Why is Professional Indemnity Insurance required?
Our in-house construction insurance expert at Romero Insurance Brokers discusses Professional Indemnity Insurance and how it affects both contractors and insurers.
Professional indemnity insurance is a commercial policy designed to protect business owners, construction workers and the self-employed. It protects against allegations of professional negligence which most often draw from customers. Claims by customers can range from service being inadequate or materials being insufficient; specifically factors which cannot be controlled by the contractor.
However, due to an increase in claims from the UK construction sector and catastrophes such as the Grenfell tragedy, the professional indemnity market has hardened. A hardening of the market means insurers are quoting higher premiums, reducing indemnity limits and adding more restrictions/exclusions. All in all, this makes buying professional indemnity insurance more difficult and more expensive, ultimately leading to a temptation for other brokers and other construction businesses to overlook this policy type. Therefore, resulting in a professional indemnity crisis.
There are many factors which have contributed to this crisis:
The Grenfell Tragedy
The Grenfell tower fire is an unforgettable national tragedy which sadly involved a preventable loss of life; repercussions have been felt over the UK and throughout the world.
It has become clear that the cladding products used were not as fire resistant as claimed. Subsequent surveys by fire engineers (known as EWS-1) have uncovered many high-rise buildings where similar products have been specified. In these cases, the architect who specified the products and the contractor who installed them will receive a professional negligence claim for the costs of removing and replacing these products with non-combustible alternatives. To date, the cost of these claims is estimated at around £1 billion.
Due to the vast number of recent claims, insurers are reconsidering their position on underwriting such risks. This has led to a rise in premiums and reduced cover.
When proposing for professional indemnity insurance, contractors need to review their past projects and quantify their exposure to similar claims in the future. The more detail the better.
A Complicated Industry
Construction projects are increasingly complex. New technologies are being invented and implemented all the time. This means there are additional risks and new clauses which need considering with each renewal. And insurers are famously wary of uncharted waters.
Where a construction company does use innovative products or methods, it is crucial that these are explained fully, including details surrounding quality assurance and testing.
Carillion plc began the process of liquidation in 2018. It is the largest ever trading liquidation in the UK. They are not alone as many construction companies have become insolvent in recent years.
It is the nature of construction that most projects are collegiate, with many different specialist sub-contractors contributing. Where a professional error is alleged or uncovered, the main contractor has the responsibility to address it and will often do so with the assistance of their insurer.
Once the matter is settled, the insurer will look to recover their outlay from those who actually committed the negligent act, be they the sub-contractor, or the architect, or perhaps the engineer.
The main issue lies within insolvency, where the insurer is unable to claim money that is owed. If one of these sub-contractors have since become insolvent, then the main contractor’s insurer is left footing the bill. This difficulty in recovering claims has seen the cost of insurance for main contractors increase exponentially.
High professional indemnity cover requirements
Many clients require up to £10 million in cover. This amount of coverage can be difficult to secure on commercially viable terms in a hardening market.
Additionally the cost of this cover is considerable as many contracts stipulate contractors maintain this amount over along period of time. Constructors will want an insurance expert when dealing with large figures to ensure they do not pay over the odds and receive full correct coverage. We recommend our clients engage with their customer to negotiate the cost, instead suggesting a more sensible risk-based approach.
Political and Financial Uncertainty
The Pandemic. The cost of living. Brexit. Inflation. Volatile market fluctuation
Indeed, insurers remain very in-tune with the country’s financial and political backdrop. They can be very reactive, causing the insurance of big risk to suddenly become difficult and expensive. Professional Indemnity Insurance is another cover type prone to being scrutinised by tightening insurers.
Early engagement, good relationships with underwriters and high-quality detailed information are needed to get insurers to the negotiating table.
The quick and efficient approval of contractual agreements is key to securing a project. Rushing leads to mistakes, and mistakes lead to unnecessary expenses. Contractual disagreements will lead to a spike in legal battles – this can lead to a litigious environment.
A Litigious Environment
There is something of a blame culture within construction. When an error occurs, the various parties to a project become entrenched and seek to defend themselves. This can cause claims costs to spiral.
A litigious culture surrounding construction is not good for constructors and causes the market to harden. The adversarial nature of managing disputes means that each party will require legal representation, leading to huge costs – even if the matter does not become litigated. To avoid this, invest in a broker who has a full understanding of construction insurance law.
The difficulties have brought some construction companies to a crisis. This professional indemnity crisis has a range of consequences:
What are the consequences of the Professional Indemnity Crisis?
- A hardened market, fewer insurers and less competition
- Higher policy excess
- A rise in premiums
- Further policy exclusions
- Delays getting insurance
- More rigorous investigation and questioning
- Indemnity limits being reduced to an aggregate from any one claim basis
At Romero Insurance Brokers, we are well placed to assist our construction clients navigate the difficult waters of the current hard market. To help overcome the consequences of the professional indemnity crisis, contractors and construction workers should be using an expert broker. Our strong relationships with insurers and unique approach ensures we get the best possible result.
To learn more about the necessity of having a broker on your side when running a construction project, read here.
What can Romero Insurance Brokers do for contractors and construction workers?