Planning a project takes work. A lot of work. With the multitude of tasks to be completed and deadlines to be met, design and build (D&B) contractors could be overlooking a crucial form of insurance from their supply chain. And they could pay a hefty price if they don’t stipulate this cover when engaging them.
D&B contractors will recognise the following scenario:
A supplier designs a product to meet your specification. They manufacture this product at a sizeable cost, but due to a design error, isn’t fit for purpose. You claim against the supplier for the cost of replacement, plus the value of any consequential losses. It’s a ‘Deal or No Deal’ situation; your ability to recover from them could rest on the insurance protection they have in place.
If your supplier holds the ‘right’ sort of cover, your claim has better chances of success. There’s your deal.
But if they have the ‘wrong’ insurance, you might be relying on a costly court case and the supplier’s financial strength to recoup your loss. Sorry but this could mean no deal.
The ‘right’ approach is to make sure your supplier has professional indemnity (PI) insurance. Your ability to successfully recover from a third party for their negligence is made much easier when they have PI insurance with the appropriate level of cover.
However, some contractors think they can rely on a supplier’s public liability (PL) insurance. There are significant risks to this approach; not only does it reduce the likelihood of recovery against the supplier’s insurance policy, it also introduces the danger of default in the event of a claim being pursued directly against them.
PL insurance provides much more limited (and in some cases zero) financial loss protection. If the claim is not covered, you’ll be saddled with the expense (and effort) of replacing the product, plus any other rectification costs and delay damages you incur. While D&B contractor’s may have an appropriate insurance policy in place to claim against, without the opportunity to recover from a supplier any rectification costs and consequential losses will end up impacting your claims record.
What is PI insurance and why is it so important?
PI insurance is sometimes known as errors and omissions insurance. It provides indemnity for claims which result from carrying out of professional services.
It does not cover criminal behaviour, or non-professional services such as workmanship, manufacture and/or installation.
Many small construction firms and/or suppliers of goods firms don’t carry PI insurance. Generally, for small businesses, the figure could be as high as 64%, according to a recent survey by ConstructAQuote.com
And it’s not uncommon for suppliers to inform a D&B contractor that most of their customers accept PL cover as an alternative to PI insurance. But failing to insist on PI insurance could be a costly oversight, as there are key differences in PL and PI cover.
What are the differences?
The policies are very different in both the way they operate and the risks they insure.
A public liability policy (also known as general liability or third party liability) provides protection for third party injury or property damage claims. It excludes claims for the cost of replacing/repairing the product that has been supplied. And generally it excludes claims arising out of any breach of professional services.
A professional indemnity policy provides protection for claims made during the period of insurance which are the result of a breach of professional duties, contract and/or statutory duties. Such claims might be for pure economic loss, or they may involve actual damage to, or defects in, the products or goods supplied.
Should all my suppliers have PI insurance?
PI insurance for suppliers is generally only required if the contract stipulates it. The rules of some regulators and professional bodies mean it’s also compulsory for certain professions, including architects and engineers.
D&B contractors are obligated, under contract, to purchase a minimum level of PI cover (specified by the owner/employer). If you engage a specialist supplier to deliver the project then it’s important you ensure they too have appropriate levels of PI cover. In other words, you should seek to appoint the parties in your supply chain on terms that are back-to-back to the contract with the owner.
There are other reasons why a D&B contractor might consider asking for professional indemnity insurance from their suppliers:
- The contractor is relying on the supplier to advise them on how to use the product
- The supplier is designing its product or work in some way to meet your requirements.
It is not unusual for D&B contractors to lack specific knowledge about what cover to stipulate in their contracts with suppliers. And suppliers can be reluctant to buy PI insurance due to both the cost and a lack of information or understanding about its benefits.
If it’s not compulsory, all too often, PI cover is the missing link in a supply chain, and the impact can be enormous for a contractor.
In reality you may not have full control over the performance of professional services undertaken on your behalf. Without a contractual requirement for suppliers to have PI insurance you could be exposing your balance sheet, and your insurance policy, to their potential negligence.
What should I do if I’m concerned?
If you would like further advice, please talk to a specialist construction broker about your exposure and risk profile.
They can advise you on all forms of risk management and mitigation, including what level of PI cover you should seek from your suppliers.
For more information, please contact David Stocks, Account Executive on +44 (0)20 7309 8342 or email david_Stocks@jltgroup.com