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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.

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.

Getting to grips with the terminology for Professional Indemnity insurance

Professional Indemnity is often seen as a complex insurance product. Here we look at some terms used in PI policies.

Civil liability wording – this starts with a broad insuring clause that offers cover for a wide range of liabilities unless specifically excluded

Any one claim – the limit of indemnity applies to each and every claim

Aggregate – limit of indemnity applies across all claims during the policy period

Claims made – the policy covers claims notified during the policy period, irrespective of when the work that led to the claim occurred

Run-off – protects a business against claims after it has ceased trading

Negligence wording – starts with a limited insuring clause, covering claims alleging negligence, and will then often extend cover beyond this.

 

Your 5 point guide to Professional Indemnity insurance

Professional indemnity (PI) insurance has become increasingly common for today’s professionals. It protects you against claims made against you by your clients for financial loss that has arisen from work undertaken by you. This could be negligent advice, poor design work or mistakes in specifications.

From engineers to IT consultants, accountants to heating and ventilation experts – if you offer your knowledge, skills or advice as part of your work or services to third parties, you should hold PI cover.

PI policies typically offer a suite of additional covers, such as loss of documents, Ombudsman awards and unintentional breach of intellectual property rights.

Here are 5 things Arlington recommend considering when arranging Professional Indemnity insurance.

  1. Looking at different approaches to cover

There can be significant differences between wordings; often the differential is the insuring clause itself. Whilst most policies are now written on a ‘civil liability basis’, some policies may be written on a ‘negligence’ basis with cover excluding certain perils.

  1. Setting appropriate limits of indemnity

If a minimum limit isn’t specified by your professional body, such as the Royal Institute of Chartered Surveyors (RICS) or is stated within your client contracts, you will need to contemplate worst-case claim scenarios. This could be influenced by factors such as the type of work you undertake, potential legal costs and how you have limited your liability, if at all, through contract.

  1. Aggregate or any one claim?

Most policies are now written on an ‘any one claim’ basis meaning each claim can be up to the full limit of indemnity. However, policies can also be written on an ‘aggregate’ basis where the limit of indemnity applies across all claims during the policy term and each claim will gradually erode the annual aggregate limit.

  1. Don’t forget run-off

PI policies are written on a ‘claims made’ basis, meaning they only cover claims notified during the policy period. This is unlike Employers’ and Public Liability, which are written on a ‘claims occurring’ basis, where the insurer at the time of the incident provides cover, irrespective of when the claim is made.

As claims may arise years after work is completed, when you retire or cease trading you will need ‘run-off’ cover. This simply entails insurers adding a cut-off date to your current PI policy, so it only covers claims made while you were still trading.

The recommended length of run-off cover may vary depending on your profession and nature of work. Six years is usually considered a minimum, although certain professions may be exposed for 12 or even 15 years, particularly if any contracts were executed as deeds.

  1. Tailored solutions

Businesses’ PI needs can vary significantly, as can PI policy wordings, so sourcing cover that meets your specific needs may seem daunting. At Arlington, we take the time to understand your professional activities to ensure that the wording and limits are appropriate to your demands and needs.

Alternatively, if your business is relatively small and your needs are straightforward, you can buy PI insurance online quickly and simply via our website.