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Professional Indemnity for Contractors within the Building Trade
Known as ‘Design & Construct’ Professional Indemnity Insurance

By David Mackinnon
David Mackinnon
Professional Indemnity Insurance was traditionally designed for and purchased by the so-called ‘professional trades’ such as architects, surveyors, accountants etc.

With the evolution of time, Professional Indemnity has become a common purchase for contractors within the Building Trade.

Contractors will tend to purchase Professional Indemnity insurance for various reasons:
There are a range of insurers who can provide Professional Indemnity Insurance for contractors, although the marketplace has been changing over the past few years, with a number of insurers withdrawing from the market following prolonged poor claims experience for this type of policy.

Professional Indemnity Insurance is normally an annual contract. However, it is important to be aware that, once Professional Indemnity insurance is first purchased, it may be difficult to stop purchasing cover in the future; the reasons being:

1. Often, contract conditions will require Professional Indemnity Insurance to be maintained for at least 12 years after Practical Completion (although this may vary from contract to contract).

2. In the UK, Professional Indemnity Insurance is usually provided on a ‘Claims Made’ basis. This gives cover for claims made (and reported to the insurer) during the current period of insurance only. Meaning that, once the policy has expired, a new policy must immediately be purchased (as to not have any gaps), in order to provide cover for past work. Once a policy has expired there is no cover in force in respect of claims that may arise even if the claim relates to work undertaken during the period of policy cover.

🕙 Retroactive Date:

Policies will often contain a ‘Retroactive Date’ which is usually the date which continuous Professional Indemnity insurance was first purchased. Insurers will not pay for work/acts undertaken prior to this date.
Professional Indemnity (PI) insurance will provide cover for legal liability arising from a breach of professional duty, in respect of the declared business activities.

🤔 What is Professional Indemnity Insurance covering?

Professional Indemnity insurance is not designed to cover faulty workmanship. It is designed to cover the ‘professional activities’ of a contractor. It will usually include:
  • Design
  • Specification
  • Feasibility Studies
  • Technical Calculations
  • Surveying
... although this may vary from insurer to insurer.

🙅 ‘But we don’t undertake any design work’.

Because of contract conditions/requirements, It is becoming very common for contractors to need Professional Indemnity insurance, even if no design work is being carried out. This may seem unfair. However, consider this:
  • Even if a full design service is not being provided, contractors may undertake seemingly-innocuous design work. Perhaps in advising a client, or taking an architect’s plans and turning them into a working drawing
  • Contractors are often involved in specifying appropriate materials
  • Duty to Warn: Even if no design/specification work is being undertaken, there remains a very real risk that a contractor could be drawn into a Professional Indemnity type claim because of their ‘duty to warn’ that the client/architect’s design is flawed in some way. It is fair to say that a contractor may retain a Professional Indemnity risk, even in the absence of design/specification work.

🚫 Policy Exclusions.

As with any insurance policy, there are standard terms, conditions and exclusions within the policy. It is important that you are familiar with these. They can vary from policy to policy.

⚖ Contractual Liability

Almost all Professional Indemnity policies will exclude contractual liability issues. At first glance, this may seem like an innocuous policy exclusion. However, it is important to be mindful that such an exclusion has wide-ranging consequences.
There is no cover arising from liquidated damages (pre-agreed sums). Also, policy cover is based on liability that would arise in the absence of a contract (i.e under common law). Again, this sounds fairly benign, however, it means that any words/clauses/terms within your contract with a client may exceed the scope of cover provided by a Professional Indemnity policy. If you accept contracts with words/terms like ‘best endeavours’ or ‘fitness for purpose’ etc etc, you may find that your contractual obligations to your clients exceeds the scope of your Professional Indemnity insurance cover. If in doubt, you should have a legal professional review your client contracts, in conjunction with your insurance policies. Failure to do so could leave you exposed in the event of a claim.

🔥 Combustibility Exclusions

A recent development in the Professional Indemnity market is that some/many insurers are adding combustibility exclusions to the Professional Indemnity policy – in respect of cladding / drylining work). This means that the policy will not pay a claim if a client alleges that a cladding / drylining system not does provide a suitable/adequate level of fire protection.
This is a new exclusion and will inevitably vary in words from insurers to insurer. It’s something to be aware of and check that the policy cover meets your requirements.

📜 Collateral Warranties

Although Professional Indemnity policies almost always exclude contractual liability, the insurer may extend to provide cover in respect of Collateral Warranties – providing that the Collateral Warranty does not extend the Contractor’s liability beyond that which they would otherwise have assumed under common law. This is a fairly common policy cover for Design & Construct Professional Indemnity policies, although, the policy terms may vary from insurer to insurer and some policies may restrict the number of assignments. The cover is also likely to exclude ‘Fitness for Purpose’ guarantees, express guarantees etc.
Collateral Warranty Checking Service. Some brokers/insurers may offer a collateral warranty checking service via their solicitor panel. It is usually a ‘one way’ service, insofar as the solicitor will provide commentary regarding the wording of the collateral warranty, but will not enter into detailed dialogue with you (although often this is possible for an additional cost).

⚖ Mitigation Clauses.

Some Professional Indemnity policies will include a ‘Mitigation of Loss’ extension. This is an important policy extension – going beyond the basic scope of a Professional Indemnity cover. Professional Indemnity cover (like any other legal liability policy) is designed to provide cover for legal liability arising from a client’s allegations of negligent design/etc. This is fine...however:
What happens if you discover your design error before the client does ? question
Do you wait for the client to notice the issue? By doing this, you may invalidate your ability to claim under the policy (because insurers should be notified immediately when you become aware of the circumstances which could give rise to a claim). This also increases the likelihood of client litigation and would increase the potential cost of rectification.

