A number of factors have impacted on the supply of professional indemnity (PI) insurance, making many question how essential it is. Stephanie Cornwall spoke to some of the experts to gain a clearer perspective on why and when it is needed.
Opinions differ and we’ve all heard plenty of arguments for and against whether PI is something that a contractor should buy. Recent reports of price hikes and reduced supply capacity to the construction sector have made some contractors question the need to have it in place.
So what exactly is PI insurance and who actually needs it?
The long and short of it is that a claim can always be made so, in contracting, a PI policy can provide peace of mind and a safety net for the contractor should the worst happen. Few have sufficient resources to meet major claims against them in accused negligence cases and PI insurance exists to mitigate this risk, providing cover for the contractor who has assumed design responsibility.
Helen Tapper, finance director at Tapper Interiors, and incoming FIS president, has worked within the contracting sector for 18 years. She said PI insurance is a relatively new concept for many contractors and stressed that ‘design’ is the key word for those unsure about whether to purchase.
“If a fit-out contractor is working for an end-user, it should be discussed as to where the design responsibility lies,” she said. “Historically most fit-out contractors did not carry PI insurance but it is becoming more common to do so because the insurance market is pushing it. Think carefully about the type and scope of works that you undertake and discuss it carefully with your broker before purchasing.”
Often clients will insist on PI being implemented. For many contractors, there will be a minimum contractual requirement for PI insurance to be in place for the duration of a contract and beyond.
Simon Henderson, managing director of Darwin Clayton, confirmed pressure from clients had driven more contractors to approach his company about PI insurance. He said: “We are seeing an increased demand for PI cover due to contractual requirements being imposed on contractors regardless of business activity or risk.”
Director of Trident Insurance Brokers, Paul Copas, said this can lead to confusion for some contractors, who aren’t clear about what they are taking on. “We often have clients contact us requesting PI insurance for individual contracts where they have not had previous PI cover and presumably not been involved in design and build contracts before,” he said. “This is not usually available and I often warn clients that becoming involved in such contracts is a long-term commitment in view of the common contractual requirement to maintain the cover for 12 years. We will only be able to provide a quote for the one year.
“We have also noticed recently that for those contractors who are involved in design and build, there seems to be pressure on them increasing limits of indemnity. Again I warn clients this cannot be provided just for the one contract. It would need to be for their whole turnover and maintained for a period of years.”
Effects on prices and provision
Prices in the design and construct PI market have risen in the past 18 months, primarily because underwriter Lloyds of London reported PI as being the second worst performing class of business and reported losses last year of £435m.
“In view of this, Lloyds revoked a number of licences to underwrite PI and syndicates were advised to only underwrite business at a profit,” Simon Henderson said. “Other UK general insurers previously active in design and construct PI have taken a similar line and the strategy is now to underwrite smaller lines/limits and apply sometimes substantial premium increases.
“As capacity has reduced in the PI market, prices have risen because A) there is less competition and B) underwriting for a profit is the key strategy. Insurers are filling their capacity with renewals and appetite for new business has reduced. Effectively what we are seeing is insurers limiting their risk and exposure whilst charging what they perceive as rates that will return a profit rather than a loss. At the time of writing there isn’t an influx of other capacity for those insurers that are exiting or hardening their position.”
Robert Morris of Jelf said many insurers left in the market are looking for significant rate increases “in an attempt to rectify their book before their lords and masters tell them to call it a day”.
“Coupled with these increases is reduced capacity on risks and policy wordings that are not as extensive. A good example of this is in the design and construct market where ‘civil liability’ cover is being reigned back to a negligence only basis of cover by some insurers,” he said. Robert said the role of a specialist PI broker in the construction market is now vital as they have the knowledge to be able to work with clients and with insurers to address the issues at hand and achieve the best solution.
