Whether you are a contractor, designer, developer, equity partner or owner thinking of constructing or bidding on a large or complex infrastructure project over the past 24 months, you likely are already aware of the escalating cost of project specific professional liability insurance to eye-popping numbers.
You may have thought when you first saw that pricing indication that the number surely was a typo, right? Not exactly. It would not be surprising, in jurisdictions like Canada, to see a carrier provide an indication that your $5 million limit policy is going to cost $4.5 million in premium. For the privilege of paying a retention or deductible of $500,000 on each and every claim.
To say the state of the project specific professional liability insurance market is a nightmare would be an understatement. How did we get here? There are several factors converging and compounding a very difficult position for insurers when reviewing the claims history on large and complex infrastructure projects:
- Significant and multiple 9-figure scale claims on large civil infrastructure projects in North America during and post construction.
- Claims incurred during the design phase – between the time when the fixed contract price is set where design is preliminary or undeveloped and when design is complete post award. Insurance market hardening from 2019 onwards, including insurers entirely exiting the professional liability space.
- Unfavourable case law (for insurers) with respect to professional liability language
These factors have left a barren marketplace with only a few insurers left standing and willing to consider writing large and complex professional liability placements. As a result, rates have skyrocketed and coverage has been severely limited.
So, where do we go from here?
Alternative Risk Transfer (ART) Solutions
This is not the first time the insurance market has exited certain industries, coverage lines, or geographies. The liability crisis of the mid-80s led to tort reforms and tax incentives for self-insuring risks. The aftermath of 9/11 and unavailability of terrorism coverage led to the Terrorism Risk Insurance Act (TRIA) federal backstop for carriers. Currently, many within traditional energy industries are reacting to some insurers publicly exiting their sector and deploying more capacity into energy transition companies.
When the insurance market does not support risks at all, or at a commercially unacceptable cost, it is appropriate to consider an Alternative Risk Transfer (or ART) approach. ART options may include self insuring, fronting, or captive utilization, among others. The intent of an ART solution is to introduce a significant financial incentive – or “skin in the game” – for the construction parties involved in the project. This “skin in the game” exposes these parties to potential losses but may also allow them to benefit from low claims results.
With the current cost of coverage, these incentives translate to millions of dollars which can become a great motivator for construction stakeholder collaboration. In other words, under such structures, construction stakeholders are willing to bet on themselves to manage this risk collaboratively and outperform the results of the traditional professional liability insurance marketplace.
There are several ART solutions available for the project professional liability market which address the current market capacity constraints and can be used to reduce the cost burden of professional liability. Additionally these structures create alignment between the construction and insurance industries through a material sharing of risk.
The Future of Project Professional Indemnity Solutions
While solutions exist for the current project professional liability crisis, the future state of this market may depend on how alternative contract models shape up. More collaborative models are on the rise with the emergence of progressive design build, alliance, and integrated project delivery (IPD). Insurance underwriters will be slow to return to traditional softer market terms and conditions for traditional procurement models. Construction parties that are quick to adopt to these new contractual models and harness their claims data and technology solutions, will be amongst the first to reap the benefits of new professional liability capacity that will bring forward terms at more traditional market levels. The alternative risk transfer approach referenced above is needed at this time of crisis in capacity, but over time, new delivery models, better data, and better use of technology will lead a way back to a more traditional flow of insurance capacity for professional liability. Ensure your organization, and its projects, has access to the current tools and future tools needed to obtain best terms in the marketplace.
Written by Ryan Brown, Senior Vice President, Infrastructure Advisory Leader.
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