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Construction/Building Contractors and PI insurance

Contractors with a design liability
In recent years it has become commonplace for contractors to incur a design liability, either by offering a design service as part of an overall building package or through a design and build contract where the design work is sub-contracted.

When you undertake contracts on a Design & Construct basis, you will almost certainly be the client's first port of call in the event of a design related problem. Even if a claim is ultimately the responsibility of another party, the costs of redirecting liability can be high and success is far from guaranteed.

How do insurers rate a risk and what do they look for?

As there is no professional body for contractors, there is no recognised qualification or specific standard of insurance coverage. It is for this reason that insurers have to pay careful attention to the qualifications and experience of the principals and staff of a business.

If a contractor is offering professional services, insurers will expect to see qualified staff, such as a qualified architect, engineer or surveyor. If there are no qualified staff, insurers will want to see CVs for those involved in technical work, and these CVs should normally demonstrate at least five years' practical experience, and maybe more depending on the services offered.

Insurers will be particularly interested in the types of projects and the sectors in which the contractor is involved. The following demonstrates how insurers would typically view areas of work:

Home building

Individually designed

Lower risk

Multiple low rise

Medium risk

Multiple high rise

Medium/higher risk

Modular (repetitive design)

High risk

 

Public/commercial buildings

Hospitals

Higher risk

Schools/universities

Medium risk

Offices/retail/warehouses

Lower risk

 

Engineering construction

Highways

High risk

Bridges/tunnels/dams

Very high risk

Harbours/jetties

Very high risk

Sewage/water schemes

High risk

 

Industrial

Power/manufacturing plants

High risk

Refineries/petrochemical installations

Very high risk

Mechanical plant bulk handling equipment

High risk

Industrial building systems

Medium risk

Insurers are particularly interested in ascertaining from which discipline income is derived, for example, architectural, civil and structural engineering, surveying, mechanical and electrical engineering, heating and ventilation engineering, chemical engineering, soil engineering and nuclear engineering.

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Other areas of interest for underwriting purposes include:

  • Contract sizes
    There is a direct relationship between the size and complexity of the job and the exposure. The proposal form will ask you to outline the types of work in which you are or have been involved.
  • Technology
    Is your firm using 'cutting edge' technology or standard, tried and tested processes?
  • Overseas exposure
    Does the practice carry out work for overseas clients? Insurers do not generally like work carried out for US or Canadian firms.
  • Retroactive exposure
    Does the practice have an exposure to claims arising from past work, whether in the current firm or from a former practice?

You will be asked to further clarify the extent of you exposure to design-related claims and for a breakdown of turnover and fee income. Examples are:

  • Turnover
    This applies if your firm designs and constructs from its own design and provides full technical supervision.
  • Fees
    This applies if you provide design and technical services only (i.e. no construction is undertaken by the firm). In this instance a design and construct wording is probably not appropriate, contact us for clarification.
  • Turnover
    This is relevant if your firm constructs from others' designs performed on behalf of your firm. Also applicable if your firm constructs from others' design and others' technical supervision.
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Examples of claims

  • A firm of contractors provided a client with a design and build service in
    respect of the construction of a quarry conveyor belt capable of carrying tonnes of material. Design of the system was sub-contracted out to specialists. After catastrophic failure of the conveyor belt machinery, substantial damage was caused. Although the claim was subrogated by PI insurers against specialist designers, the claim was settled against the contractor for £42,000.
  • In another case, the temperature of a new cold storage room at a factory was consistently too high because of inadequate design. Paid £250,000 plus costs.
  • In a claim centring on alleged specification failure, a major fire in a UK Airport Terminal emanating from a fast food restaurant caused millions of pounds worth of damage. The insured was one of 13 defendants added as co-defendants by building insurers. One of many allegations involved the inadequate specification of extractor flue that allowed hot gasses to build up. Although the contractor was involved in specification, the claim was successfully defended. Costs £50,000.
  • A claim linked to inadequate design involved an air extraction and temperature control at a restaurant which failed to work properly. The restaurant was closed pending repairs, resulting in £150,000 paid, plus costs.
  • A structural design defect was at the centre of a claim in which incorrect structural calculations contributed to total building failure of new car park. Paid £750,000 plus costs.

