Contractors with a design liability
In recent years it has become commonplace for contractors to incur a design liability, either by offering a design service as part of an overall building package or through a design and build contract where the design work is sub-contracted.
When you undertake contracts on a Design & Construct basis, you will almost certainly be the client’s first port of call in the event of a design related problem. Even if a claim is ultimately the responsibility of another party, the costs of redirecting liability can be high and success is far from guaranteed.
How do insurers rate a risk and what do they look for?
As there is no professional body for contractors, there is no recognised qualification or specific standard of insurance coverage. It is for this reason that insurers have to pay careful attention to the qualifications and experience of the principals and staff of a business.
If a contractor is offering professional services, insurers will expect to see qualified staff, such as a qualified architect, engineer or surveyor. If there are no qualified staff, insurers will want to see CVs for those involved in technical work, and these CVs should normally demonstrate at least five years’ practical experience, and maybe more depending on the services offered.
Insurers will be particularly interested in the types of projects and the sectors in which the contractor is involved.
The following demonstrates how insurers would typically view areas of work:
|Individually designed||Lower risk|
|Multiple low rise||Medium risk|
|Multiple high rise||Medium/higher risk|
|Modular (repetitive design)||High risk|
6 Areas of Interests that Insurers review when reviewing the construction risk
Please see examples of claims resulting from Professional Indemnity Insurance in Construction
The usual cover
Insurers want to cover only professional exposures and do not want to end up paying for poor workmanship on under-priced contracts. So, cover is normally limited to design or specification, feasibility study, technical information calculation, surveying undertaken only by or under the direction and direct control of a properly qualified architect, engineer or surveyor.
Supervision cover will normally be limited to situations where the insured is not supervising their own or their sub-contractors’ workmen in their contractor capacity. Other professional activities that are intended to be covered will normally need to be endorsed separately.
Usually the limit of indemnity for contractors will be ‘aggregate’ with legal costs inclusive within the limit of indemnity. However, it is not unknown for ‘any one claim’ limits to be available with legal costs in addition. The excess will normally apply to insurers’ costs and expenses (see costs in addition and costs inclusive).
As cover is not normally provided for on the broader form ‘civil liability’ basis, additional cover for liability for lost documents and libel and slander will usually need to be added, so comparisons between wordings being offered by different insurers is needed.
Presenting your proposal for insurance prior to your renewal date:
The presentation of your business to insurers is very important both in respect of the facts i.e. the things for which cover is required, and the way in which you do your business, both of which influence an insurer’s perception of your business and the risk it poses to them.
We would always recommend that in addition to the proposal form you are asked to complete, you provide supporting documents with your proposal such as:
Remember: Don’t forget to include the names of any businesses with which you have merged, or any that you have acquired, as these will need historic cover. Likewise you may have ceased to offer certain services for which cover is still required.
Keep a written record of all requests for cover to be extended and any historic or material changes to your business. This information can be updated each year and provided as an addendum to the proposal. Any certification the business may have i.e. accreditation by a governing or standards council, is also well worth disclosing.
Renewal is an ideal time to review your insurance requirements. As your business grows and your contract values increase, it is wise to consider what could go wrong and how much it may cost to settle a claim – and also cover the attendant legal costs. Some policy wordings provide a limit of indemnity with legal costs in addition to the limit. Others provide limits of indemnity which include the legal cost. However, the cost of litigation is high and can eat into the limit of indemnity provided if costs are inclusive.
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