Construction Insurances Explained – Professional Indemnity Insurance

A) Professional Indemnity Insurance

The Insurance coverage provided under Professional Indemnity Insurance policies is for awards of damages, costs or settlements (including defence costs) for which the a company or individual  is legally liable resulting from a claim made against them during the policy period for any act, error or omission arising out of the conduct of the business. Cover is for matters notified to the insurers in the policy period. The event giving rise to the claim may have occurred during the same period of insurance but is more likely to have occurred before (perhaps many years before). It is because of this that Professional Indemnity Insurance is described as being on a ‘claims made’ basis.

Professional Indemnity Insurance can be obtained many insurance brokers. Professional Indemnity Insurance is a specialised area of expertise, and many high street insurance brokers either do not deal with this type of cover, or deal with it so rarely that they are not experienced in the various nuances of the cover. Quite often the brokers who are the most experienced in this area are specialists with expertise in this type of cover and normally the relevant Malaysian professional bodies representing Architects, Engineers, Surveyors  and other design disciplines have details of brokers who their members regularly obtain such cover. These compiled lists of approved insurers, who normally comprise a mix of Lloyd’s Syndicates and Insurance Companies, all of whom have generally agreed to provide the minimum levels of cover to members of the various professional bodies’ members. Before any professional makes any decision regarding the selection of  brokers or insurers it is a good idea to talk to other members to see if they can recommend a particular organisation, or to their professional body who would normally supply a list of experienced brokers .

Once a choice has been made it will be necessary for the member of the Design team to complete a proposal form. It is extremely important that forms are completed fully and legibly, as this is the information on which the underwriter will base the premium to be charged.

Forms that are badly completed or illegible, and some of them are, give a bad impression; a well-completed, neat and tidy form makes a favourable first impression and may save the Design Team member as also the Employer money. If it is considered necessary to elaborate on certain aspects of the work then it is advisable to for the Design Team member to put extra information on separate sheets of paper. It is important not to be tempted to conceal any matters that might be felt detrimental to the proposal. Insurance is a contract of utmost good faith, and any omitted information that would influence any decision made by insurers.

Where a Design Team Member takes out annual Professional Indemnity Insurance it is important that the insurance policy wording should be on a civil liability basis, which means that it covers claims from third parties for matters arising out of the conduct of the insured Design Team member. The insured does not have to have been negligent to have a successful claim made against them. There will be a limit of indemnity shown in the policy and this should be on an each and every claim basis, in other words the amount of cover selected is the maximum amount that insurers will pay for any one single claim. There should be no limit to the number of claims that can be made in any one year of insurance.

Costs and expenses incurred by insurers in dealing with any claim, for example expert witness fees, solicitors fees, should be in addition to the amount of cover purchased. For example, if there is protection for RM 10m for any one claim and the claimant successfully claims RM 9m and the costs to insurers in various fees, etc. are another RM 2m then they will pay RM 11m in total.

There will generally be a claims excess on the policy. This is the amount that the Design Team member will have to pay in the event of a claim. This will vary from insurer to insurer, and will almost always be a higher amount for higher risk work, so there could be a policy where the excess is the first RM 10,000.00 of each and every claim but rising to in excess of RM 500,000.00, for each and every claim arising out a claim.

The various professional bodies will generally lay down minimum levels of cover for its members in order for them to remain compliant with the professional body’s requirements and practice in their specific field. It should be remembered that these are minimum levels only and may not be appropriate for specific project. Generally the minimum levels are based on fee income bands or similar.

Unfortunately for the Design Team member most underwriters are not prepared to increase the cover just for one specific project, and they insist it is done for all works executed by the Design Team members company. In addition if a collateral warranty is required by the Employer then this will mean that the higher cover has to be kept in place for a minimum period of time from practical completion. Thus this extra cost needs to be factored in when deciding the fee for such a project by the Design team member when submitting his fee proposal to the Employer.

The exception to this rule is where a specific project is of such a size that project cover is attractive to underwriters. Given that there are very high minimum premiums for this cover, the contract needs generally to be of a substantial size, and attract a fee of the size, that justifies this level of premium. Very few insurers offer this cover and it is a specialist area.

As highlighted Professional Indemnity Insurance covers errors and omissions and professional negligence on the part of the Design Team comprising Architects, Engineers, Surveyors and other design disciplines who may be held liable for losses due to bad design or incorrect professional advice. As such it is essential that the Employer obtain independent and professional advice on the suitable insurance coverage level and the periods for which such should be maintained by the members of the design team. Inherent Defects insurance or Decennial Liability insurance may protect the Employer against losses due to the threat of imminent collapse of the structure and subsequent debris removal, together with costs related to remedial measures and legal expenses. However, Professional Indemnity insurance must address retroactive date clauses and should reflect the risks and requirements of the Architects, Engineers, Surveyors and other design disciplines in respect of the project. In addition thought must be given to the claims made or claims occurrence clauses and extended reporting clauses must be thoroughly discussed and agreed in respect of the specific project. Project specific Professional Indemnity cover is generally not preferred by the insurers and tends to be expensive for the design team members thus it is essential consideration of particular insurance requirements is considered prior to engagement of the various Design Team members to ensure additional inflated costs are not incurred at a later stage otherwise the Employer may find himself forced to accept the coverage offered by the standard Professional Indemnity Insurance which most consultants keep in place on an annual basis.