For construction contractors there is a general understanding of the need for them to carry public liability insurance. What sometimes causes confusion is why they are also asked to carry professional indemnity insurance, which typically occurs as part of a tender for a construction contract.
We have written this article to help provide some clarity as to why professional indemnity insurance is important to the construction industry, and to clarify when a claim falls under professional indemnity insurance and not under public liability insurance.
Let’s start by defining the differences between professional indemnity insurance (PI) and public liability insurance (PL)
Professional indemnity insurance will cover claims made by a client for professional negligence or mistakes made in the work you have done for them. Claims can be made due to perceived poor business advice, professional errors, defamation or libel, and sub-standard work.
Professional indemnity insurance can cover the cost of legal defence, compensation payments, any additional costs for rectifying an issue and loss of income as a result of the claim.
Public liability insurance covers claims of injury or property damage by a member of the general public against your business. This could include customers, clients, suppliers or passers-by. Public liability insurance can also cover the cost of your legal defence, compensation payments, medical costs and loss of income as a result of the claim.
In summary, the key difference between the two insurance policies is that public liability covers for risks of injury or damage. Professional indemnity is focused on when you work for a fee but do not undertake physical construction work, and will provide cover for professional errors, mistakes and negligence that cause a financial loss.
What is Construction Professional Indemnity (PI) Insurance?
Construction Professional Indemnity insurance is designed to protect contractors and sub-contractors in the event that claims are made against them for allegations relating to errors in their work, incorrect designs or professional negligence, that causes their client a financial loss.
The policy provides cover to the construction contractor for legal defence costs and any damages awarded in relation to alleged errors in the design and/or the build of a project. Examples include incorrect designs, a project not being fit for purpose, or a contractor not using the correct materials as detailed in the specification.
Standard Professional Indemnity policies typically exclude any claims relating to an incorrect design, build, maintenance work or installation. Construction Professional Indemnity policies are worded is specially to cover these types of claims and will provide cover for costs incurred in remediation work or mitigating a loss or potential loss that may otherwise result in a claim.
What is covered by Construction Professional Indemnity (PI) Insurance?
- Damages, costs and any monetary awards made against you arising from any claim first made against you and reported during the period of insurance arising from any actual or alleged negligence; unintentional breach of confidentiality; unintentional breach of copyright; libel, slander or defamation; any other actual or alleged act, error or omission that results in a civil liability.
- Construction Act adjudication clause, not including the excess.
- Loss of documents.
- Compensation for court appearance.
- Discovery period.
- Construction (design and management) regulations.
- Data protection.
Why do Professional Indemnity (PI) Insurance claims occur?
As well as fulfilling contractual requirements, PI protects reputation and liability.
In many cases, PI claims are unfounded, but other parties in the contractual chain seek to apportion the blame, or to recover their own costs. Many professional indemnity claims are for defence costs, where liability is successfully defended.
When considering construction risk, it is easy to focus on the party with overall responsibility for design. However, the types of claims that are brought against construction professionals and sub-contractors are far broader and include errors or omissions in planning and specification, in technical calculations, and for project co-ordination.
PI is designed to protect you when a claim is made. Claims are ‘retrospective’ from work before, during and after construction projects, i.e. from tender & planning risks through to defects that arise post completion.
The majority of PI claims related to construction projects are slow to be discovered and often develop into serious legal matters. Provided your PI policy is incepted when you start trading and kept in force, a policy will cover you for past work. Cover for past liabilities is referred to as retroactive cover.
What limit of Professional Indemnity cover do construction professionals need?
Professional Indemnity insurance offers contractors a range of cover limits to choose from depending on their specific requirements.
There are a number of ways to discover how much cover you need for a given contract:
Consult your client – If you are contracted for work to a specific client, it will often state the level of cover required in the contract. You can easily select this level of cover to meet your minimum contractual requirements.
Consult your industry body – If you are a member of an industry body you might be required to carry a minimum level of professional indemnity insurance as part of your membership. It is advisable to speak to the relevant membership team to find out the details.
Make your own decision – If you opt to arrange cover for all the work you undertake it is advisable to cover the worst-case scenario for each project you undertake.
For this you will need to consider the following:
The cost of rectifying a serious mistake – Rectification cover is vital for the construction industry and covers the costs incurred in remediation work or mitigating a loss that may result in a claim, including:
- any consequential losses your client would suffer as a result of your error.
- any damages or compensation due to your client, typically decided by the courts unless a settlement is reached.
- any legal fees incurred by your client in pursuing you.
Caunce O’Hara offer Professional Indemnity insurance policies tailored for the construction industry with cover limits ranging from £100,000 – £10,000,000.
If you would like to discuss cover for your construction business call 0333 321 1403 to speak to one of our award-winning schemes team or click to build a quote online in minutes!