Many clients have asked us why Contractors need to purchase Professional Indemnity Insurance. Usually they have been asked to hold the cover as part of a tender but don’t really understand what cover is provided or what limits of cover they need.
The most common question we receive from contractors is when does a claim fall under Professional Indemnity Insurance and not under Public Liability Insurance when undertaking design and building work.
The information provided below details what the Professional Indemnity Insurance covers as well as some real-life claim examples from our insurers where claims have occurred that will not be covered under a standard Public Liability policy.
What is the difference between Public Liability (PL) Insurance and Professional Indemnity (PI) Insurance?
Public Liability Insurance covers you against material damage to property and injury claims that result from negligence on behalf of you or one of your employees. If a third-party experiences property damage or bodily injury as a result of your business activities, Public Liability Insurance will help cover the cost of the claim as well as court and legal fees.
Professional Indemnity Insurance on the other hand has traditionally covered intangibles, such as financial loss due to faulty design, poor advice, or unintentional copyright infringement. Professional Indemnity Insurance covers your legal defence fees and the cost of compensation you may owe due to damages.
What can sometimes confuse matters is that Professional Indemnity Insurance can also provide cover for bodily injury and property damage, if this has occurred as a result of an incorrect design or professional service, for instance property damage occurring due to incorrect structural calculations being provided which results in a collapse.
Much like a Public Liability policy, Professional Indemnity Insurance it will not cover any claim arising from defective workmanship, including defective physical construction work, erection, installation, repair or service, defective products, or any defective materials, workmanship or production techniques used.
Both of the above types of insurance cover very different things, which is why it is important for contractors to hold both Professional Indemnity and Public Liability Insurance if they undertake any design work when carrying out construction projects, even if this design work is carried out by a third party such as an engineer.
What is Construction Professional Indemnity (PI) Insurance?
Construction Professional Indemnity, also known as Design and Construct Professional Indemnity, is a policy designed to protect contractors and sub contracted specialists, for allegations relating to errors in their work or incorrect design.
The policy covers the contractors legal defence costs and any damages awarded in relation to alleged errors in the design or the construction of a project, for instance the incorrect design, a project not being fit for purpose or a contractor not using the correct materials as detailed in the specification.
A standard Professional Indemnity policy will exclude 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. A Design and Construct Professional Indemnity policy will provide Rectification Cover – costs incurred in remediation work or mitigating a loss or potential loss that may otherwise result in a claim.
Most Contractors Professional Indemnity policies will generally include the following cover:
Collateral Warranty Cover – claims arising from any collateral warranties, duty of care or similar agreements provided by you, to the extent that such liability would have attached to you in the absence of such contractual duty, term or agreement.
Consequential Losses – Cover for Indirect losses which accompanies an insured loss, for instance the loss of earning to a third party following a claim.
Health & Safety Legislation Cover – reasonable costs and expenses incurred with the insurers prior written consent for defence of any proceedings first brought against you under the Health & Safety Legislation
Pollution Cover – claims arising out of the actual, alleged or threatened, sudden or accidental presence, discharge, dispersal, release, migration or escape of pollutants other than asbestos, nuclear or radioactive material of any sort.
Defence Costs Cover – covers defence costs incurred with the insurers prior written consent.
Fraud and Dishonesty Cover – liability of your business to any third party resulting from fraudulent or dishonest conduct of any employee.
Lost Documents Cover – costs of replacing or restoring documents lost in your custody or control.
Court Attendance Cover – if attending court as a witness by any principal, partner, member, director or employee when defending a claim, a typical rate of $200-@400 per person per day.
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