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What do contractors need to know about professional indemnity insurance?

The essence of a design and construct contract is the contractor’s responsibility for both the design and construction of the works. 

Professional indemnity insurance is essential to provide cover for losses arising out of a professional error in the design or specification of the works, which can be significant.

For design-and-build contractors, professional indemnity cover is required in addition to policies such as Public Liability and Contractor’s All Risks.

Professional indemnity insurance is a liability policy aimed at protecting a policyholder against their legal liability (whether in contract or tort) for damages arising out of an error in the professional services provided by the policyholder. It does not provide cover for defective workmanship or contractor’s supervision.

Terms and conditions

A key aspect of all professional indemnity insurance policies is that they are written on a ‘claims made’ basis.

This means it is the policy in force at the time the claim is first made against the policyholder and notified to the insurer which should respond, rather than when the alleged negligent act, error or omission occurred.

“If a design-and-build contractor complies with his contractual obligation to rectify a defect in the design of the works, a claim may never materialise”

The terms, conditions and exclusions of the professional indemnity policy place a great emphasis on the awareness and timely notification by the policyholder of a claim or circumstance.

Failure to notify in accordance with the policy conditions may entitle the insurer to decline the claim, and if the failure to notify a pre-renewal claim or circumstance occurs after the policy has been renewed, insurers may be entitled to cancel the policy.

Mitigating and preventing claims

In construction contracts, a formal claim relating to a dispute or problem may not be made against a policyholder immediately.

If a design-and-build contractor complies with his contractual obligation to rectify a defect in the design of the works, a claim may never materialise.

Most professional indemnity policies written for design-and-build contractors allow for this by providing a supplemental ‘mitigation of loss’ clause, to cover costs and expenses in mitigating or preventing a potential claim, which would otherwise be covered under the policy.

“Construction PI claims generally require extensive technical enquiries to establish”

This clause is subject to various conditions, most notably that the prior consent of insurers is required.

For senior construction managers who are responsible for notifying these matters to their broker or insurer, it is important they are informed by their subordinates of a potential notification or circumstance as soon as possible.

Most insurers allow a few weeks, rather than a few days in which to notify – but this is dependent on the policy wording.

Extensive enquiries

In summary, construction PI claims generally require extensive technical enquiries to establish: what has gone wrong, who might be responsible, whether there is an effective insurance policy to cover the liability or loss, what immediate steps need to be taken and whether there is a cost-effective solution?

A construction manager who becomes aware of a problem should speak to their company insurance manager or broker in the first instance, who will then advise whether the matter should be notified and under what policy.

Once notification is received, this will allow an insurer to decide whether the appointment of an adjuster or solicitor is required.

Bob Paterson is a chartered civil engineer and loss adjuster and director of Walsh PI (Triton Adjusting), part of the Triton Global Group which specialises in the defence and handling of professional indemnity claims

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