Changes in the construction professional indemnity market and how to manage them
This article was co-authored by Tegan Johnson, Solicitor Apprentice, Sheffield.
One trend dominating conversation across the construction industry currently is the changes faced when procuring insurance cover.
It isn’t hard to remember a time when placing professional indemnity insurance was a routine matter. However, things have changed somewhat over the past couple of years. Whilst there are a number of causes, the impact has been singular: a hardened market. Policies are often subject to new restrictions and exclusions, such as fire safety, cladding and facades, or even wider wording. Levels of cover previously held are more expensive (both in terms of the policy and excesses) or unavailable, with more insurers declining to provide cover completely.
Contractors and consultants are thinking differently about the work that they bid for and take on, or declining to tender entirely, due to those changes. Some ongoing long-term or past projects are experiencing issues as parties can no longer access cover on the terms they agreed to in the contract.
How can parties begin to overcome this?
Opening discussions with insurance brokers well in advance of renewal will give consultants and contractors more chance to “shop around” for options. Equally, starting discussions around insurance cover early in the tender or contract negotiation stage for a new project may help with reaching a mutually beneficial position. Where there are specific exclusions on coverage, separate policies may be acquired – or other consultants appointed with specific cover to carry out parcels of work.
Further practical steps include negotiating contracts with obligations which reflect the current market, and which do not hold parties to a level of cover they could not reasonably be expected to maintain. Where there are gaps in insurance cover, parties may take comfort in appointing additional professional team members with specific expertise (such as employer-side fire safety consultants to peer review designs and workmanship), or to exercise greater than usual caution around the specification of particular products.
It is already commonplace to find wording in contracts to the effect that professional indemnity insurance only needs to be held at the specified level where it is available on commercially reasonable rates and/or terms. This caveat can help consultants in the event they cannot source sufficient insurance, and it promotes discussion on what cover might be available and any compromises that might be reached. The inclusion of what steps the parties should take where cover is not available is also sensible and can avoid disputes forming.
For projects completed in recent years, avoid complacency. With professional indemnity insurance, coverage is on a claims-made basis; meaning that it is the policy in place at the time of the claim and not at the time the work was carried out that matters. If coverage lapses, or there is less cover available than at the time of the project, all parties to a contract could suffer in the event of a claim. Accordingly, construction professionals should check their ongoing contractual requirements before renewing their insurance – even after projects are complete, parties are usually required to maintain professional indemnity insurance for the duration of the limitation period (generally six or 12 years).
Ultimately, all parties need to be aware of the insurance position (whatever that is) and to facilitate genuine, productive discussion. It is in nobody’s interest to ignore potential coverage issues. Simply opening discussions and co-operating in a pro-active manner can ensure insurance is held which satisfies all parties in a commercially reasonable way.
Related item: Shortage of Approved Building Inspectors