Why do contractors need Professional Indemnity Insurance?

Many of our clients’ have asked us why Contractors need to purchase Professional Indemnity Insurance. Usually they have been asked to hold the cover as part of a tender but don’t really understand what cover is provided or what limits of cover they need.

The most common question we receive from contractors is when does a claim fall under Professional Indemnity Insurance and not under Public Liability Insurance when undertaking design and building work.

The information provided below details what the Professional Indemnity Insurance covers as well as some real-life claim examples from our insurers where claims have occurred that will not be covered under a standard Public Liability policy.

What is the difference between Public Liability (PL) Insurance and Professional Indemnity (PI) Insurance?

Public Liability Insurance covers you against material damage to property and injury claims that result from negligence on behalf of you or one of your employees. If a third-party experiences property damage or bodily injury as a result of your business activities, Public Liability Insurance will help cover the cost of the claim as well as court and legal fees.

Professional Indemnity Insurance on the other hand has traditionally covered intangibles, such as financial loss due to faulty design, poor advice, or unintentional copyright infringement. Professional Indemnity Insurance covers your legal defence fees and the cost of compensation you may owe due to damages.

What can sometimes confuse matters is that Professional Indemnity Insurance can also provide cover for bodily injury and property damage, if this has occurred as a result of an incorrect design or professional service, for instance property damage occurring due to incorrect structural calculations being provided which results in a collapse.

Much like a Public Liability policy, Professional Indemnity Insurance it will not cover any claim arising from defective workmanship, including defective physical construction work, erection, installation, repair or service, defective products, or any defective materials, workmanship or production techniques used.

Both of the above types of insurance cover very different things, which is why it is important for contractors to hold both Professional Indemnity and Public Liability Insurance if they undertake any design work when carrying out construction projects, even if this design work is carried out by a third party such as an engineer.

What is Construction Professional Indemnity (PI) Insurance?

Construction Professional Indemnity, also known as Design and Construct Professional Indemnity, is a policy designed to protect contractors and sub contracted specialists, for allegations relating to errors in their work or incorrect design.

The policy covers the contractors legal defence costs and any damages awarded in relation to alleged errors in the design or the construction of a project, for instance the incorrect design, a project not being fit for purpose or a contractor not using the correct materials as detailed in the specification.

A standard Professional Indemnity policy will exclude any claims relating to an incorrect design, build, maintenance or installation, however a Design and Construct wording is specially designed to cover these types of claims. A Design and Construct Professional Indemnity policy will provide Rectification Cover –  costs incurred in remediation work or mitigating a loss or potential loss that may otherwise result in a claim.

Most Contractors Professional Indemnity policies will generally include the following cover:  

Collateral Warranty Cover – claims arising from any collateral warranties, duty of care or similar agreements provided by you, to the extent that such liability would have attached to you in the absence of such contractual duty, term or agreement.

Consequential Losses – Cover for Indirect losses which accompanies an insured loss, for instance the loss of earning to a third party following a claim.

Health & Safety Legislation Cover – reasonable costs and expenses incurred with the insurers prior written consent for defence of any proceedings first brought against you under the Health & Safety Legislation

Pollution Cover – claims arising out of the actual, alleged or threatened, sudden or accidental presence, discharge, dispersal, release, migration or escape of pollutants other than asbestos, nuclear or radioactive material of any sort.

Defence Costs Cover – covers defence costs incurred with the insurers prior written consent.

Fraud and Dishonesty Cover – liability of your business to any third party resulting from fraudulent or dishonest conduct of any employee.

Lost Documents Cover – costs of replacing or restoring documents lost in your custody or control.

Court Attendance Cover – if attending court as a witness by any principal, partner, member, director or employee when defending a claim, a typical rate of £250 -£500 per person per day.

What Professional Indemnity limit should a contractor have? 

Indemnity insurance is slightly different to other types of insurance. Whereas with a property or car insurance you are usually given a standard limit of cover (the maximum amount your insurer will pay out), with professional indemnity insurance, you will be given a range of limits to choose from.

