A fundamental shift in the contractor-controlled insurance program (CCIP) market is insurers’ growing appetite for commercial projects of significantly smaller value than such wrap-up programs have traditionally covered.
Construction projects no longer have to carry values in excess of $200 million to attract CCIP underwriters, market executives say. Projects valued at $25 million—and sometimes even substantially less than that—are now eligible for wrap-up coverage.
Unlike in much larger construction projects, however, the coverage for these smaller jobs is being underwritten by surplus-lines insurers.
In addition, general contractors for these smaller projects can wrap up only General Liability (GL) risks, whereas a CCIP typically provides the insured’s GL, plus Workers’ Compensation and Umbrella coverage.
The GL-only CCIP has been available for residential builders for about a decade, but it is now available to commercial contractors. And general contractors like having the option available to them.
“We’re seeing the use of CCIPs increasing dramatically” by contractor clients of all sizes, says Mark Toglia, senior vice president and Northeast regional director for the construction-services group at Aon Risk Solutions.
The desire of commercial-project general contractors to wrap up at least their General Liability insurance stems in part from the enactment of anti-indemnification laws in several states, market executives say.
Subcontractors, unhappy about long-running contractual risk-transfer obligations that force them to indemnify and insure general contractors for negligence, have fueled the enactment of those laws, notes Jack Gibson, president and CEO of Dallas-based consultant International Risk Management Institute Inc., which provides resources including reports and educational conferences designed for risk-management, insurance and legal professionals.
States that have passed anti-indemnity laws are California, Colorado, Kansas, Louisiana, New Mexico, Oregon and Texas. Those laws “make CCIPs more attractive,” says Jack Probolus, marketing director for wrap-ups at Liberty Mutual.
“From a contractor’s point of view, [these laws] definitely push them” toward a CCIP, agrees Scott Jensen, vice president of AmWINS Brokerage of Florida in Satellite Beach. AmWINS, which specializes in GL-only wrap-ups, typically places coverage for contractors that generate $25 million to $100 million of annual revenue.
Another advantage of GL-only CCIPs for general contractors is that even if the job is too small for a full wrap-up program, they can reduce at least their General Liability insurance costs. In addition, the deductible for a GL-only CCIP is a fraction of that for a full CCIP.
Dave DeLaRue, Dallas-based senior vice president in the national construction practice at Willis North America, says the typical deductible for a GL-only CCIP is $25,000 but that he has seen deductibles as low as $10,000 for small projects.
Deductibles for full wrap-up programs run from $250,000 to $1 million, market executives note.
REPUTATIONS WORTH THEIR WEIGHT IN RATE
Due to several factors, including lower investment returns, construction insurers have pressed for higher rates over the past six to nine months on CCIPs.
Depending on the region of the country, rate increases for contractors seeking their first CCIP—which are greater risks, as their results are not proven—are 10-15 percent higher than several months ago, says broker Michael Hastings, Atlanta-based national project-risk practice leader in the U.S. construction practice for Marsh Inc.
But those contractors with existing CCIPs find themselves in a good bargaining position come renewal time.
Contractors renewing their wrap-up programs likely will be able to renew at expiring rates or at most just a few points higher—around 2-5 percent—Hastings says, as their reputations give them the leverage to shop their risks around to different carriers.
“Everyone’s saying rates have to go up, but there is [insurer] competition for a reduced number of projects,” he adds, which is having a dampening effect on increases.
Broker Michael Campo, Kansas City, Mo.-based senior vice president and team leader in the construction-services group at Lockton Cos. LLC, says rates are flat to even slightly lower for renewals.
“The last few wrap-ups I’ve done, I’ve seen rates come down,” DeLaRue concurs. “Everyone is talking of rates firming, but no one is doing that. There’s always a guy who’ll say, ‘We’ll do this a little bit cheaper.’”
THE CONTRACTOR PERSPECTIVE
Indeed, large contractors with significant CCIP experience report stable and even somewhat lower rates.
Ed Littleton, vice president of risk management at commercial-construction contractor Balfour Beatty in Dallas, says his company has enjoyed favorable rates since 2008 due to the competition among insurers for contractors that have been successfully winning construction bids in a tough economic climate.
In Milford, Conn., Turner Construction Co. expects to renew its CCIP at expiring rates, which have been “pretty consistent” for years, says Chris Smith, vice president and managing director of account and wrap-up operations at Turner Surety & Insurance Brokerage Inc. The brokerage, an affiliate of Turner Construction, places insurance for the giant contractor as well as for other contractors and project owners.
For Edmonton, Alberta-based PCL Constructors Inc., which is in the process of renewing its three-year rolling CCIP, a rate reduction looks as though it will be “pretty tough to negotiate,” says Jim Mitchell, vice president of risk management.
However, Mitchell says he expects to lower PCL’s retention while maintaining its expiring rate.
Although CCIP insurers are largely not pressing for changes in coverage terms and conditions, Mitchell says his underwriters are now seeking more information than during past renewals, including additional details on the company’s loss history and management-succession planning.
EXCESS INSURERS SEEK TOP DOLLAR
When it comes to excess coverage, it’s a different pricing story.
The greatest pressure for additional rate, market executives say, is coming from lead excess insurers, which typically offer between $10 million and $25 million of limits, compared to the $2 million per occurrence/$4 million aggregate coverage typically provided by primary insurers.
Because there are fewer insurers writing excess than primary coverage—and because of those much-larger limits—excess insurers want additional premium “for putting their capital out there,” says Aon’s Toglia.
So contractors face 5- to 10-percent rate hikes for the first $25 million of excess coverage, Toglia adds.
IN EMPIRE STATE, HIGHER RATE
CCIP rates, of course, can be higher in certain cities, most notably in New York—where large jury awards for injured workers who sue their employers have pushed up insurance costs there astronomically, market observers say.
Insurance costs in New York represent 7-12 percent of construction value, compared with a more typical 2-4.5 percent elsewhere, according to Smith of Turner Surety & Insurance.
Some insurers don’t allow contractors that generally operate outside of New York to use their CCIPs for the occasional jobs they have in the Empire State without paying additional premium and possibly bumping up their deductibles, says Willis’ DeLaRue.
Yet regardless of location, obtaining CCIP coverage for first-timers is not nearly as easy as it was in the past, adds Hastings: “What insurers aren’t doing is writing a CCIP for any contractor that can spell ‘CCIP.’”