7 Construction and Environmental Liability Coverage Trends as Identified by RT Specialty

Demand for construction and environmental professional liability products is expected to rise this year as construction activity rebounds from the impact of the COVID-19 pandemic.

By: Joel Berg | March 5, 2022

After years of a flat market, carriers are finally boosting premiums for contractors professional liability coverage, according to a 2022 market update by Chicago-based wholesale brokerage firm RT Specialty.

That was one of the more prominent conclusions in the firm’s update, which examines the latest trends in environmental and construction-related professional liability insurance, according to Joey Nawa, vice president of RT Specialty’s environmental and construction professional practice.

Carriers had been pushing rates lower to boost market share, Nawa said. But in the face of significant claims, as well as a general increase in premiums across the board, leading insurers are turning the corner on contractor’s professional liability.

Carriers across the marketplace have predicted that contractor’s professional liability rates could rise between 2% and 5%, though general economic inflation could drive rates higher, Nawa said.

“As a result of inflation, it may be more costly to defend a claim. If the cost to defend a claim increases, the cost to purchase an insurance policy may likewise increase.”

RT Specialty’s update also anticipates an uptick in claims this year across the basket of policies covered in the update.

In addition to contractors professional liability, they include pollution liability, pollution legal liability, architects and engineers professional liability, owners protective professional indemnity and real estate developers professional liability.

Demand for the products is expected to rise this year as construction activity rebounds from the effects of the COVID-19 pandemic.

However, higher levels of activity can potentially create greater exposure, Nawa said.

The risks are compounded by the general labor shortage, which could mean contractors and designers are leaning on less-skilled, less-experienced workers requiring heightened oversight and compressed timelines. Supply chain challenges, meanwhile, can shorten the time frame for getting projects done.

“The risk manager portion of my brain would say, depending on the particular facts and circumstances of the insured, value in these coverages may only escalate with the economy and labor market in their current state,” Nawa said.

Contractors also face rising environmental liabilities, particularly as regulators focus on pollutants such as PFASs and PFOAs, so-called forever chemicals that do not break down in nature, Nawa said.

Many project owners increasingly require coverage, he added.

Here is a closer look at RT Specialty’s forecast for each coverage line.

1) Contractors Pollution Liability

New carriers are expected to enter the market for the policies, which cover pollution conditions arising from contracting operations performed by or on behalf of the insured party.

The result should be stable rates for companies with clean loss reports.

In 2021, some carriers added exclusions for communicable diseases on top of existing restrictions on coverage for mold and bacteria. But some carriers did not, the report said.

2) Pollution Legal Liability

Demand for the policies has soared as the U.S. economy emerges from the pandemic, according to RT Specialty. The $1 trillion infrastructure bill signed into law last year will only spur greater demand.

Policy terms are unlikely to change in 2022 but some sectors could face greater scrutiny from underwriters. They include industrial, hospitality, habitational, health care and energy.

3) General Liability/Pollution Legal Liability

The combined policies are designed for chemical manufacturers, distributors, waste management facilities and other manufacturers of environmental products such as storage tanks, pressure vessels, pumps, valves and pollution control equipment.

The market for the policies tightened in 2021 due to the emergence of new contaminants, rising litigation, costly natural disasters and the overall impact of COVID-19.

Insurers are expected to respond with more exclusionary endorsements related to pollutants such as PFASs.

4) General Liability/Contractors Pollution Liability/Professional Liability

The combined policies are tailored to the needs of environmental contractors, waste transporters, environmental consultants and contractors in the oil, gas and energy sectors.

Many carriers have adopted a conservative underwriting approach to the policies, according to RT Specialty.

And that is expected to continue into 2022.

Premiums, meanwhile, could rise 5% to 25%, depending on the degree of exposure and line of coverage, RT Specialty added.

5) Architects and Engineers Professional Liability

Rates had been falling for years for architects and engineers professional liability. While some careers have begun raising premiums in select segments, the market overall is expected to remain stable, according to RT Specialty.

Areas where the market may continue to tighten include project-specific professional coverage, coverage extensions for cyber and privacy liability and firms specializing in geotechnical, structural and civil engineering.

Carriers also are hesitant when it comes to firms active in residential design, particularly for condominiums and single-family homes, Nawa said.

“It’s really tough for those companies to meet the very high demands of their clientele and very often it leads to claims under their insurance policies.”

6) Owners Protective Personal Indemnity

The policies gained popularity in 2021 as a lower-cost alternative to professional liability policies for insuring catastrophic errors in the performance of design and other professionals, according to RT Specialty.

The firm expects the product to continue attracting interest this year as markets tighten and rates rise for traditional professional liability products.

Rates for owners protective personal indemnity policies should remain competitive, the firm added.

7) Real Estate Developers Professional Liability

The policies combine features of professional liability insurance for design professionals, contractors, real estate professionals and owners, according to RT Specialty.

Spurring demand in 2022 could be a proliferation of requirements from lenders and investors seeking to mitigate risk.

Buyers, however, should be aware of coverage disparities among policies, RT Specialty said. The firm also suggested paying attention to how carriers respond to claims.

Like businesses in many other industries, insurers may often be short-handed, Nawa said.

“The amount of turnover that we have seen has really caused things to slow down in terms of a servicing standpoint.”

The slowdown is, in many instances, impacting claims but also proofs of insurance, which contractors typically need before setting foot on a job site, Nawa said. &

Joel Berg is a freelance writer and adjunct writing teacher based in York, Pa. He has covered business and regulatory issues. He can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.