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Building Services professionals – A PI case study

The recent tragic events at Grenfell Tower have highlighted how liability and blame may be apportioned to various parties involved in the maintenance, refurbishment, safety and management of a large building, with the likely cost to insurers – both in the UK and worldwide – running into millions of pounds.

Arlington have already witnessed direct insurance implications to the fire, with PI insurers now asking specific questions as to the height of, and construction materials used in buildings that firms may be involved in. Certain professionals such as cladding firms and fire safety inspectors are now struggling to buy PI insurance at affordable premiums.

However small your role may be in an overall project, the knock-on effects of an error or failure in your design, advice or specification should not be underestimated, particularly if a building cannot function or operate for its purpose or within specified timescales.

The following is a case study concerning an air conditioning sub-contractor whose installation error could potentially have cost them a six figure sum, had they not held PI (Design & Construct) insurance.

Background

A contractor was appointed for a design and construct refurbishment of a large department store. Part of the works included the design, supply and installation of a new air conditioning system which was subcontracted to an M&E consultant for the design, and to another subcontractor for the installation.

However, the air conditioning system failed to meet the department store’s own performance specifications so practical completion was not granted for the refurbishment works. There was a risk of significant claims for loss of business if the store didn’t open on time and LADs were likely to be applicable.

3 problems were identified as having caused the failure of the air conditioning system:

  • The air handling units were under-sized due to the negligent design by the sub-contractor’s designers
  • The sub-contractor altered the duct work as it was being installed to avoid obstructions that had been located in the ceiling void
  • The sub-contractor failed to install any sensors in the system, despite these being included in the designer’s specification and design

The sub-contractor had to spend significant additional costs (circa £700,000) by working at night to rectify the defects so that the store could re-open on time. Practical completion was finally achieved before Christmas.

What were the key issues regarding PI insurance?

The air conditioning subcontractor held a Design & Construct PI policy, which contained a mitigation of loss clause. If they had not undertaken the rectification works, the main contractor would have had to undertake them and could then have claimed the costs back from the sub-contractor. The insurers had to consider:

  • Was the sub-contractor’s own expenditure mitigation costs that it could recover under its PI policy, or merely costs expended to achieve the sub-contractor’s contractual obligations?
  • Were the amendments by the sub-contractor design changes which may be covered under PI, or workmanship failings which would be excluded under a PI policy?
  • Was the omission of sensors a design or workmanship failing?

The benefits of professional indemnity insurance in this case

 The insurer reached the following conclusions: 

  • The PI policy was a Design and Construct policy which contained a mitigation of loss clause. If the sub-contractor had not done the works, the main contractor would have been obliged to undertake them and would have claimed them from the sub-contractor. Therefore, the costs were recoverable under the PI policy as they were deemed to be works to mitigate a claim.
  • The amendments to the pipework were considered to be a design change because it was a conscious decision to change the pipework route even though it was different to the drawings. This was covered by the PI policy.
  • Unfortunately the omission of the sensors was not covered because it was deemed poor workmanship.

Although the M&E subcontractor held a PI policy, it is important to note that this only covered part of the remedial works costs that were incurred. The PI policy responded and covered works that were in progress under a contract and not subsequent to practical completion.

 

Professional Indemnity Insurance – questions we are frequently asked by professional businesses

What is professional indemnity insurance and what does it cover?

Professional indemnity insurance is there to pay for legal defence and costs if a client takes you to court for supplying inadequate advice, designs or services which results in financial loss for them. The insurance also pays a sum of money to the client to compensate for their losses.

 

Who needs professional indemnity insurance?

Anyone who provides professional services, advice or designs should consider taking out professional indemnity insurance.

Mistakes do happen and if a client alleges that you have made a mistake causing them financial loss, professional indemnity insurance will pay your legal costs and will also cover any financial compensation awarded to your client.

 

Is professional indemnity insurance compulsory?

For some professions, such as accountants and financial advisers, it is compulsory to hold professional indemnity insurance. For other professions, such as facilities managers and building services consultants it may be a requirement of a work contract or being a member of a professional body.

 

How much does professional indemnity insurance cost?

