This month, our director James Martin provides a brief Q & A about the Design & Construct Professional Indemnity insurance to CIF Construction magazine – you will find the full article on pages 34-35 of July/August ’19 issue.
Design & Construct Professional Indemnity Insurance has become a pre-requisite for many contracts in recent years but contractors often struggle to understand what it covers and why the cover can be so expensive. The following article provides a brief Q&A.
What does Professional Indemnity Insurance cover?
Every individual or business that provides a professional service has a duty to their clients to ensure that this service that is of a high standard and executed with reasonable skill and care. If a breach of that duty occurs or is alleged to have occurred, professional indemnity insurance will cover the costs of a legal defence and third party damages subject to the policy terms and conditions.
What is Design & Construct (D&C) Professional Indemnity Insurance?
Where contractors engage in professional design, advice or specification as part of their overall operations, they can purchase D&C Professional Indemnity Insurance to protect them against claims which arise out of alleged negligent design, advice or specification (professional services).
What if you don’t do any design but are still being asked for PI insurance?
In recent years, many contractors are being asked to provide professional indemnity insurance even where they carry out little or no design work. This is often a standard pre-contract requirement so it is important to communicate to underwriters when design work is minimal and a reduced premium should apply. The policy can still provide cover for incidental design and advice provided by the contractor throughout the project, subject to policy terms and conditions.
What if you already have Products Liability Insurance – is this duplication?
Products liability covers claims arising from (a) third party injuries and (b) third party property damage arising out of a defect in a product. For example, if a pipe was defective or poorly installed and subsequently ruptured, causing injuries to people in the vicinity as well as damage to surrounding property, the injuries and damage to the third party property would be covered under products liability as the root cause was poor workmanship and not design error.
If a heating system was found to be underperforming or failing and the root cause was identified as a design/specification error then that claim would be covered under D&C Professional Indemnity subject to the policy term and conditions.
Why are Professional Indemnity Insurance rates increasing?
The Grenfell Tower Fire which occurred in June 2017 caused catastrophic losses and resulted in the deaths of 72 people. It was the worst residential fire in the UK since the Second World War and the rapid spread of the fire has been attributed to cladding on the exterior of the building. The fire has widely been cited as a turning point for the construction professional indemnity insurance market, putting underwriters on the back foot and forcing insurers to review the potential for catastrophic losses elsewhere in the construction sector.
In addition to Grenfell, Lloyds of London reported losses of £2bn in 2017 and professional indemnity insurance was identified as one of the underperforming business lines. These events have contributed to a more difficult professional indemnity insurance market and many Design & Construct contractors have been subjected to large rate increases and restricted cover terms during 2018 and into 2019. Insurers have generally moved to reduce the size of their construction PI exposure and are especially wary of contractors involved in cladding. Fortunately, there is still capacity in the Lloyds and London market, however underwriters are more selective on the risks they accept.
What is the difference between each and every claim and aggregate?
An aggregate policy provides one limit and this applies to all claims reported during the period. So if you have a €6.5M limit and have one claim for €1M then there will only be €5.5M left for any subsequent claims reported during the policy period. An “Any One Claim” policy means that there will be €6.5M cover for each claim even if there are multiple claims reported during the policy period, again subject to the policy terms and conditions. “Any One Claim” limits are often a contract requirement, however, for some contractors, these have been more difficult and expensive to secure.
What is a collateral warranty?
Collateral warranties create a contractual link between one party (for example, a subcontractor or an engineer) and another party, such as a funder, where a contractual link would otherwise not have existed. A collateral warranty gives the second party a direct right of recourse against the subcontractor. Collateral warranties often have a requirement with regard to maintaining a certain level of professional indemnity insurance for a set period.
What does “claims made” basis of cover mean and why are contractors asked to keep cover in place for years after the contract has finished?
With professional indemnity insurance, it is the policy in place on the day you become aware of a claim or circumstance that will cover the claim. So even if an issue arises out of professional services provided years earlier when you were insured with a different company, the insurance company that you are covered with on the day you find out about a potential claim is the company that will cover the claim. Professional indemnity policies also have retroactive dates which have the effect of putting a backstop on how far back your professional indemnity policy will provide cover. The retroactive date is normally the date from which you first held cover, assuming you have had continuous cover since that date. It is imperative that this date is carried forward when you change insurer and that there are no gaps in cover.
Every insurance policy contains detailed terms and conditions. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We are happy to provide additional guidance in this area and should you wish to discuss any aspect of your insurance arrangements, please do not hesitate to contact us on 049 433 2944, e-mail info@martininsurance.ie or complete our online enquiry form.
