Professional indemnity (PI) insurance has traditionally been purchased on an annual basis. This will provide protection against claims from third parties alleging loss from negligent advice, design, or supervision provided by that firm. These policies will insure the client for all current and historical work on a “claims-made” basis.
Project specific covers
An alternative way of obtaining professional indemnity is Specific Project Professional Indemnity Insurance (SPPI). Following the Grenfell tower fire, the number of insurers offering cover on this basis in the UK decreased substantially, the ensuing “hard market” resulted in them all but disappearing largely due to some significant global losses.
As insurer appetite for PI insurance generally has increased over the last 9 or 12 months, we are also seeing renewed availability of SPPI. Primarily these covers were aimed at larger global projects with contract values of around £500 million or more, but this figure is reducing and terms can be offered on much “smaller” contracts (of approx. £50 million).
The aim of SPPI insurance is to ensure dedicated capacity, or limits of a predetermined amount for the whole design and construction period of the project and beyond. The policy therefore provides cover for a period (generally 6 or 10 years — but on occasions for longer, for example in the Middle East, where they may be 17 years), and unlike traditional professional indemnity, it will indemnify the whole professional team (contractors, architects, engineers, project managers, quantity surveyors, and other professionals).
Where the funder, beneficiary, or developer is concerned that there is inherent risk in relying on their consultants’ annual PI policies, an SPPI may be the answer. An individual consultant’s policy cover may change from year to year, or be influenced by other factors that can erode the protection offered. In contrast, the SPPI approach ensures that the specified terms required under the contract and the limits agreed can be secured for the period required.
Benefits of SSPI
As outlined above, the ring-fencing of liabilities and claims will benefit the funder but will also protect the annual policy of a particular professional or contractor. Other benefits can include:
- A policy (often non-cancellable) is in place throughout the contract build period to ensure contractual compliance
- The multi-year SPPI policy will continue in force even where individual annual PI cover is unavailable for any reason
- Premium costs are fixed for the duration of the contract and can be factored into the project costs
- A discount should be provided on the annual PI insurance — as the major projects have alternative cover
- Peace of mind and reduction in-project administration such as obtaining and reviewing certificates for all consultants
- Cover is ideal for joint venture arrangements where resources and insurances can be pooled
- Claims resolution is easier without significant legal wrangling and costs incurred determining who is responsible for the error
Owner’s protective professional indemnity insurance (OPPI)
A specific single project professional indemnity insurance differs from an OPPI policy. It provides an indemnity to all of the named professional team and replaces the professional indemnity cover of each professional party. In contrast, the OPPI is a contingent policy that can be arranged to indemnify the project owner/developer only and operates to top up or replace other consultant’s policies covers when they fail to adequately protect.
Project owners or developers may purchase OPPI insurance if they are concerned that the level of PI cover carried by the design firms, consultants and other professional services providers working directly for them may be inadequate. This type of policy can be useful as a backup arrangement for the owner but is not intended to be front-line cover in the same way as a specific single project insurance is.
Obtaining cover
SPPI cover requires specific forms to be completed, which require the disclosure of all the parties to be covered, as well as the outline contract detail.
Insurers will also require a copy of the contract pack — including all appendices and full details of the liabilities that are being signed up to. This information should enable a specialist broker to obtain terms from a range of insurers for the specific period and to the appropriate limit of indemnity.
Covers will always be aggregate, and the scope of cover may be more limited than an annual PI policy. The retention/excess applied will also be significant (which may or may not be palatable to all of the professional team) but the benefits, particularly to the funder of the project and the main contractor, can be substantial.
