We’ve got it covered – or have we? Current Challenges in Professional Indemnity Cover

Maeve Crockett, Associate, Construction and Engineering, Arthur Cox outlines for Irish building magazine how having adequate and appropriate insurance in place is not only essential, but also to the mutual benefit of all parties involved in a construction project.

In recent times however, obtaining Professional Indemnity (PI) Insurance has become one of the ‘major challenges’ facing contractors, consultants (and employers alike). How did we get here, and what steps can be taken in order to overcome this challenge?

Increasing Demand For PI Policies

Maintaining PI insurance has long been a requirement for consultants providing design and other professional services on a project, but over the last several years, it has also increasingly become a standard requirement for contractors and subcontractors in respect of design obligations assumed under their contracts. PI (in a construction context) covers a party’s legal liability for advice and design, and the evolving understanding of who is responsible for ‘design’ on a construction project has resulted in the requirement for the maintenance of PI policies to be wider than ever before.

Historically, a traditional project delivery structure saw employers engage a team of professional designers, and subsequently provide the resulting design to a contractor for construction. Under this model, design responsibility remained with the employer and its professional design team, and as a result contractor and subcontractor PI insurance was rarely sought. A design-build project delivery structure, where employers engage a single entity to design and construct the project, however, requires the design-build contractor to maintain a PI policy, and in circumstances where they are also the principal party responsible to the employer for design, such a requirement was largely uncontroversial.

In more recent years, however, it has become widely accepted that design responsibility is often assumed by various parties engaged on a project, particularly in the form of advice or design by specialist subcontractors (for example glazing and facades) as well as on-site advice, calculations or ‘ad hoc’ design provided by a contractor during the construction process. In addition, the introduction of the BCAR Regime (in accordance with the Building Control Amendment Regulations), and in particular the requirement that contractors and subcontractors must sign Completion Certificates and Ancillary Certificates respectively, has resulted in a widely accepted view that PI cover for contractors and subcontractors is now a necessity.

The PI Market In Context

While demand for PI policies in the construction sector has grown over the last number of years, this has coincided with a significant shift in the PI market, particularly in the wake of the Grenfell Tower fire. For insurers, the event highlighted the magnitude of potential exposure in relation to fire safety issues. The aftermath of the event saw a number of changes, including:

(1) the withdrawal of some providers from the market, (2) an increase in the information insurers require in relation to a project and the risks being assumed by their prospective insured party, making PI policies more complex to obtain, (3) the introduction of widespread exclusions in relation to cladding and other aspects of fire safety, (4) ‘any one claim’ cover being replaced with ‘aggregate’ cover in many instances and (5) an increase in premiums.

As a result of the high demand for PI insurance, and the recent changes in the PI market, it is now increasingly difficult, and in some cases prohibitively expensive, for contractors and subcontractors to obtain the levels and types of PI cover which employers (and funders) are seeking. These difficulties are also being experienced by some construction professionals.

‘Any One Claim’ Or ‘Aggregate’ Cover

The move from ‘any one claim’ to ‘aggregate’ cover in particular, represents a significant departure from the type of PI cover generally sought by employers in the Irish market. While an ‘any one claim’ policy provides cover up to a stated limit for each individual claim made during the period of insurance, an ‘aggregate’ policy provides cover up to a stated limit for all claims made in the period of insurance. For example, if two claims (each of €1.5m) were made against a €2m any one claim PI policy, the insurance would cover both claims, as they are both under the stated limit. Conversely, if the same two claims were made against a €2m aggregate PI policy, the insurance would only cover up to the €2m limit, leaving the balance of the total claims (€1m) to be covered by other means.

Aggregate cover can provide a further difficulty, as the contractor’s or consultant’s PI policy effectively covers all projects on which the contractor or consultant is engaged. For example, a contractor is engaged on three separate projects (A, B and C), with a single €2m aggregate PI policy in place. Two claims (each of €1m) in relation to Project’s A and B respectively are made against the policy. The insurance would cover both claims as the aggregate total does not exceed the limit of €2m. However, should a claim arise on Project C during the same period of insurance, the employer on Project C would find that insurance claims to date had already reached the policy threshold, and therefore no further cover would be available to respond to their claim.

“The move from ‘any one claim’ to ‘aggregate’ cover in particular, represents a significant departure from the type of PI cover generally sought by employers in the Irish market.”

Impact On Existing Contracts

Contractors and subcontractors are being faced with difficulties on renewal of PI policies, finding that the level and type of cover which they previously maintained (which in many cases is mandated by the contracts or collateral warranties to which they are a party) is either unavailable, or available only at a significantly increased premium. For example, this year has seen ‘any one claim’ cover being widely replaced with ‘aggregate’ or ‘annual aggregate’ cover. While some contracts may provide a degree of flexibility with regards to the type and level of PI insurance to be maintained (for example a provision that the maintenance of such insurance is subject to it being generally available in the market), others may specify the required PI insurances without any allowance for the possibility that such insurance may become unavailable during the period for which the contractor must maintain it.

Contractors and subcontractors should be mindful that failure to maintain insurances in line with those required in their contracts will be in breach of their contractual obligations, and as such they should be proactive in bringing the issue to the attention of their employer or other counterparty. Where the contract allows for the possibility that PI insurance of the type and level specified may no longer being available, the contractor should follow the steps set out in the contract to address this. In the event that the contract provides no flexibility, the contractor should bring the matter to the attention of the employer in order for the parties to review and ensure that the best available cover (having regard to the nature of the project and the contractor’s scope) is in place. Ultimately, the challenges in the PI market are ones that are shared between all parties on the project and a pragmatic approach to this challenge will be required.

In light of the increased levels of information now often required by insurers when placing PI policies, contractors and subcontractors should apply for renewal of insurance in good time, in order to be able to provide timely notice to their employer in the event that issues are encountered, and to ensure that gaps in cover can be addressed.

New Contracts

Contractors, subcontractors and employers should be mindful of the current challenges in relation to PI insurance when negotiating and entering into new contracts. While employers will want to ensure that they are requesting the best cover available in the market, they should be mindful that seeking an absolute commitment from a contractor to maintain a specific level and type of PI insurance for the required period may ultimately be impractical in light of the state of flux in the PI market. Similarly, contractors should be conscious of signing up to such provisions, even where they currently maintain the required level and type of PI insurance, as the future availability of the insurance in the market is not assured. Ideally, contracts should include provisions that address the situation where the required level of cover ceases to be available at commercially reasonable rates.

Given the uncertainty in the market, both parties should consider whether insurance provisions which allow a degree of flexibility might be appropriate, and should be proactive in keeping the lines of communication on the matter open, in order to ensure that appropriate cover (for the benefit of all parties) is maintained.

Maeve Crockett is an Associate, Construction and Engineering, Arthur Cox. Maeve.Crockett@arthurcox.com  www.arthurcox.com

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