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Crisp Insights: Contractors Professional Indemnity Insurance – Why the mooted covers are more fiction than real?

There is an assumption that having obtained a “professional indemnity” policy of insurance, it will provide Contractors with cover against the design risks imposed by agreements with Principals. Unfortunately, such “covers” under a “PI” insurance policy are more myth than a reality.

The stated qualification for cover for so-called “Professional Services” by Contractors is similar for all the insurers. In summary the Contractor being “controlled” and /or “supervised” by a “qualified” person. First, its unconvincing to assert that a Contractor is being supervised by a design consultant. Second, all Contractors accept a liability for the so called preliminary designs they have been provided (and usually to ensure such preliminary designs are “fit for purpose”). Those designs come too early in time to be supervised by a design consultant, engaged by the Contractor.

It’s also claimed on behalf of insurers that cover follows the Contractor providing “project management” services. That can’t be correct given no design consultancy is providing project management services to the Contractor.

Then to so called “fit for purpose” design warranties. In one instance it’s been said on behalf of an Insurer that fit for purpose warranties are not covered as it doesn’t reflect a contract obligation but rather a warranty included in the agreement. In effect arguing the Contractor is not responsible for the design, which itself is a “contortion” and fails to have regard to the fact that the design obligations have been expressly imposed on the Contractor by the agreement.

The next difficulty for any Contractor is the so called “contractual indemnities” for the design risks assumed and included in the agreement with the Principal. Such indemnities are said to be an “Exclusion” from cover both because of the indemnity given and additionally that any breach arises from a failure to perform by a third party designer in any event. Compounding these issues are the fact that excluding the Proportionate Liability Legislation (which each agreement compels) is a further exclusion from cover.

Lastly noting that the reality of the lack of “cover” provided by the mythical PI insurance policy is itself a breach of the head contract and a further basis for claim by a Principal against a Contractor.

This short discussion hasn’t included the question of whether there is “cover” available for building performance warranties and meeting (or exceeding) rating measures/ requirements.

It’s necessary for all Contractors to better understand the liabilities (and indemnities) they have to date so willingly assumed. To reassess their engagements with their design consultants. Also, to have their Broker definitively respond as to each of the above issues.

Finally, to work with their Principals to relook at the design risks being assumed by the engagements and much greater thought given to the design risks for which insurance indemnification is actually available.

Absent clearly defined and accessible insurance the issue for Contractors is why would you assume design risks when liability is unlimited and the claim by the Principal is made as an indemnity which is an immediate claim against the company’s liquid assets on its “balance sheet”.

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