Professional Indemnity Insurance – Construction Design & Build Risks
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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:
| Home building | |
| Individually designed | Lower risk |
| Multiple low rise | Medium risk |
| Multiple high rise | Medium/higher risk |
| Modular (repetitive design) | High risk |
| Public/commercial buildings | |
| Hospitals | Higher risk |
| Schools/universities | Medium risk |
| Offices/retail/warehouses | Lower risk |
6 Areas of Interests that Insurers review when reviewing the construction risk
- Contract sizes
There is a direct relationship between the size and complexity of the job and the exposure. The proposal form will ask you to outline the types of work in which you are or have been involved.
- Technology
Is your firm using ‘cutting edge’ technology or standard, tried and tested processes?
- Overseas exposure
Does the practice carry out work for overseas clients?
- Retroactive exposure
Does the practice have an exposure to claims arising from past work, whether in the current firm or from a former practice?
- Turnover
This applies if your firm designs and constructs from its own design and provides full technical supervision. This is also relevant if your firm constructs from others’ designs performed on behalf of your firm.
- Fees
This applies if you provide design and technical services only (i.e. no construction is undertaken by the firm.
Please see examples of claims resulting from Professional Indemnity Insurance in Construction
- A firm of contractors provided a client with a design and build service in
respect of the construction of a quarry conveyor belt capable of carrying tonnes of material. Design of the system was sub-contracted out to specialists. After catastrophic failure of the conveyor belt machinery, substantial damage was caused. Although the claim was subrogated by PI insurers against specialist designers, the claim was settled against the contractor. - A claim linked to inadequate design involved an air extraction and temperature control at a restaurant which failed to work properly. The restaurant was closed pending repairs, resulting in a large claim paid, plus costs.
- A structural design defect was at the centre of a claim in which incorrect structural calculations contributed to total building failure of new car park.
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:
- A CV showing the principals qualifications and experience in the areas of business to be covered
- Any Terms of Business or terms of engagement you use
- A copy of your corporate brochure
- Details of your website
- An insurance history listing all material changes to your business since you first had professional indemnity insurance. For example, mention any previous businesses for which you require cover. It is possible you may be asked for a claims history from the previous business or a copy of its last completed proposal form.
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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