Professional indemnity insurance contractors in 2024. A comprehensive guide.
Professional indemnity insurance contractors
There is a general understanding of the need for construction contractors to carry public liability insurance.
However, there often needs to be more clarity about why contractors must also carry professional indemnity insurance.
This article will outline professional indemnity insurance for contractors and help to provide answers to your questions.
We will clarify the differences between professional indemnity insurance and public liability insurance claims and cover why professional indemnity insurance is important for the construction industry.
We will cover the following:
- Why do contractors need Professional Indemnity Insurance?
- What is Construction Professional Indemnity Insurance?
- What is covered by Construction Professional Indemnity Insurance?
- What is the difference between Public Liability (PL) Insurance and Professional Indemnity (PI) Insurance?
- What do Professional Indemnity Insurance claims occur?
- What limit of Professional Indemnity cover do contractors need?
- Professional indemnity insurance contractors claim
Why do contractors need professional indemnity insurance?
When undertaking design and building work, contractors are typically asked to hold professional indemnity (PI) insurance as part of a tender. Still, they often don’t understand what limits of cover they need or what cover is provided.
To understand why contractors need professional indemnity insurance, you have to understand what it covers. In this case, it’s also helpful to understand the differences between public liability (PL) insurance.
In this article, we will examine when claims fall under professional indemnity and not under public liability.
We have also included examples of claims that will not be covered under a standard public liability policy to examine the differences.
What is Construction Professional Indemnity Insurance?
Professional indemnity (PI) insurance for contractors, also known as design and construct professional indemnity, is designed to protect contractors and sub-contractors.
This insurance type aims to protect them from allegations relating to errors in their work or incorrect design.
In the event that claims are filed related to work errors, incorrect designs, or professional negligence, construction professional indemnity insurance will cover financial losses.
Construction professional indemnity policies provide cover to the construction contractor for any legal defense expenses they may face, while also covering the damages in relation to alleged errors in the build and/or design of a project.
Some examples include
- Incorrect designs and build
- A project not being usable or fit for purpose
- A contractor using incorrect materials as detailed in the specification/agreement.
A standard professional indemnity policy excludes any claims relating to an incorrect design, build, maintenance or installation, however, a “design and construct” wording is specially designed to cover these types of claims.
Design and construct professional indemnity policies provide “rectification cover” – costs incurred in remediation work or mitigating a loss or other potential loss that may otherwise result in a claim.
What is covered by Construction Professional Indemnity Insurance?
Professional indemnity insurance includes:
- Damages, costs, and any monetary awards made against you due to claims
- Construction Act Adjudication Clause, not including the excess
- Discovery period (the time after expiration an insured can identify and report losses during a policy or a bond period)
- Data protection
- Construction (design and management) regulations.
Most Contractors Professional Indemnity policies will generally include the following cover:
- Collateral warranty: this covers claims arising from any collateral warranties, the duty of care, or similar agreements provided by you, to the extent that such liability would have been attached to you in the absence of such contractual duty, term, or agreement.
- Consequential losses: this covers indirect losses which accompany an insured loss, for instance, the loss of earnings to a third party following a claim.
- Health & Safety legislation: with the insurers prior written consent, this covers reasonable costs and expenses incurred for the defense of any proceedings first brought against you under the “Health & Safety Legislation”.
- Pollution cover protects against claims arising out of the actual, alleged, or threatened, sudden or accidental presence/release of pollutants other than nuclear, asbestos, or radioactive material of any sort.
- Defense costs cover any defense expenses incurred (with the prior written consent by the insurer).
- Fraud and dishonesty cover protects the liability of your business to any third party resulting from fraudulent or dishonest conduct of any employee.
- Loss of documents: this covers any costs related to replacing or restoring documents that you lost.
- Court attendance covers the compensation for any court appearance.
What is the difference between Public Liability (PL) Insurance and Professional Indemnity (PI) Insurance?
In summary of the above, here are the differences between Public Liability (PL) Insurance and Professional Indemnity (PI) Insurance.
Public Liability Insurance
This insurance type covers you against injury claims and damages to property resulting from negligence on behalf of your business.
In other words, public liability insurance will help cover expenses of the claim, and legal fees for third-party injuries and damages as a result of your business activities.
Professional Indemnity Insurance
This insurance type on the other hand typically covers intangibles, such as financial loss due to poor advice, faulty design, or copyright infringement.
In addition, professional indemnity insurance will help to cover your legal defense expenses and compensation costs if you are held liable for damages caused.
What’s the difference?
Professional indemnity insurance can also provide cover for bodily injury and property damage (if they occurred as a result of an incorrect professional service, for example: due to the collapse of a faulty building). Therefore, this sometimes confuses people.
However, professional indemnity typically will not cover claims arising from defective workmanship or production techniques used.
Both of these types of insurance provide different cover. Therefore, contractors need to hold both professional indemnity and public liability insurance if they undertake construction projects and building work, even if this design work is carried out by a third party such as an engineer.
What do Professional Indemnity Insurance claims occur?
As well as fulfilling contractual requirements, professional indemnity insurance for contractors protects reputation and liability.
