Contractors' and Consultants' PI insurance - how much is enough?

Solicitors advising in relation to new buildings, whether acting for developers, purchasers, tenants, funders or the construction industry, are often asked what level of PI insurance their clients should ask the contractor, design sub-contractors and consultants to maintain. This is a commercial rather than a legal question, but clients still ask it and there are some sensible guidelines which a solicitor can give without actually quoting a figure (which we are not really qualified to do).

We should begin by reminding the client that PI insurance covers only the design work or other professional services provided –it does not cover workmanship or materials. Therefore when I refer below to a contractor, it is only a contractor with design responsibility, either under a design and build contract or under a contractor’s designed portion within a traditional contract.

Next, the key points we should advise the client to consider are as follows, stressing that they should be considered separately for the contractor and each of the consultants and designing sub-contractors, because they all have different roles and the risk profiles of their work are all different. Therefore how much PI insurance they should have will be different in each case.

The starting point, or theoretical answer, is to work out what is the biggest loss the client could suffer if the consultant, contractor or sub-contractor got their design or other services as wrong as they could in the worst possible circumstances. A couple of examples may help

A design and build contractor and the structural engineer are responsible for the foundations and the structure - they could get things so wrong that, either during construction or a few years later, the building has to be demolished and rebuilt. That would not be covered by any insurance policy which most clients are likely to maintain so the client’s loss would be the cost of demolition and rebuilding. Whilst that was going on, the client would have to hire alternative space and/or incur business disruption costs. Therefore the design and build contractor’s and structural engineer’s PI insurance needs to be for a figure well in excess of the construction cost.

The M&E services engineer could not make the building fall down, no matter how badly he performed (he could perhaps design the electrical system so badly that it causes a fire which burns the building down, but that should be covered by a normal buildings insurance policy). Therefore the worst he could do in reality would be to design the services so badly that they had to be ripped out and re-fitted. That would cost a lot, and could require relocation whilst the work was carried out, but would be quicker and the total cost including business disruption would be nowhere near as much as in example 1 above. The client can therefore accept a lower PI figure for the M&E Engineer than for the Structural Engineer.(a) insisting on the consultant or contractor in question taking out a project-specific policy extension (which will cost money, which they will add to their fee/price so the client will end up paying it);

or(b) the client taking out a "latent defects" insurance policy, but these policies are expensive and do have some significant limitations; or(c) accepting the lower PI figure which the consultant or contractor actually has and taking a commercial view that:

even £1m, let alone £5m or£10m, buys an awful lot of remedial work;

bigger disasters than that are incredibly rare and unlikely to occur; and perhaps the risk is therefore small enough to take in order to avoid having to pay the increased costs of covering the risk by method (a) or (b) above.

This article was produced by Chris Holwell, a partner in Freeths Construction department.

It was first published by Solicitors Journal on 28.10.14 and is reproduced with kind permission.