February 2007

Contractors Professional Indemnity Insurance
Contractors often run into problems regarding professional indemnity insurance as they don't appreciate what cover is required.

Contractors who enter into building contracts on a design and build basis commonly encounter problems regarding professional indemnity (PI) insurance. This is largely due to most contractors failing to appreciate what cover is required. These problems can be eased if contractors appoint a specialist insurance broker and openly discuss their requirements.

In many instances, design and build contractors do not undertake any design work themselves. This work often being undertaken by consultants or specialist sub-contractors. The fact remains that the contractor has entered into a contract which makes them responsible for all design, even though it is carried out by others!

Reasonable Skill
This presents a problem for the contractor in that its PI policy only covers the contractor for the common law duty of care obligation of "reasonable skill and care". As such, the contractor could be found to have exercised reasonable skill and care but failed to achieve the higher fitness for purpose obligation, leaving the contractor uninsured for that higher duty.

Obtain Confirmation
It is normally a condition of the sub-contractor extension that the contractor ensures that the sub-contractor has adequate PI cover. In many cases, the contractor may be under an obligation to obtain confirmation of the sub-contractors PI insurance on an annual basis.

This is extremely important for a contractor, not just because it is a condition of its own PI policy but because the contractor needs to see that the sub-contractor or sub consultant is insured, and therefore worth pursuing in the event of a problem. The contractor is likely to be the first port of call in the event of a claim by the employer.

Despite the introduction of the Contracts (Rights of Third PArties) Act (1999), collateral warranties remain a major feature with all construction parties. Many insurers have adopted a collateral warranty extension. However, this is unlikely to cover all warranty requirements and contractors need to check warranties carefully to see that it does not take them outside of the protection offered by their policy.

Contractors should always discuss collateral warranties with their brokers and/or solicitors if they have any concerns. Some PI brokers are prepared to review and comment on proposed collateral warranties for their clients to see that the obligations are consistent with the protection offered under the policy.

Source: Insurance Times, 15 February 2007.