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Project Loss Insurance can prevent catastrophic losses and improve surety bond capacity for some companies. Learn more about this product, what it costs and how to obtain it.
Project Loss Insurance (PLI) is a type of insurance written to prevent a catastrophic loss on a construction project. The policy protects against causes of project failure that is normally excluded from other insurance policies and surety bonds. Project Loss Insurance is a trade name for a Travelers Insurance product. This article discusses that product, although it is possible that competitors will provide similar products in the future. The product could also change with time.
Project Loss Insurance protects against risks that are normally difficult to cover. These include the following:
Nonpayment by a project owner could also be considered under the policy. Not only are these items excluded from most insurance, but they are also common causes for contractor failure and Bond Claims.
Project Loss Insurance is not a catch all. It is meant to provide insurance against true catastrophes. Still, the following things are typically excluded from the policy:
The product will sit in excess of Subcontractor Default Insurance or Subcontractor Bonds
Project Loss Insurance works by sharing in a covered loss with a contractor subject to Deductibles, Co-Insurance and Policy Limits. Typically, terms are that the insurance company will pay 75% of a covered loss, after the deductible is met.
Limits depend on a company’s financial strength. Most PLI policies have a maximum limit of $15 million. However, each company’s maximum limit is based on a Contractor’s Analyzed Net Worth.
Analyzed Net Worth is a company’s Total Assets minus their Total Liabilities after the underwriter has subtracted items that cannot be used to pay bills. These items often include Goodwill, Amortization, and receivables from owners and related parties.
A company’s limits are also set by their type of business. These are:
Vertical Contractors (Contractors that construct buildings)
60% of the Company’s Analyzed Net Worth
Horizontal Contractors (Contractors involved in road work)
80% of the Company’s Analyzed Net Worth
Regardless of the Company’s Analyzed Net Worth, the policy maximum will be $15 million.
Deductibles depend on the type of company and their financial strength. Because PLI is intended for only catastrophic events, deductibles are dependent on the Contractor’s Analyzed Net Worth. Standard Deductibles are:
Vertical Contractors (Contractors that construct buildings)
20% of the Company’s Analyzed Net Worth
Horizontal Contractors (Contractors involved in road work)
15% of the Company’s Analyzed Net Worth
Let’s assume a General Contractor specializing in commercial buildings has a $10 million analyzed net worth. They suffer a $5 million Loss on a project due to poor estimating, bad production and delay damages. The Contractor has a PLI policy in place.
Once the contractor’s loss on the project reaches $2 million (their deductible) the policy begins to provide valuable cash available to the contractor. This cash is paid at $0.75 for every 1.00 of loss over the $2 million deductible.
In this example, the PLI policy would provide $2,250,000 cash to the contractor on this project.
You’ll notice that the contractor still suffered a significant loss on the project. However, the policy provides vital cash flow to allow the contractor to finish the project and hopefully continue to remain in business.
PLI helps solve a particularly important issue in Construction. Generally, when a project goes bad, cash and resources are pulled from other projects to fill the void. This can put the contractor in a downward cash spiral that is difficult to recover from. PLI can provide that cash so that a contractor can survive and get back on track.
The cost of Project Loss Insurance is determined by both the type of contractor and their internal controls. General contractors can expect to pay 0.1% – 0.3% of their annual construction revenue.
For example, a General Contractor with good controls in place would pay $100,000 in a year where their revenues were $100 Million or 0.1%.
Trade Contractors can expect to pay 0.3% – 0.5% of their annual revenue.
PLI is billed quarterly based on the contractor’s total construction revenue that quarter.
PLI is underwritten similarly to contract surety bonds. The underwriter will conduct a review of the Contractor’s financial statements including Work in Progress and Completed Contract Schedules.
Further, a thorough review of the Contractor’s estimating, accounting systems and other internal controls are important. An underwriter is looking to make sure a contractor has procedures in place to prevent a loss from happening.
Surety Bond underwriters look at PLI favorably. Having a policy in place to keep the company operating could limit or prevent a bond claim. This could allow bond underwriters to feel comfortable extending more bond capacity to a contractor. However, the product is still fairly new, and many surety bond underwriters may be unfamiliar with how it works or the product’s benefits.
PLI can be a useful product for most any contractor. It can be particularly useful for contractors with above average uncertainty. For example, a contractor who sells and carries a seller note may wish to protect their interests with a policy. Also, Contractors involved in large or long-term projects may find it reasonable to reduce risk.
Project Loss Insurance is a fairly new product that can help Contractors protect their balance sheets. Although the product is currently exclusive to Travelers Insurance, it is possible that others may enter the market in the future with different rates, terms and deductibles.
