Professional indemnity insurance: don't skimp

It’s understandable that in the current climate most businesses, regardless of the sector in which they operate, will be looking at ways to reduce costs and make efficiency savings. For some construction firms, particularly those whose typical project is now significantly smaller than it once was, cuts to the extent of professional indemnity insurance cover - which is not required by law in the same way as employer’s liability insurance - may be where the money-saving axe falls.

Firms may try to find savings in buying a policy with a lower maximum cover limit or by changing from a policy that provides a specified amount of cover for each claim, to one which is on an aggregate basis, so the limit is a total amount for all claims. Some may be failing to take up professional indemnity altogether.

Typical professional indemnity insurance policies provide cover for one year and are renewed annually. The cover is on a “claims made” basis, meaning that in order to be covered by a policy, the claim has to be made within the year of the policy period. What some may find surprising to learn is that the date when the negligent act occurred is irrelevant - it’s the date when the claim was made that counts.

When clients select a professional team or contractors select design subcontractors, it is important that each of them carry a level of professional indemnity insurance appropriate to the size of the project and that clients specify in the contract the minimum level of professional indemnity insurance they are to maintain. Most clients or contractors will routinely check at the time of appointing the team that it has the required insurance in place. However, what is sometimes overlooked is that the obligation continues for the entire period - usually 12 years - of the consultant’s or subcontractor’s potential contractual liability for their work on the project.

How many clients continue to monitor that the cover is kept up once the project is complete? And more pertinently, when renegotiating a cheaper deal in conjunction with their broker, how realistic is it for consultants or subcontractors to remember the level of cover needed to maintain sufficient cover for projects completed more than 10 years ago?

How many clients continue to monitor that the cover is kept up once the project is complete?

It is worth remembering that brokers usually only ask for details of projects in the last three years and for many designers there has been a reduction in turnover in that period.

Claims often arise due to negligence in the design of the project, the result of which isn’t always immediately apparent. Fortunately, professional indemnity cover for such negligence is often mandatory under the rules of many professional bodies. However, where it isn’t mandatory or mandatory cover is too low, there are a number of things clients and contractors can do to prevent themselves getting into hot water.

Contracts should clearly state what should happen if the designer no longer has the required level of insurance. This can range from the threatening in tone - “we’ll take out whatever additional cover we think is appropriate at your cost” - to the more cosy - “we’ll then discuss how best to cover the risk”. These are practical solutions if the reduction in professional indemnity cover occurs while a project is still being built.

It may be possible to obtain a latent defects insurance policy as an alternative while the project is under way but once the project is complete, that option usually disappears or would be prohibitively expensive.

The industry is missing the point if it feels this is just another piece of administration. If you are a client whose foundations have failed five years after completion of your key manufacturing facility, you will not be impressed to find you have no recourse to damages because the designer has under-insured or has no insurance to cover your loss.

Once the project is completed, it might be wise to keep a diary reminder to request evidence of your team’s cover each year until the liability period has expired. This benefits both sides as the annual request will serve as a reminder to the professional and/or subcontractor of their ongoing obligations, which they can then factor into any decisions they make about their insurance cover.

Ben Thornycroft is a partner in Beachcroft