Builder's Risk: Limits for CAT peril insurance

CAT – or catastrophe – perils, such as windstorm or earthquake, are typically covered by a standalone sublimit that reflects the lender's view of a PML – or probable maximum loss.

PML is the modeled calculation the insurance industry employs for all CAT perils. Arguably, each successive iteration of the model provides a more accurate definition of potential loss. However, it's important to keep in mind that PML is only an approximation.

Three recommendations for selecting coverage for long-term, large-scale construction projects:

  • Make sure your CAT peril limits account for both direct damage and "soft" costs – or continuing expenses incurred while structure is being rebuilt.
  • Eliminate all but the most financially solvent insurers – those with an S&P "A" rating or higher. It is only a matter of time before CAT losses – or, more likely, a series of CAT losses – bring financial distress to the insurance industry and there are insolvencies. As Warren Buffet once said, "Only when the tide goes out, you discover who's been swimming naked." Insurance is a "illusion" until you actually need it.  Then the concept of claims paying ability becomes a real priority.
  • Consider potential value increases due to inflation and overruns as any additional capacity may be difficult find after construction is well underway.


Insurance products underwritten by Westport Insurance Corporation, First Specialty Insurance Corporation, North American Capacity Insurance Company, North American Specialty Insurance Company, North American Elite Insurance Company, Washington International Insurance Company, or Swiss Re International S.E. All subsidiary insurance companies are subject to a common S&P rating of AA- and AM Best Rating of A+ Class 15. Nonadmitted insurance products are available only through licensed surplus lines brokers and may not be available in all states.