How to Decipher your PI Insurance Exclusions: a collaboration with Marsh Insurance
What is Professional Indemnity (PI) Insurance?
The purpose of Professional Indemnity (PI) Insurance is to indemnify the insured for claims made during the period of insurance or for circumstances notified to an insurer during a policy period which develops into a claim in future policy period’s arising out of the performance of their professional duties.
– Oliver Swann (Principal of Construction Professional Lines – Marsh Specialty)
PI is a claims made basis insurance, which means you must have a current insurance policy in place in order to make a claim.
Insurers will indemnify the insured for damages they may become legally liable to pay a third party who has suffered financial loss caused by a breach of professional duties performed by the Insured.
A breach in professional duties may arise from:
- Tort i.e. Negligence (common law)
- Breach of Contract/ Deed
- Breach of Statute law
PI claims are often related to historical claims from facts five or more years ago, therefore, it emphasises the importance of good record keeping and maintaining appropriate cover, even after you leave that profession or retire.
Why do engineers need professional indemnity insurance in Australia?
There are a whole host of professionals who can benefit from this type of insurance, whether a sole trader or business owner. A professional can really be anyone that provides advice or a service.
Anyone who believes that they have been financially harmed by your advice can take legal action. Sometimes employees make mistakes or advice is given without full knowledge or understanding of the customers’ situation or procedures and training are overlooked.
“In the construction industry, we would recommend that all parties undertaking professional duties to take out PI insurance as a form of balance sheet protection, for example architects and engineers. For contractors who enter design & construct contracts or engineering procurement construction contracts, they will also require PI insurance. Contractors that assume design risk contractually will require PI insurance as they are vicariously liable for the negligence of their third-party consultants,” Mr Swann says.
The law such as the Victorian Builders Practioners Act and the NSW Design Build Practioners Act also legislate the requirements of professional indemnity insurance for certain individuals depending on their profession and area of service.
“There are many residential towers in NSW & Victoria that have flammable cladding installed, which are currently having this removed at great expense. Some allegations may be unfounded, while others like poor engineering related to the choice of installing flammable cladding, raise potentially life-threatening issues. Without adequate Professional indemnity, the costs can be financially crippling and your business reputation damaged.”
What does PI cover? And what fine print exclusions do I need to look out for?
PI Insurance covers claims of negligence, malpractice or misconduct are covered under your Professional Indemnity Insurance. Extensions to cover can include defamation, IP infringements, breach of consumer and fair-trading laws, fraud and dishonesty, fidelity, PR costs and inquiry costs.
All policies cover legal costs to defend, investigate and settle the claim (if necessary) arising from your professional activities.
In a Construction PI policy for contractors, covered professional duties generally include:
- Feasibility studies
- Designs whether early contractor involvement, detailed or advice in respect of design
- Incorrect or inadequate specification
- Technical information calculation
- Geotechnical Studies
- Project Management
- Surveying (Quantity and Land)
- Procurement management
- Construction Management
A construction PI policy is designed to cover professional work, and not construction/ building work. A straightforward way to think of it is, “white collar” work and “blue collar work” with the latter not being covered under a PI policy.
“The PI market is in a hard phase of the market cycle, which means insurers are limiting their capacity on any one account and restricting the coverages they have previously offered, particularly in the area of Cladding,” Mr Swann says.
PI insurance policies can contain exclusions which may impede a professional’s scope to specify certain product categories. Where professionals have an exclusion on their PI insurance policy, they will work with and sign off on products within the parameters of their policy. There are many differently worded exclusions which are mostly around the use of ACP’s or non-compliant or non-conforming materials. Concerns around compliance due to exclusions move beyond just fire, which is why compliance to FP1.4 is so important.
PI insurers are currently taking a more considered approach on how they ensure aluminium composite cladding. Whilst most insurers will provide some form of aluminium composite cladding restriction/exclusion, we would advise that all parties consult with their insurers and/or insurance brokers as to how their particular restriction/exclusion applies. For example, not all insurers impose blanket exclusions; rather exclusions in regard to “non-conforming” and/or “combustible” aluminium composite cladding.
“It is important to not only look out for coverage restrictions under the policy, but also restrictions in terms of sub-limits of liability. A sub-limit will restrict the level of indemnity provided by insurers in respect of certain covered exposures, for example, Loss Mitigation coverage. Fitness for Purpose and Novated Design are also important covers included within a contractors PI policies as they take on these liabilities under contract.”
When it comes to insurance, there should be no issues arranging Property Insurance for projects clad in Vitracore G2. The Insurance Council of Australia is very clear on its ACP identification protocol, that a product like G2 which is deemed non-combustible and contains 0% polymer in its core, is classed as a category D, with A being the highest risk through to D which is non-combustible or considered a low-risk fire by insurers.
Vitracore G2 is both a compliant and conforming product – it satisfies the performance requirements of FP1.4 (damp and weatherproofing) and the deemed-to-satisfy provisions of C1.9(e)(vii) for non-combustible material.
Vitracore G2 is considered low risk in combustibility by many insurance providers and brokers.
How much professional indemnity insurance do I need for my business?
Your Professional Indemnity Insurance needs to be tailored to your industry and specific business needs. Therefore, it is highly recommended that you speak to a specialist insurance adviser who can help you to understand the cover available and any options recommended to provide financial protection for you and your business.
If my insurance exclusion does not work for my business, what are my options?
If your PI policy coverage does not work for your business, there are options available to you.
Firstly, you can ask your broker to seek alternative quotes from existing PI insurers to ascertain whether broader terms are available in the marketplace.
As the PI market is continually changing, and coverage for certain risks are no longer available at commercially viable rates, you could seek to re-negotiate contractual terms on projects to avoid any gap in covers.
Another option for insureds is to look at Self-insurance via a captive insurance solution in situations where it is difficult to obtain adequate PI coverage
“At Marsh we undertake contract reviews for our Construction clients and provide risk management advice on how their insurance policies are compliant with their contracts to avoid any such gaps in coverage if a legal liability was to arise from the insureds professional business.”
We understand the general confusion that the industry may have around this topic and knowing the compliance of your products, so we are more than happy to discuss insurance and risk further with all potential clients of Fairview.