In many cases, PI claims are unfounded, but other parties in the contractual chain seek to apportion the blame or recover their own costs. Many professional indemnity claims are for defense costs, where liability is successfully defended.
When considering construction risk, it is easy to focus on the party with overall responsibility for design. However, the types of claims that are brought against construction professionals and sub-contractors are far broader and include errors or omissions in planning and specification, in technical calculations, and in project coordination.
PI is designed to protect you when a claim is made. Claims are ‘retrospective’ from work before, during, and after construction projects, i.e. from the tender and planning risks through to defects that arise post-completion.
The majority of PI claims related to construction projects are slow to be discovered and often develop into serious legal matters.
Provided your PI policy is incepted when you start trading and kept in force, a policy will cover you for past work. Cover for past liabilities is referred to as retroactive cover.
What limit of Professional Indemnity cover do contractors need?
Indemnity insurance is slightly different from other types of insurance.
You are usually given a standard limit of cover with property or car insurance, for example, (or the maximum amount your insurer will pay out).
With professional indemnity insurance, you will be given a range of limits to choose from.
In other words, depending on their specific requirements, professional indemnity insurance offers contractors different limits to suit their needs.
So, what limit should you choose?
There are several ways to help you find out how much coverage you need for a given contract.
- Check with your client – Your clients will often state the level of cover required in the contract, so it’s best to start there. If they have, you can easily select that coverage to meet their requirements when buying your policy. If they’ve specified that you need to have professional indemnity but don’t state a limit, it’s advisable to check how much they would consider acceptable before you buy.
- Check with your industry body – If you are a member, you might be required to carry a minimum level of professional indemnity insurance as part of your industry body membership. Any details about minimum cover requirements are typically contained in an agreement, but if not, it’s advisable to contact the relevant department to find out more details.
- Make your own decision – Arranging cover for all of the work you undertake is best done by covering for the worst-case scenario for each project. Consider how much it would cost you to rectify the mistake.
For each project, take into consideration:
The cost of rectifying a serious mistake – For the construction industry, rectification cover is vital. It typically covers any fees incurred in remediation work or mitigating a loss that may result in a claim, which includes:
- Any consequential losses your client would suffer as a result of your mistake, for example, missed business opportunities or project delay.
- Any damages or compensation due to your client (this will be decided by the courts unless a settlement is reached).
- Any legal fees incurred by your client in pursuing you which could be costly.
Professional indemnity insurance contractors claim
To help you better understand claims in the industry, here are some examples of industries that need contractors professional indemnity insurance and a few case study examples.
- Commercial builder
- Mechanical engineers
- Cladding contractors
- Specialist subcontractors
- Electrical engineers
- Heating and ventilation engineers
- Electrical contractors
Commercial builder
After its completion, a claim was made about the faulty design of a new-build apartment block.
Rectification costs that were settled in court went into the millions to repair, which was upheld and paid by the professional indemnity insurer.
Mechanical engineers
Hospital equipment was installed but some of it was not suitable and failed during emergencies.
It was decided that the contractors were at-fault and negligent. The PI insurer then paid a couple of hundred thousand in expenses.
Cladding contractors
A design for a new building did not have adequately designed fixings to support the weight of the structure. As a result, a section became loose and injured a member of the public while damaging nearby property.
As this was not covered under their public liability insurance, this was settled and cost upwards of one million.
Specialist subcontractors
Design works were subcontracted to engineers and a building contractor was employed on a design and construct basis.
Design errors were noticed during the construction process, which led to rectification costs and delays.
The engineers had ceased to trade and their public liability insurance policy was no longer active, so the contractor had to deal with the claim. It was submitted under their policy.
Electrical engineers
An electrical engineer’s client alleged that newly installed lighting was inadequate and failed to comply with the required regulations.
This was not covered under their public liability insurance and a claim was submitted under their professional indemnity insurance policy.
Heating and ventilation engineers
A client alleged negligence in the design of a heating and ventilation system after a contractor designed and installed a heating system.
As this was not covered under their public liability insurance, a claim was submitted under their professional indemnity policy.
Electrical contractors
An electrical contractor designed and supervised the installation of electrical services in a shopping mall. Allegedly due to a design fault, operational difficulties were spotted with air-conditioning.
This was not covered under their public liability insurance and a claim was submitted under their professional indemnity policy.
Professional indemnity insurance claims summary
As a result of these types of claims, all contractors should carry professional indemnity insurance.
Professional indemnity insurance quote
Receiving various quotes will help you to find the right professional indemnity insurance for you.
It's important you know what your options are before making a decision, and the following can provide you with affordable quotes and a high level of service.
Contractors insurance USA
For companies registered in USA you can receive quotations from Progressive Commercial
Contractors insurance UK
For companies registered in UK you can receive quotations from Simply Business
Contractors insurance Cyprus
For companies registered in Cyprus you can receive a quotation from Pitsas Insurances by completing the quotation.
We offer coverages made specifically for contractors.
Pitsas Insurances can work with your unique needs to help you secure customized insurance packages and contractor coverage policies.
To find out more about how our team of insurance experts can help you, see here.