Legal Q&A: Professional indemnity insurance

When does a party need to effect professional indemnity insurance?

Professional indemnity insurance (PII) indemnifies the insured against legal liability arising from professional activities.

In the context of the construction industry, these activities include architectural and engineering design, cost monitoring and control from quantity surveyors, and procurement and management from project managers. A contractor's professional activities are likely to include design, particularly on a design and build project, but also on traditional contracts. These often involve the contractor in providing discreet elements of design, as well as management of the day-to-day construction process. It is vital that parties providing these services maintain PII, as their resources are unlikely to be sufficient to meet anything other than minor claims. This is recognised by employers who frequently make PII cover a condition of the contract or appointment.

Establishing the extent of a contractor's professional activities is not always clear-cut. PII is expensive and so the trend in the industry is that, unless specifically given design responsibility, a contractor is unlikely to offer PII or be required to effect it. But - and depending upon the relevant contractual provisions - this does not mean the contractor is absolved of liability in respect of any 'professional activities'.

Is product liability cover (PLI) an alternative to PII cover?

PLI provides an indemnity against liability for accidental death or injury (except to employees) or accidental loss or damage to other property. Consequential losses arising from the defect are covered, but the cost of replacing the product or rectifying defects in the product itself is excluded.

With PII, cover extends to replacement and/or repair costs, but is conditional on the insured failing to exercise reasonable skill and care. PLI is often encountered where subcontractors provide specialist standard products, such as lifts or curtain walling, and where the subcontractor is not carrying out bespoke design as would specialists piling or M&E subcontractors.

Will PII provide cover for all claims made in respect of defective design?

An insured party will only be indemnified where the defective design results from an act or omission which is covered by the policy wording. Policies frequently use terms such as "failure to exercise reasonable skill and care" or "negligence, errors or omissions". As a general rule, PII excludes cover for "fitness for purpose" obligations and may not cover breaches of contractual terms which impose a higher duty than the law of negligence.

If a party is retiring or going out of business, does this mean there is no longer any need to take out PII?

PII policies operate on a "claims made" basis, so a policy has to be in force at the time of the claim. Parties will generally remain potentially liable for as long as 12 years after completion of the project, so there is a need to maintain PII throughout this period, and contracts often require this.

A retiring party may similarly need to maintain cover. If the party ceases to exist (e.g. a company is dissolved), then building owners will need to investigate other methods of protecting their interest.

What is the difference between 'each and every claim' and 'aggregate' cover?

Each and every claim cover allows the insured to make an unlimited number of claims, but each individual claim cannot exceed the set limit of indemnity. Aggregate cover means that the insured can only claim up to a total limit of indemnity, generally in any one calendar year. Aggregate cover is cheaper and easier to obtain, but does not offer the same level of protection.

Are there any common exclusions under PII policies?

In addition to normal exclusions (such as dishonesty, fraud, etc), PII policies commonly exclude public liability, property damage and claims in relation to pollution, asbestos and toxic mould. Some PII policies may also exclude increased liability arising out of the provision of collateral warranties.

Are the new JCT provisions in relation to maintenance of PII adequate?

The wording is generally acceptable, however amendments are needed to ensure, for example, that the PII policy covers negligence, and that the contractor is not able avoid maintaining PII because of increased premiums arising from a poor claims history.

David Johnson and Andreas Dracoulis are both members of Boodle Hatfield's Construction Team. They can be reached via email: djohnson@boodlehatfield.com and adracoulis@boodlehatfield.com