The problem of PI

No, we don’t mean PI as in 3.14159265359, we mean professional indemnity insurance, often referred to as ‘PI’ insurance.

Professional indemnity insurance is one of several insurances that sit behind many a building contract and professional appointment. Its purpose is to it cover professional negligence, errors and omissions, breach of duty and civil liability. When it is maintained at suitable levels it gives both the policy holder and their clients comfort that should there be a problem with the professional services provided, there is insurance to cover losses that may be sustained. In the construction industry it is normal practice to see PI insurance being maintained by designers, contractors who undertake design and other professionals engaged in the construction process, such as project managers, quantity surveyors and employer’s agents. It is usually held on either an ‘each and every claim’ basis or on an ‘in the aggregate’ basis – the former clearly being more beneficial albeit more costly to procure.

The last five years have seen hikes in the cost of professional indemnity insurance that have had a huge impact on businesses that require this form of insurance, their clients and the industry as a whole. The Grenfell Tower fire in 2017 triggered a massive hike in premiums, with insurers increasingly reluctant to offer cover for envelope or cladding work, and some specialists in that area of construction who continued to trade seeing hikes of over 1500% in a five year period. The ongoing liabilities generated by the aftermath of the Grenfell tragedy meant that the return for insurers on existing professional indemnities was lower, and the hardening of the reinsurance market compounded the problems. The result has been increasing premiums across the construction industry, with professionals even with exemplary claims histories being unable to maintain their previous levels of insurance. Exclusions, sub-limits and sometimes unaffordable premiums have meant that both professionals and employers have had to re-think how risk is allocated under some contracts.

So, what can be done?

For larger projects, it may be possible to revisit the procurement structure to see if the risks can be better spread rather than, for example, a design and build or EPC approach where the whole project risk is wrapped (and insured) by one party. Using a construction management approach, for example, may spread that risk better. Further options that have been mooted look towards different insurance models – including project latent defects insurance policies and alliancing models which partner with insurers as well as professionals and contractors to share the pain/gain in a project.

But these options are only realistically available for larger projects which can stand the greater set-up cost. For both employers and professionals in the rest of the market, options are currently limited.

For professionals and contractors with ongoing professional indemnity insurance commitments under existing contracts it is crucial to instigate early discussions where previously agreed levels of professional indemnity insurance can no longer be maintained so that both parties can decide how best to manage any additional risk. In relation to new contracts, it is important to be aware of and reflect the increasing limitations under professional indemnity insurance policies in the contract so that the extent of a party’s liability under a contract does not exceed that for which they have insurance.

Most employers will already be all too aware of the fall in the level of professional indemnity insurance cover amongst contractors and professionals, and of the increase in construction costs that is consequent upon the rising costs of procuring even those lower levels of cover. To protect themselves, it is important to ensure that those gaps in, or risks arising out of, the extent of professional indemnity insurance cover are identified, managed and mitigated throughout a project, Furthermore employers should also to ensure that any funders or end users are aware of such matters so that expectations upstream are managed and that contractual documentation reflects this.