Why are construction managers difficult to insure?
When building or remodeling a house, homeowners often will turn to their construction manager to assist in overseeing building, recommending and selecting bidders, and securing permits. The construction manager will likely be faced with a multitude of tasks. And for that reason, those professionals can be challenging to insure. In California, there are but a handful of markets willing to write the class.
Construction managers (CMs) belong in the “design professionals” professional liability category. Those professionals can be licensed architects or engineers, contractors, or simply professionals who have undergone some specific training and/or certification in construction management and possess related work experience within the construction industry.
Some construction managers may be certified; associations, such as the Construction Management Association of America through their Construction Manager Certification Institute, offer certification programs. While not usually required, CM certification can improve coverage or terms.
Not all CMs are built alike
There are basically two types of construction management services: agency and at risk. When the CM offers his or her services for a fee without an entrepreneurial profit interest and is responsible only to the owner, acting in the owner’s best interest at every stage of the project, it is considered Agency CM.
The At Risk CM delivery method commits the CM to deliver the project within a guaranteed maximum price (GMP), bringing an entrepreneurial element to the project. Under At Risk, the CM is a consultant to the owner in the areas of development and design, and has a role comparable to a general contractor’s during the construction phase. At Risk CMs have to protect themselves in the contract and agreement for services because there is a guarantee on the table.
One carrier defines CM services as: “Professional services performed by the insured during a construction project, for an owner or design professional that may include advice or recommendations on planning, design, scheduling of construction, and, the overall coordination of the separate prime contractors and construction activities.” Another carrier defines CM professional services as: “Construction Managers act as the owner’s representative on a construction project, coordinating the efforts of the design elements and construction trades to produce the desired result.”
Basically, the CM’s goal is to successfully complete the project. A CM’s skills must include management techniques that must be applied effectively to the various phases of the construction project. Professional services may start with the pre-construction phase, which may include overseeing the selection of design professionals; soliciting, reviewing, recommending and selecting bidders; securing governmental and municipal approvals and permits; and selecting prime contractors. The CM is usually involved in scheduling contractors and subcontractors, and suppliers, as well as supervising and inspecting construction activities. In some instances, the CM implements and coordinates safety programs. A CM may take on financial duties, such as cost estimates, preliminary budgets and cost tracking.
CMs plan, direct and coordinate a variety of construction projects, including residential, commercial, mixed retail and condominium, and industrial. They are generally considered to be on call 24 hours per day to handle possible delays associated with inclement weather or emergencies onsite.
The key is to have a complete copy of the contract that governs the project to understand and ascertain the parties to the contract. It is also important to understand the responsibilities and potential liabilities of the CM–not every CM activity may be insurable.
Examining the underwriters
The appetite of carriers interested in writing construction managers varies. Some want strictly commercial projects. Others write a mixture of retail and condominium work. Some handle residential-only projects. Some carriers require a licensed architect or engineer on staff to offer coverage on an architects and engineers (A&E) policy form, while others will entertain the unlicensed CM under a miscellaneous professional liability form attaching a contingent bodily injury and property damage (BI/PD) endorsement for claims arising out of the insured’s professional services as CM, as defined under the policy.
An incident-sensitive form or an awareness endorsement, and a bilateral extended reporting period option, should be negotiated whenever possible. Minimum premiums, capacity and deductible and retention options vary depending on the services rendered, type of project, location and project cost.
A full review of the contract for services is a necessary part of the submission, along with a thoroughly completed A&E application and supplement for construction-related services.
The underwriting exposure consensus for that class of business seems to be cost overruns, as “fixed price” contracts appear to be the owners’ preferred contractual form. CMs under pressure to meet a completion date and a price deadline sometimes cut corners, take short-cuts and use inferior materials or labor jeopardizing the project as a whole.
Given the variety and number of professional services rendered by CM’s, coupled with the probability of multiple claims emanating from a single project, it is no surprise underwriters are not eager to jump in and offer coverage.
Rocio L. Orta is a professional liability underwriter who heads the professional liability division at WSS-Pasadena, Calif.