So, which limit should you choose? This is one of the most common questions we are asked by our customers and there are a number of ways you can decide.

Check with your client – If you’re undertaking a contract for a specific client, they may well have specified a minimum amount of cover required for you to undertake the contract. If they have, you can simply choose this level of cover when buying your policy in order to meet their requirements.  Typically, we see most clients are requested to hold a minimum limit of indemnity of £1,000,000. If they’ve specified that you need to have Professional Indemnity Insurance but don’t state a limit, it may be worth checking with them how much they would consider acceptable before you buy.

Check with your industry body – If you’re a member of an industry body they may require you to hold a minimum level of cover as a condition of membership. Details about minimum cover requirements are usually contained in your membership agreement, but if you’re unsure, speak to your industry body directly to find out.

Decide for yourself – If you simply want to arrange cover for all work you undertake, the best way to choose your limit of cover is to consider a worst-case scenario and how much you think it could cost to put right. For each project you are working on, take into consideration:

The cost of getting a third party to rectify a serious mistake you’ve made – depending on the type of work you do, this could be very costly in itself. For the construction industry rectification cover is a must, it covers the costs incurred in remediation work or mitigating a loss or potential loss that may otherwise result in a claim. A typical example could be underpinning of foundations.

• Any consequential losses your client would incur as a result of your mistake – for example, delay of a project leading losses or missed business opportunities
• Any damages or compensation due to your client which will usually decided by the courts unless a settlement is agreed
• Any legal fees incurred by your client in pursuing you – these can easily run into hundreds, if not thousands, of pounds

Our Professional Indemnity Insurance policies are tailored for the construction industry with cover limits ranging from £100,000 – £10,000,000 and higher. If you would like to discuss what type of limit might be appropriate for your business call 01732 252 898 to speak to one of our specialist advisors.

Contractors Professional Indemnity Claim examples 

Mechanical Engineers – Having designed and installed a backup generator for a hospital, it transpired that the generator was not suitable as it failed during an emergency. It was decided that the Contractors was negligent. The PI insurer paid £135,000

Electrical Engineers – a client alleged that the emergency lighting was inadequate and did not comply with relevant regulations following installation at an industrial unit. This was not covered under their Public Liability Insurance and a claim was submitted under their PI policy for £80,000

Cladding Contractors – A design for a shopping centre façade did not have adequately designed fixings to support the structures weight. As a result, a section of the structure became loose, injuring a member of the public and damaging cars and nearby property. This was not covered under their Public Liability Insurance and a claim was submitted under their PI for £1,300,000

Specialist Subcontractors – A building contractor was employed on a design and construct basis to construct a private medical Centre. Design works were subcontracted to engineers. Design errors became apparent in the building control systems during construction leading to rectification costs and delays. The engineers had ceased to trade and their PI policy was no longer in place, leaving the contractor to deal with the claim. This was submitted under their PI policy £710,000

Heating and Ventilation Engineers – The contractor designed and installed a heating system but following the work the client alleged negligence in the design of a heating and ventilation system. This was not covered under their Public Liability Insurance and a claim was submitted under their PI policy £380,000

 Electrical Contractors  – The contractor designed and supervised the installation of the mechanical and electrical services in a shopping centre. Operational difficulties became apparent with the air-conditioning, allegedly due to a design fault. This was not covered under their Public Liability Insurance and a claim was submitted under their PI policy £850,000.

Commercial Builder – Following the completion of a new build development. It was alleged that parts of an apartment block were of faulty design. This was upheld in court and the amount paid including rectification costs was £3,000,000 by the PI insurer.

As a result of claims like these, we are increasingly seeing main contractors and councils request that all Contractors carry Professional Indemnity Insurance.

 If you would like a quotation for Professional Indemnity simply send a completed PI proposal form to info@clarkewilliams.co.uk or call 01732 252 898 and we’ll be happy to provide you with competitive terms.