Mercator Risk Services | Project Insurance

E&O: Errors & Omissions

Project Insurance

Opportunities

Project insurance for the architects and engineers ("A&E") segment can be a significant opportunity for new sales, but only a few markets currently provide this coverage. Project insurance is a small segment of the architects and engineers (A&E) market, but is growing in importance. Pressure to use project policies comes from owners of the project, design professionals and A&E underwriters. For the right circumstances, project coverage can provide your design professional clients (architects and engineers) with a creative solution to a difficult coverage problem.

Although they are not annually renewable, project insurance policies provide unique solutions to A&E clients and are a great opportunity for new business. They are high limit, multi-year policies with large premiums.

What is Project Insurance?

Project insurance policies typically provide professional liability (errors and omissions or E&O) coverage to a group of design professionals for claims arising from a specific insured construction project. Coverage is in force for the construction period plus one or more years after completion of the project. This type of policy covers all design exposures for the life of the project under a single limit for a pre-set cost. For purposes of claims arising from the covered project, the project policy normally replaces the design professionals practice policies (see Architects & Engineers).

Project policies work best on larger, more complex projects where the design team is composed of a lead design firm and a number of additional design specialists of varying sizes.

Why Project Insurance?

Project insurance offers a series of advantages to the project owner, members of the design team, and to underwriters. The owners benefits can include:

All design professionals are covered for the project
The project has a dedicated limit of insurance, therefore there is no erosion of limits from claims arising from other projects
The cost of professional liability coverage for the design of the project is known at the start
Claims from the project are handled by a single insurer, so there is no issue with allocation of responsibility among the design professionals
The policy is in force beyond the completion of the project, so there is no need to ensure the annual renewal of the project design professionals practice policies
A single policy provides an opportunity for the owner to utilize Risk Management practices for the design professionals engaged on the project

With this coverage approach the project owner is ensured that an adequate policy limit will be maintained for the life of the project, and that none of the design groups policies will be non-renewed or eroded from claims on other projects.

Design Professionals can also benefit from a project policy:

Design exposure for the project is removed from their practice policy
If large limits are needed for a project, the project policy will eliminate the need to purchase higher limits under their practice policy.
The lead design firm can be sure that protection exists for the smaller firms involved in the project to the amount of limits provided
Since the cost of a project policy is typically paid by the owner of the project, the insurance cost is eliminated for the design firms
Small design professionals without E&O coverage do not have to purchase their own coverage to participate on the project

For particularly complex projects, underwriters benefit from being able to specifically underwrite the project in question. However, the higher limits and long length of the policies provided offset this benefit. Therefore, project insurance can be difficult to obtain at a reasonable price, particularly for larger or more complex projects.

Underwriting Project Insurance

Coverage is typically provided on a claims-made basis, although policy forms vary significantly. Limits and deductibles vary with the size and type of the project.

Since project policies cover the larger, more complex projects, underwriting project insurance is difficult and coverage can be costly. Because underwriters are providing coverage to a group of design professionals over a long period of time with a large limit, project insurance can be difficult to obtain. Underwriters will want to review a range of information about the project and the firms involved.

Some projects present such significant design hazards that underwriters will not include the projects under design professionals practice policies. Therefore, project policy underwriters are constantly reviewing submissions with a wary eye, looking out for adverse selection. As the A&E market tightens, more projects may end up requiring project insurance. The result will be higher rates and more restrictive terms for these type of projects.

Pricing for project insurance varies widely depending upon the size and complexity of the project, the design professionals involved and the terms being offered. However, pricing for project insurance, where available, has increased significantly over the last few years . Premiums are based on construction value or design fees, and may be adjusted if the scope of the project changes. Premiums are payable up front or in annual installments.

Using Project Insurance

Because project insurance utilizes a unique approach to cover a group of professionals, the use of project insurance in a specific situation should be considered with the following in mind:

Deductible allocation the obligation for any deductible losses should be defined early on by the owner or members of the design team. Deductible obligations can be picked up by the owner, by the lead design firm, or allocated among the design team. Which ever way is chosen, the method should be determined in advance.

Project Size Project policies are not typically cost effective for small or simple projects. A rule of thumb is to consider project coverage on projects with a construction value of more than $2 million.

Retroactive Coverage In some cases the project policy is put in place after the design work has begun. If so, retroactive coverage should be requested for the design period prior to the effective date.

Practice Policies many practice policies contain an exclusion similar to the following:

If any Insured works on a project where there is a project specific policy in force, then any claims arising from such project are excluded by this policy.

Therefore, it may make sense to endorse the project onto the practice policy to ensure coverage for the period after the project policy term expires.

Owners Protective Coverage

Another form of project insurance, called Owners Protective, is also available in very limited situations. This type of policy provides similar coverage to a more standard project policy with the following exceptions:

Owners protective coverage is for the benefit of the project owner
It is excess of the design professionals practice policies
Premiums tend to be less expensive than project coverage
Underwriting is more difficult, and coverage is more customized
Each practice policy may need to be endorsed to remove or adjust the project policy exclusion
Provisions in the contracts between the owner and the design professionals, particularly provisions limiting liability, may impact coverage

Note that many practice policies contain an exclusion for claims where a project policy applies (see above). The application of this exclusion to owners protective coverage is unclear.

Mercator Risk Services Inc. ("Mercator" or "Mercator Risk Services") provides professional liability for a wide range of design professionals, including project insurance. Please let us know your clients needs and we will provide you with information and assistance with your particular situation or account, and professional liability coverage.

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