If your policy has a ‘Mitigation of Loss’ clause, the policy will extend to provide cover to the policyholder (the Contactor) in respect of costs/expenses reasonably incurred in respect of any action taken to mitigate a loss or potential loss that would otherwise be the subject of a claim.

This clause is a game-changer, and can turn a potentially prickly (and expensive) issue into one which is far more manageable. It may be possible to rectify the problem without your client even being aware.
The wording of this extension can vary from policy to policy.

We would recommend that your chosen Professional Indemnity policy includes a ‘Mitigation of Loss’ – type clause.

⚖️ Legal Defence Costs

Professional Indemnity policies include cover for defence costs and expenses incurred in the defence of a Professional Indemnity claim. Some insurers provide this cover in addition to the Limit of Indemnity. With some policies, it’s included within the Limit of Indemnity, meaning that such defence costs will erode the policy cover in the defence of the claim. For this reason, policies that provide Defence Costs in addition to the Limit of Indemnity, may well be preferable.
Are all employees covered for design work? This is something to be careful of. Wordings vary from insurer to insurer, but generally, an insurer will require work to be undertaken by a competent person – usually persons with relevant professional qualifications or five years’ experience relevant to the work undertaken. Check your policy for full details.

🌍 "We outsource our design work to consultants."

It is very common for certain/all aspects of design to be outsourced to sub-consultants. This should certainly reduce your Professional Indemnity premium, particularly if you are checking that the sub-consultant has their own Professional Indemnity insurance. However, be careful. Just because you utilise the services of a professional sub-consultant, this does not mean that you should not carry your own Professional Indemnity Insurance. There are so many ways which a design/specification Professional Indemnity claim could land at your door, as the Design & Build Contractor:
  • The sub-consultant may not be in business next week/month/year
  • The sub-consultant may not have paid their premium
  • They may not have insurance with a reputable insurer
  • They may not have disclosed all relevant information to their insurer
  • The sub consultant’s insurance may decide that their client is not liable and not pay the claim
... It is likely that any Professional Indemnity claim will be directed to the Design & Build Contractor by the client – after all, that’s who they have their contract with. The client will not be interested in directing their claim to an engineer/architect/consultant with whom they have no contractual relationship, and with whom they will have less prospect of achieving a successful claim.

🍓 Changing Appetite of Professional Indemnity Insurers

Following some high-profile events (i.e Grenfell) many Professional Indemnity insurers are restricting their appetite to write certain types of Professional Indemnity insurance. We have seen the following recent situations:
  • Some insurers withdrawing from the market
  • Many insurers only willing to provide £2m / £5m cover (top-up policies can be bought to provide the required level of cover)
  • ‘Any One Claim’ cover not commonly being offered. Many insurers are restricting cover to ‘Aggregate’ only – meaning that the limit of indemnity (i.e £2m) in the maximum that they will pay during any one period of insurance. Contractors will need to assess their options with regards to the limits of cover/basis of cover which they are contractually agreeing to with this clients. If ‘Any One’ claim cover is becoming more difficult to obtain (which is indeed the case), contracts may need to be amended to reflect this. Possibly being replaced by ‘Aggregate’ Professional Indemnity insurance requirements, or with a ‘where commercially available at a competitive premium’ caveat.

📙 Variations of Cover between Insurers

Policy cover can vary between insurers. It is important that you select the cover that is right for you – protecting the potential risk and adhering to your obligations to your client to carry a certain level of cover. For example:
  • Policy Extensions. Some policies will include Collateral Warranty extensions and/or Mitigation of Loss extensions. Both very important
  • Retroactive Date. Some insurers will negotiate over the retroactive date. If you have never purchased Professional Indemnity previously, but you have undertaken previous design work, you may be able to negotiate a backdated retroactive date. Something to discuss with your broker.
  • Limit of Indemnity. Some policies will provide ‘Aggregate’ cover. Some will provide ‘Any One Claim’ cover
  • Excess. Excesses will vary from insurer to insurer. Typically from £500 to £5000 depending on your company size. Some insurers will only apply the excess to actual awards, and not to defence costs (meaning that there is no excess to pay if you successfully defend the claim)

🙊 Disclosure of Information to Insurers

The Insurance Act 2015 replaced previous insurance legislation for commercial insurance policies, and has clarified the Insured’s obligations to undertake reasonable searches and to disclose material circumstances to the insurer, within their ’Fair Presentation of Risk’

On balance, we believe that The Insurance Act 2015 is a good piece of legislation and has levelled the relationship between the Insured and the Insurer. However, whilst it has restricted the insurers from taking certain actions which may have been detrimental to the Insured, it has also clarified the obligations of the Insured when providing information to the insurer.

Please be sure to disclose all material circumstances to the insurer and make reasonable searches in doing so. Failure to do so could prejudice your policy cover in the event of a claim.

You should discuss your obligations under The Insurance Act 2015 with your broker or with Trade Protect.

This Professional Indemnity Information guide is designed to be a brief overview of Professional Indemnity Insurance – for Contractors within the Building Trade. It is not designed to outline the cover within all policies as this can very hugely from insurer to insurer. You should discuss your exact requirements with your Insurance Broker or Trade Protect.

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