What is Professional Indemnity (PI) Insurance?
Professional indemnity in construction is an insurance policy designed to protect contractors and subcontractors from allegations related to errors in their work or professional negligence that results in a financial loss for the client. PI insurance protects you and your business if your client alleges a financial loss for a breach of a professional duty of care or unintentional breach of contract, unintentional breach of confidentiality or copyright, and loss of documents or data. The policy will cover the construction contractor for legal defence costs and any damages awarded to the client in relation to alleged errors in their service.
Construction professional indemnity insurance differs from standard professional indemnity insurance policies. Standard professional indemnity policies exclude claims relating to incorrect design, build, maintenance work or installation. Construction Professional Indemnity policies are worded specifically 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 the difference between Public Liability (PL) Insurance and Professional Indemnity (PI) Insurance?
As outlined above, professional indemnity insurance covers intangible claims made by a client for financial loss due to professional negligence or errors in their work. Public liability insurance covers claims of injury or property damage by a member of the general public against your business. Both types of insurance cover very different things, which is why it is paramount for contractors to hold both public liability insurance and professional indemnity insurance.
What is covered in construction professional indemnity insurance?
The policy covers the contractors legal defence costs and any damages awarded in relation to alleged errors in the design or the construction of a project. For example, an incorrect design, a project not being fit for purpose or a contractor not using the correct materials as detailed in the specification.
Contractor Professional Indemnity policies will generally include the following cover.
Collateral Warranty Cover
Collateral warranty covers claims arising from any collateral warranties, duty of care or similar agreements provided by you, to the extent that such liability would have attached to you in the absence of such contractual duty, term or agreement.
Indemnity Insurance covers the constructor for indirect losses which accompanies an insured loss, for example, the loss of earning to a third party following a claim.
Health & Safety Legislation Cover
Professional indemnity insurance covers any relevant costs and expenses incurred for the defence of any proceedings first brought against you under the health and safety legislation.
Pollution cover protects you from claims arising from the actual, alleged, sudden or accidental presence, discharge, dispersal, release, migration or escape of pollutants that negatively impact the client’s environment.
Defence Costs Cover
Professional Indemnity Insurance commonly covers defence costs incurred with the insurers prior written consent.
Fraud and Dishonesty Cover
This is covered under professional indemnity insurance and involves the liability of your business to any third party resulting from fraudulent or dishonest conduct of any employee within your business.
Lost Documents Cover
A professional indemnity insurance policy covers you and your business from the costs of replacing or restoring client documents lost in your custody or control.
Court Attendance Cover
Under the professional indemnity insurance policy, you are covered under the policy for any legal defence costs incurred (typically a rate of £250 – £500 per person, per day). This includes attending court as a witness by any principal, partner, member, director or employee when defending a claim.
What limit of professional indemnity should a contractor have working in construction?
Professional indemnity insurance differs from other types of insurance in that you will be given a range of limits to choose from rather than one standard limit of cover. It is important to do your research to discover which limit is best suited to you and your business. To help you decide the most appropriate cover, there are a number of methods you can use to gain the right information to influence your decision for your construction company.
Check with your client
If you’re undertaking a contract for a specific client, they may have specified a minimum amount of cover required for you to undertake the contract. If they have, you can simply choose this level of cover when buying your policy in order to meet their requirements. If the client has not stated a limit, it is important that you check in with them to discover how much they would consider acceptable for the contract.
Check with your industry body
If you are a member of an industry body, it is common that they will require you to hold a minimum level of professional indemnity insurance cover as a condition of membership. Details about minimum cover requirements should be contained in your membership agreement, however, if you are unsure it is important that you speak to the industry body directly.
If you would like to purchase professional indemnity insurance that will cover all the construction work that you undertake, the most appropriate way to decide the necessary limit of cover is to consider your worst case scenario and decide how much you think it would cost to put it right. For this method, it is important to consider the consequential losses your client would incur, the damages or compensation due to your client and any legal fees incurred by your client in pursuing you.
In an increasingly litigious environment, professional indemnity insurance is a necessary policy for people working in construction to protect them from claims made by a third party as a result of professional negligence or errors in their work.