Wherever there is risk, there is usually insurance. Accordingly, because the process of designing a building is full of risk, it is no surprise that architects and engineers have long since recognised the need to purchase professional indemnity insurance. With the advent of design and build contracts, the design risk has transferred to the D&B contractor. This has, in turn, created the need for a new form of insurance, namely a professional indemnity policy for the design department of a D&B contractor.
There are several such policies on the market and they all, in essence, adopt a similar structure. There is, of course, a significant overlap with standard professional indemnity policies. For example, claims and circumstances must be notified immediately and there must be no admissions of liability. However, purchasers of insurance need to be aware that there are a number of differences. Furthermore, it is important for D&B contractors to analyse what will be (and, perhaps more importantly, what will not be) covered by the policy. Some of the key issues are set out below.
- The policy is highly unlikely to cover poor workmanship. The policy is a professional indemnity policy and will be restricted to professional issues such as design. Many problems on site, however, cannot be so easily compartmentalised. Problems have a tendency to embrace both design and workmanship issues. This immediately creates a potential for conflict between a D&B contractor and his insurer. When issues such as this arise, therefore, it is important that insurer and insured work together as far as possible.
- D&B contractors will often sub-contract the design work to an independent firm of architects or engineers. If so, the D&B contractor will need to ensure that the policy protects them against any negligent acts by the sub-contractor. Some policies will have this automatically, whereas others require a separate endorsement to be added to the policy. Insurers will probably require a right to recover losses from the designer, so it is important to ensure that there are no restrictions on suing the designer in the contract.
- The policy will normally be restricted to negligence. Although the standard JCT 81 form of design and build contract limits the contractor's design obligations to those of e.g. an architect without a construct obligation, the normal position in the absence of such a term is that the contractor has a "strict" fitness for purpose obligation in relation to both design and construction. This can, again, create problems between Insurers and Insured; the Insured is exposed for mere non-performance but needs to show actual negligence to recover under the policy.
- The policy will restrict cover to negligence in the conduct and execution of the "professional activities and duties". This term will be specifically defined and the definition needs to be read carefully. It will normally cover most tasks which, under a traditional contract, would have been undertaken by the architect or engineer, such as design, supervision, surveying, etc. However, the definition is not as simple as that:
- The design must be "performed" by the D&B contractor (or its sub-contractor). Although this will normally be the case, we have seen cases where the design was undertaken by another party, e.g. the employer's architect, and this was simply adopted by the D&B contractor who did not themselves use an architect to check the design. This is unlikely to be covered.
- Any task must be "professional" and must normally be undertaken by or under the direction of a properly qualified professional.
- Supervision by a D&B contractor of its own work will almost always be excluded where such supervision is undertaken in its capacity as building or engineering contractor.
- Policies will often exclude any claims between companies in the same group, unless the claim has been brought by a third party.
- If a design defect becomes apparent during construction, it will need to be remedied and this will often result in additional costs. However, a D&B contractor may not be able to recover these from the employer and the employer, having no loss, will not technically have a claim to trigger the PI policy - to cover this D&B PI policies contain mitigation of loss clauses. It should be noted that these clauses generally do not indemnify the insured in relation to the loss itself, merely in relation to those costs and expenses incurred in order to mitigate (or reduce) the level of the loss. It is unlikely, therefore, that the D&B contractor will be entitled to recover all the remedial costs under this clause. The mitigation of loss clause may be limited to those additional costs, such as acceleration costs, incurred in reducing the level of the remedial works.
It can be seen that, although D&B PI insurance can provide valuable protection (and is increasingly required by Employers as a contractual term), it does so within certain parameters that need to be understood clearly. D&B contractors need to exercise considerable care in ensuring that their policies meet their requirements so that as with all insurance issues, it is essential that any design and build insurance is purchased through a specialist insurance broker, who will need to be fully aware of your needs, requirements and expectations so that these can be notified to the Underwriter.
It is also important that those drafting or negotiating D&B contracts and sub-contracts are aware of what D&B policies do not cover so that any uninsured exposure can be contained by the contract terms.
For further information, please contact Peter Mansfield on peter.mansfield@cms-cmck.com or on +44 (0)117 930 7838