Policy wordings

Some standard PI policies are not adequate for contractors with a design liability. There are a number of reasons for this:

  • Activities of a contractor may be excluded.
  • They will not provide cover for liability arising out of the negligence of specialist designers, consultants or sub-contractors of the insured (subrogation rights against such consultants must be maintained).
  • They may not indemnify the insured against costs and expenses incurred in respect of action taken to mitigate a loss that otherwise would be subject to a claim under the PI policy.
  • They will not always provide cover for the defence civil or criminal proceedings brought under listed building, building regulation or health and safety legislation.
    Wordings are not normally written on a 'civil liability' basis (covering all civil liability, not just negligence). Generally they are written on a 'legal liability' basis providing cover for legal liability arising from negligence in the conduct and execution of professional activities.

The usual cover

The operative clause of a D&C policy is generally very restricted. Insurers want to cover only professional exposures and do not want to end up paying for poor workmanship on under-priced contracts. So, cover is normally limited to design or specification, feasibility study, technical information calculation, surveying undertaken only by or under the direction and direct control of a properly qualified architect, engineer or surveyor.

Supervision cover will normally be limited to situations where the insured is not supervising their own or their sub-contractors' workmen in their contractor capacity. Other professional activities that are intended to be covered will normally need to be endorsed separately.

Usually the limit of indemnity for contractors will be 'aggregate' with legal costs inclusive within the limit of indemnity. However, it is not unknown for 'any one claim' limits to be available with legal costs in addition. The excess will normally apply to insurers' costs and expenses (see costs in addition and costs inclusive).

As cover is not normally provided for on a 'civil liability' basis, additional cover for liability for lost documents and libel and slander will usually need to be added, so comparisons between wordings being offered by different insurers is needed.

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The usual exclusions

Design and construct policies demand careful attention to exclusions. Typically, policies will exclude:

  • Death or bodily injury
  • Loss or damage to physical property (but loss of documents may be covered)
  • Punitive or exemplary damages (many policies have no geographical or jurisdiction limitations)
  • North American offices and jurisdiction
  • Nuclear risks
  • Claims and circumstances known at inception of the cover
  • Onerous collateral warranties
  • Pollution - care must be taken here if the contractor needs or wants environmental claims covered.

The usual extensions available

  • Loss of documents
  • Libel and slander
  • Collateral warranties
  • Adjudication in accordance with the Housing Grants, Construction & Regeneration Act 1996.
  • Duty to warn - a contractor that has no design or professional supervisory responsibility may still have a duty to warn the client if they become aware of a
    design defect, (many insurers will not give this cover).
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Presenting your proposal for insurance

The presentation of your business to insurers is very important both in respect of the facts i.e. the things for which cover is required, and the way in which you do your business, both of which influence an insurer's perception of your business and the risk it poses to them.

We would always recommend that in addition to the proposal form you are asked to complete, you provide supporting documents with your proposal such as:

  • A CV showing the principals qualifications and experience in the areas of business to be covered
  • Any Terms of Business or terms of engagement you use
  • A copy of your corporate brochure
  • Details of your website
  • An insurance history listing all material changes to your business since you first had professional indemnity insurance. For example, mention any previous businesses for which you require cover. It is possible you may be asked for a claims history from the previous business or a copy of its last completed proposal form.

Don't forget to include the names of any businesses with which you have merged, or any that you have acquired, as these will need historic cover. Likewise you may have ceased to offer certain services for which cover is still required.

Keep a written record of all requests for cover to be extended and any historic or material changes to your business. This information can be updated each year and provided as an addendum to the proposal. Any certification the business may have i.e. accreditation by a governing or standards council, is also well worth disclosing.

Keep your presentation neat and tidy. Bear in mind that an untidy presentation may be construed as an untidy business. Allow yourself time to complete the presentation and remember that a hard copy always look better that a faxed one sent in at the last minute.

The Professional Indemnity Insurance market is relatively small so at the point of renewal, concentrate on asking only one or two specialist brokers to quote. Bombarding the market with requests can result in your proposal being locked out of some markets.

Renewal is an ideal time to review your insurance requirements. As your business grows and your contract values increase, it is wise to consider what could go wrong and how much it may cost to settle a claim - and also cover the attendant legal costs. Some policy wordings provide a limit of indemnity with legal costs in addition to the limit. Others provide limits of indemnity which include the legal cost. However, the cost of litigation is high and can eat into the limit of indemnity provided if costs are inclusive.

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