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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.

 

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