other errors, but CGL responds to bodily injury or property damage caused by an accident or resulting from the contractor’s work. Typically, general liability policies do not address economic loss or other issues of vicarious liability such as, Indemnity, Rectification/Mitigation of Damages, Faulty Workmanship, or Pollution/Mold Liability. Contractors' Professional Liability insurance can provide the protection a construction client needs when facing accusations of errors or negligent design, engineering, construction management, or consulting services performed by the contractor or on the contractor’s behalf.
ECONOMIC LOSS & PROFESSIONAL NEGLIGENCE
Contractors face significant financial risk when promising to deliver a completed project on time and within budget. For example, if a contractor estimates the cost of a warehouse project to be $2M and a loading platform is later revealed to be inadequate to meet the stated warehouse needs, the required revision can push project costs to $2.5M, leaving the contractor liable for the additional $500K required to replace the platform. Or, if a contractor subcontracts the design of a ventilation system to a mechanical engineer that specifies an inadequate system, the contractor can be held liable to help replace the underperforming system if the mechanical engineer doesn’t carry adequate E&O insurance.1
PROTECTIVE INDEMNITY & FAULTY WORKMANSHIP
While many contractors believe CGL polices cover faulty workmanship claims, the truth is that most don’t cover rectification of errors, and they often exclude damages resulting from defective workmanship, as well as the funds, time, and work hours needed to correct the mistake.5 The Protective Indemnity provisions of a Contractors Professional Liability program can help cover an insured’s financial loss associated with claims by a contractor against another entity providing professional services such as an architect or engineer. Protective Indemnity is designed to function in excess of a subcontracted architect or engineer's underlying insurance, when their insurance isn’t adequate to cover an issue it will step in to defend the contractor and pay the difference in costs if needed.1
RECTIFICATION/MITIGATION & POLLUTION/MOLD
Contractors Professional Liability can also help prevent errors or project issues from growing into bigger problems. Mitigation coverage proactively responds to professional and/or pollution issues that could reasonably lead to a third- party claim against the contractor. If a contractor discovers an error during construction, the carrier advances funds directly to the insured to rectify the error and get the project back on track. This coverage can inspire a faster response to pollution or professional service exposures, helping the contractor stay on schedule and within budget. It also helps maintain a strong relationship between the project owner and the contractor.5
Because pollution is excluded from the general liability policy, an add-on is typically needed to cover pollution arising from construction activities or operations. Policies typically include coverage for transported pollutants, mold, emergency response, and restoration costs. Mold losses, in particular, can impact a variety of different contractors, including roofers, window installation contractors, HVAC firms, and plumbers, among others. Mold is troublesome, because it often grows in hidden areas - behind walls, under carpeting, or inside HVAC ducts – often not noticed immediately, and results in damage and liabilities that can be catastrophic for a contractor without pollution coverage.5
HOW CAN AGENTS HELP?
Agents dedicated to doing right by their clients should make it a point to proactively communicate with insureds about the general liability policy exclusions in order to help them understand their risks around pollution, faulty workmanship, and the potential for economic loss claims. In an increasingly litigious society, agents and brokers should also be discussing the changing project landscape, the scope of services provided, and the contractual arrangements around projects to better understand the level of each client’s exposure. This is especially important for the rising number of construction firms that are now bypassing outside design professionals by adding their own in-house architectural, design, or engineering services.5
As the construction industry evolves, navigating changing risk profiles can be made easier by working with the right wholesale partner. CRC Group maintains strong relationships with the markets that provide Contractors Professional Liability coverage and know which market is the best fit for a design/build firm, artisan contractor, contract manager, or other building specialist. CRC’s producers grasp the subtleties of the various forms available and work hard to obtain the best product at an optimal price for every client.
Minimum premiums typically start around $2,500 - $5,000 with an average retention of $5,000 for $1,000,000 in coverage, depending on the class of business and nature of operations. When evaluating a submission, underwriters generally require:
- A completed application
- A statement of qualifications or a company website link to obtain a clearer picture of the insured’s level of experience
- 3-5 years of CGL loss history to determine the likelihood of a potential claim
- A project list including the largest 3-4 projects completed over the last 12 months
- If an insured has experienced a loss, the agent should provide an explanation and the steps taken to mitigate the risk for future projects
When something goes wrong at the construction site, the subsequent claim can cost $1M or more. Just one lawsuit can have a devastating impact on a small to mid-size contractor, HVAC company, design firm, or other party responsible for delegating design elements or managing construction - making it a smart move to add Contractors Professional Liability to your current risk management program. Even the best of contractors are not immune to mistakes. Concepts or designs don’t always work out as planned. However, even if you haven’t made a mistake, a client can still file a lawsuit. In such a scenario, protecting your reputation will mean responding to the suit and incurring defense costs. When that happens, Contractors Professional Liability coverage will typically cover legal fees, indemnify the third party, and pay for any necessary rework.
There is truly no substitute for partnering with an experienced wholesale specialist that understands the marketplace and has the expertise to address the challenges around contractor exposures. CRC is known as a resource and collaborative partner that can help your clients protect their business assets as well as their hard-earned reputations. Contact your CRC Group producer today to learn more.
- David Finneran is an Assistant Vice President and Broker with CRC Group’s Boston, Massachusetts office where he specializes in the areas of Pollution, Professional Liability, and Product Recall.
- Professional Liability: Are Contractors Adequately Protected?, IRMI, December 2000. https://www.irmi.com/articles/expert-commentary/professional-liability-are-contractors-adequately-protected
- Contractors Professional Liability Insurance, Investopedia, July 2021, https://www.investopedia.com/terms/c/contractors-professional-liability-insurance.asp
- New Construction Spending in the United States from 2005 to 2019 with Forecasts from 2020 to 2024, Statista, 2020. https://www.statista.com/statistics/226368/projected-value-of-total-us-construction/
- Insurers Plan to Continue Hiking Liability Rates for Architects, Engineers, Insurance Journal, February 24, 2021. https://www.insurancejournal.com/news/national/2021/02/24/602407.htm
- Contractors Should Work with Their Agent or Broker to Be Sure They Make an Informed Decision on Whether or Not to Buy, The Rough Notes Company, Inc., March 29, 2021. https://roughnotes.com/contractors-professional-pollution-liability/