The Grenfell legacy
The Grenfell Tower incident has contributed to the overall effect and one of the key issues that underwriters now routinely ask about in far greater detail is the type of linings that contractors are installing. Some underwriters have stopped writing design and construct PI altogether since Grenfell.
But if a contractor can demonstrate good risk management policies, including training, accreditations, method statements and an overall embracement of professionalism, these will all be attractive features to underwriters, Simon said. “This is especially so when the insurance market ‘hardens’ as we are currently seeing in PI,” he said. “If members are finding difficulties with placing their PI risk, they should talk to a broker that specialises in the design and construct sector or a broker with a Lloyds licence as whilst capacity in the London markets has hardened, this is where the class is still underwritten more readily.”
Helen firmly believes many contractors working for Tier 1 contractors can avoid the need for PI altogether if they make it clear from the outset that design responsibility does not rest with them.
“We have always advised our members not to take design responsibility on contracts when working for Tier 1 contractors, and to make sure that this issue is discussed at the pre-contract stage,” she said. “If design responsibility is mentioned at all in the contract, have it crossed out and approved and minuted by the Tier 1 contractor.”
If a fit-out contractor is working for an end-user, then once again it should be discussed as to where the design responsibility lies, she advised. FIS has produced a factsheet for members which outlines some of the common questions contractors might have about professional indemnity insurance.
What is PI insurance?
PI insurance, also known as errors and omission insurance (E&O) provides indemnity for the designer’s legal liability for damages from the results of a claim towards the designer’s breach of professional duty. In essence, PI insurance protects the designer from claims against harmful or potentially harmful mistakes / accidental negligence in the design process.
Who needs PI insurance?
PI insurance is designed to cover anyone that has any design responsibility, including but not limited to:
• Main contractors and subcontractors working on design and build projects i.e. contractors who have been given design responsibility for the project
• Principle designers
A designer is an organisation or individual that prepares or modifies a design for any part of a construction project, including the design of temporary works, or who arranges or instructs someone else to do it.
Construction contracts will usually require those with design responsibilities to purchase and provide evidence of PI insurance to protect themselves against any claims they may have in the future.
Contractors requesting PI Insurance for individual contracts where they have not had previous PI cover and not been involved in design and build contracts before is not usually available, they should be aware this is a long-term commitment in view of the common requirement to maintain the cover for 12 years.
It is important to advise your insurer at the earliest possible moment of a potential claim as this gives the insurer a chance to advise the insured and to mitigate the risk and to meet claims notification conditions within the policy.
What does PI insurance cover?
The policy covers the cost of defending claims of negligence made against it, subject to the insured party paying the initial excess set out in the policy. Policies can be extended to provide cover for employee theft (fiduciary cover). PI insurance is usually expected to be maintained through the whole period of design liability. This is normally either six or 12 years. Cover can be fully retroactive for neglect error or omission of professional duty in respect of past services.
It may include claimants’ costs and expenses, defence costs, investigation costs, and some policies may extend to include mitigation costs, however a retroactive restriction date may be placed on the policy.
This date is normally the earliest date from which professional indemnity cover has been held continuously. Increasing limits of indemnity. It’s important to remember that this cannot be provided just for the one contract, it would need to be for their whole turnover and maintained for a period of years.
PI insurance limitations
PI insurance will not cover defective workmanship or unfit contractor supervision unless expressly included within the insurance policy. Usually PI insurance policies expressly exclude faulty workmanship.
PI policies will often exclude cover of losses arising from onerous contract terms to the extent the associated liability exceeds what would otherwise have been the parties’ liabilities by law. The insurer will not cover these projects as the designer has taken on increased risk owing to the increased difficulty of meeting the contract’s obligations.
Designers under the contract term “fit for purpose” may have problems recovering liability claims under its PI policy, even if the designer acted negligently. Some PI policies expressly exclude all cover on a project where fitness for purpose is imposed. This is due to the increased risk on meeting the obligation that the design will meet its intended use immediately on completion of the project.