The cost of professional indemnity insurance varies depending on your occupation and other factors, such as your annual turnover and the size of projects you work on.

If you want to get an idea of what it might cost for your business, you can very quickly and easily get a quote with us online.

Directors & Officers (D&O) insurance explained

What is Directors & Officers insurance?

Directors, managers and employees are all expected to adhere to certain duties and standards in their day to day role at work. These can range from simply acting in the best interests of the organisation, to complying with strict legal and regulatory standards.

If an individual falls short of their obligations they can be held personally liable via civil, criminal or regulatory proceedings.

D&O insurance protects these individuals, covering the costs of defending allegations made against them and reimbursing associated fines and penalties.

It also typically includes certain protection for the organisation itself, as well a range of optional covers.

What is a typical D&O claim?

There is no such thing as a typical D&O claim. Directors and officers face a broad range of exposures, and claims can come from virtually anywhere, including:

  • Customers
  • Shareholders
  • Competitors
  • Suppliers
  • Creditors
  • Employees
  • The organisation itself
  • Regulators
  • Governmental and law enforcement agencies

D&O insurance provides the best safety net against the wide range of risks facing individuals within an organisation.

How does this relate to corporate governance?

In recent years, the role of corporate governance has come under intense scrutiny, with a clear trend towards greater individual accountability. In fact, since the financial crisis in 2008, D&O insurance claims have increased four-fold, largely attributed to intensifying regulation across both the UK and globally.

One example is the latest revision to the health and safety sentencing guidelines, which introduced a greater focus on the actions of individuals, and lowered the thresholds for custodial sentences to be awarded.

This trend of greater individual accountability has made D&O insurance more relevant than ever for today’s businesses.

Who needs D&O cover?

Every organisation can benefit from D&O insurance, regardless of its size or legal status. Every director and officer faces various duties in the performance of their role, and each is vulnerable to potential allegations of wrongful conduct.

Smaller organisations may arguably gain the greatest relative benefit from D&O cover, as they typically have fewer resources to defend allegations or fund potential fines, penalties or awards for damages. Despite this, many small and medium enterprises still fail to appreciate the importance of D&O cover in today’s marketplace.

What about limited liability?

One common misunderstanding is that directors and officers are protected by an organisation’s limited liability status.

While limited liability offers financial protection to an organisation’s shareholders, it bears no relevance to the liabilities attached to directors’ and officers’ day-to-day roles and responsibilities.

Directors’ and officers’ personal assets – such as cash, property and pensions – are therefore all at risk if accused of wrongdoing in the performance of their role, with no limits on their potential liabilities.

What happens in the event of a claim?

D&O insurance protects individuals against alleged ‘wrongful acts’, which are broadly defined. This includes funding defence and investigation costs, and reimbursing fines or penalties when a defence is unsuccessful.

Most modern D&O policies will also extend cover to the organisation itself where it is allowed to fund claims on behalf of its directors and officers.

An important exclusion to be aware of is that, on public policy grounds, policies are unable to reimburse fines issued for criminal offences, such as fraud.

Is it easy to get D&O cover?

It’s very easy to buy D&O insurance. It can easily be bought online and cover can be in place very quickly at moderate cost.

Find out what costs might be involved for your business by getting a quote from us online now.

 

 

Do you have sufficient Professional Indemnity cover?

In an increasingly litigious world, businesses must be prepared when it comes to facing professional indemnity (PI) claims as these can be costly and time-consuming. For smaller companies with fewer resources, it could take just one claim to threaten the existence of a business or your own personal livelihood.

PI cover will protect your firm against claims arising out of negligent advice, design, or specifications given in the course of your business where your clients have suffered a financial loss. While some professions are obliged to take out PI cover as part of their regulatory body’s requirements, many do not, and risk leaving themselves exposed.

Without PI cover in place, businesses are left to handle claims on their own. Even where allegations are unfounded, the investigation and defence process can be lengthy and draining on resources. To help ensure that small businesses are adequately protected, you should weigh up the potential cost of facing a complex and lengthy claim versus the relatively low cost of a PI policy.

 

Why not get a quote from Arlington online? It’s quick and easy to do.  You may find that Professional Indemnity insurance isn’t as complicated and expensive as you thought.