Construction insurance types

Professional indemnity (PI) insurance is available to protect consultants in respect of claims made against them for negligence or breach of contract for their professional services provided. This insurance is usually available on a claims-made basis. That is, the consultant takes out insurance on an annual basis for any claims that it may receive during that year, irrespective of when a negligent act was alleged to have been made. This makes it imperative that consultants maintain their policy on an annual basis even after they cease trading. Run-off cover is available for a single premium for such liabilities.

Most professional institutions have made arrangements with the insurance market for a specific insurance product to be made available to their members. Institutions often make it mandatory on their members to take out these policies. RICS has a compulsory requirement for principals of firms that provide surveying services (partners, directors, sole principals/sole practitioners, members (of limited liability partnerships) or consultants) of firms that provide surveying services to carry PI insurance. The level of cover is determined by the gross income of the firm and the type and scope of cover is pre-negotiated with the insurance market by RICS.

Important issues with regard to PI insurance policies include the following.

• The insurance should be on an ‘each and every claim’ or ‘any one claim’ basis as these provide cover to the full limit of indemnity for each claim that is made against you during the insurance period. The alternative is an ‘in the aggregate’ policy, which provides a fixed limit of indemnity for all claims made during the insurance period.
• The retroactive date should include past activities if this cover is required.
  
• The insurance limit should ‘exclude defence costs’ or state that ‘defence costs are in addition’, so that insurers will pay up to the full limit of indemnity to settle the claim and in addition pay the defence costs incurred such as legal fees. The alternative is a policy that ‘includes defence costs’, which means that the limit of indemnity could be eroded by the legal costs involved in defending the claim. These can accumulate quickly in the event of court proceedings.
• Check the limits of cover for asbestos, toxic mould and pollution. The insurance provided varies significantly both in terms of whether any cover is provided and if it is the exact levels and basis of the cover.
• Check the notification provisions. They are generally a ‘condition precedent’ of the policy, which means that insurers can refuse to pay a claim if the claim provisions are not adhered to. Brief all staff carefully about the need to notify the insurers about possible claims and what to do in the event that they have a claim made against them. Failure to notify can allow insurers to refuse to pay a claim or even void your policy totally. This is particularly important with the time periods imposed on adjudication, but some policies are now starting to include strict and very short periods for notification for all claims.
• Check for an innocent non-disclosure clause. If you have made a mistake in the information submitted to insurers or are late in notifying a possible claim, this clause will provide a certain amount of protection. The wording of such clauses varies and not all allow for late notification issues. The inclusion of such a clause is not a substitute for good claims notification procedures.
• Check what rights the insurer has to terminate the policy during the insurance period. Bankruptcy and non-payment are fairly standard; some policies give insurers the unilateral right to cancel the policy at any stage by giving a certain period of notice, generally 30 days.
• Ensure that you are happy with the security of the insurer you are going to use. If the insurer cannot pay their liabilities then the policy has no value. With a claims-made policy the main risk is that an insurer becomes insolvent during the claims resolution period, which can be several years after the initial notification, with the result that there may be a short fall in the claim payment.