Project Loss Insurance: The Next Great Insurance Innovation?

Few industries face more risk on a day-to-day basis than construction. The insurance industry has adapted over time to cover damage to the project itself, cyber-attacks, faulty workmanship and even subcontractor defaults. One thing the industry hadn’t yet evolved to do was insure the risk of financial loss on a project. While a bond may protect a project owner against the failure of a contractor as a result of these things, there has not been a product designed to provide protection for the contractor’s loss of profits. After identifying this gap, Travelers Insurance developed this product and plans to release it in the final months of 2020. Through early conversations with our clients, we have discovered there are a few main points they want to understand. WHAT DOES IT COVER? The policy is designed to cover financial loss due to circumstances that were mainly considered uninsurable:

• Bad Bid Estimates
• Poor Production
• Subcontractor Failure/Default
• Delay Damages
• Cost Increases
• Manufacturer/Supplier Failure
• Site Conditions (or weather on a limited basis)

WHAT IS NOT COVERED? As with most insurance policies, understanding what the policy actually covers can only be done by understanding what’s not covered. While the courts will make the final determination on how a policy is interpreted, it appears as though the exclusions are limited to a few general categories:

• Exposures that should be covered by other insurance (bodily injury and property damage, design errors, cyber liability, employment practices, asbestos, mold, physical perils to the project)
• Government Action, Fines or Penalties, Pandemics
• Virus or Microorganisms
• Interruption or Failure of Infrastructure
• Nonpayment by Project Owner

That is not a full list of exclusions but are likely the more common ones. A full list of exclusions can be reviewed in the policy. HOW DOES IT WORK? This policy is designed to be a life vest that helps you get back to shore and not a lifeboat that keeps you afloat for years.

• Provides coverage across all jobs and not just the “high-risk” jobs
• Interim payments are made to the contractor during the job
• 6-figure deductibles or higher
• Percentage of the claim shared with the contractor, likely as low as 25%

WHO IS IT AVAILABLE TO? Fortunately, companies don’t already have to be a Travelers client to purchase this coverage. This product is available to a broad range of contractors including general building, trade/subcontractors and infrastructure contractors. The company is expected to be able to produce a Work in Progress report and have strong internal financial controls. At this time, Travelers is focused on mid-sized companies. Whether a bad estimate, poor project management, subcontractor defaults or job site issues like unforeseen ground conditions, there are many reasons why construction companies should explore Project Loss Insurance. If you have any questions, please reach out to anyone on your VFCA service team.