Minimise The Impact Of Construction Project PI Disputes
Construction Principals / Developers expose themselves to a range of risks when embarking on a construction project. This includes the potential for an error by a Contractor, Consultant or Sub-Consultant whilst carrying out their professional services which can lead to a major financial loss.
Defective design and / or specification and non-conforming 'fitness for purpose' applications are one of the most common causes of disputes on construction projects. These disputes often arise from stakeholders that have inadequate insurance coverage, resulting in contract disputes and disagreements on who should be responsible for the costs.
Resolving these matters can result in major financial problems, project delays and legal expenses for the Principal / Developer.
Traditionally, to avoid exposure, Principals / Developers have made it a contractual requirement for contractors, consultants and sub-consultants to carry Professional Indemnity Insurance for the duration of the project, and normally for some 6 or 7 years beyond.
Relying on this arrangement can cause significant problems for Principals / Developers after a circumstance or loss arises, including but not limited to;
- Inaccurate description of the professional services disclosed by the Contractor or their Consultants / Sub-Consultants to their PI Insurers
- Inadequate PI Insurance cover - such as 'negligence only' policies rather than civil liability
- Exhaustion of the Contractors or Consultants / Sub-Consultants aggregate limits under their annual PI Insurance policies
- High deductibles on PI Insurance policies in place for Contractors or Consultants / Sub-Consultants
- Unexpected exclusions such as property damage and/or bodily injury; breach of contract / contractual liability, limitation of liability and Novated design exclusions
- Unreasonable or limited loss mitigation cover
It is also necessary for the Principals / Developers to obtain Certificates of Currency from each Contractor, Consultant and Sub-Consultants for each project with as much detail as possible each year. This needs to be continued until the required period has come to an end and followed on for 6-7 years to ensure the coverage is still adequate and in place.
Minimise your exposure
As an initial step to minimise your exposure, our insurance brokers will often recommend that Principals / Developers include the following extensions in their Contract Works and Public Liability policies;
- Under Contract Works - obtain the broadest coverage for loss or damage as a result of faulty design. This is known in the market as LEG3 or DE5 coverage
- Under Public Liability - Amending the normal exclusion of liability for professional errors by "writing back" property damage and bodily injury
The above recommendations should be discussed with your insurance broker and should not be wholly relied upon.
Before you embark on your next project, consider these Smart Insurance Solutions
Option One - Principal Controlled PI Insurance (with Insurer subrogation rights)
The Principal / Developer can place a PI Insurance policy which insures themselves, rather than the contractor, consultants and sub-consultants.
The Insurer should indemnify the Principal / Developer the costs of rectification if there is a faulty design or specification. The insurer will then seek to recover from the faulty party or parties.
In this way, the Principal is indemnified without any delay to the project and at a minimal legal cost.
Option Two - Principal Controlled PI Insurance (no subrogation rights, all parties are insured)
The Principal / Developer can place a PI Insurance policy which insures themselves, as well as the contractor, consultants and sub-consultants.
The insurer will indemnify the Principal / Developer the costs of rectification if there is a faulty design or specification. The insurer will not seek to recover from the faulty party or parties, as all are insured under the policy.
In this way, the Principal is indemnified without any delay to the project, and at a minimal legal cost. This type of insurance is not inexpensive, however it should be a consideration for the larger and more complex projects.
Do you have the right insurance program for your needs?
For the right advice, reliable cover and highly competitive rates, talk to one of our Construction Specialist Insurance Brokers today. Ask about our free insurance health check and experience the Coverforce difference for yourself.
We note that the above article is intended to be general information only and it is not intended to be financial or personal advice. Before acting on the general information provided in this article, please consider the appropriateness of the information provided by having regard to your own objectives, financial situations and needs.