Insurance can be a bit of a sticky issue in the construction industry. While on the one hand insurers want to limit their risk exposure, on the other there can be some quite strict stipulations on acceptable insurance levels that will allow a consultant and/or contractor to carry out a particular project. It’s all about striking a balance - exposure against costs - and all in all, professional indemnity insurance (PI) can be a bit of a headache.
Once the negotiation of contract documentation is over and an appropriate level of insurance for a project is set, it should be plain sailing. Proof of PI cover is exhibited and parties move on. Contracts are signed, the development begins and in reality all keep their fingers crossed that the whole insurance debacle was simply a formality and there will be no need to make any claims. But what if claims are necessary? Out comes the insurance paperwork.
Let’s say that you expected a consultant to hold a PI level of £5 million each and every claim. You requested proof of this and through a copy certificate you got it, but according to the underlying policy documentation issued by the insurer, this isn’t the full story. Somewhere in the depths of the policy documents are a few surprises that might put a twist on your “each and every” policy.
There can be one or two surprising clauses in underlying policy documentation which have not been reflected in certificates – “aggregation” being the buzz word here. Believe it or not, and rather confusingly to say the least, we have seen a situation where a clause in standard issue policy documentation sought to aggregate the whole of an each and every claim policy, while others sought to aggregate specific elements of insurance.
The existence of aggregation clauses in underlying insurance documents (that are on the most part intended to run alongside our “each and every claim” cover example) might be more common than you think. We are not for one minute suggesting that your average insurer is guilty of some shoddy disclosure practices. Understandably, they need to balance their risk exposure adequately and they can’t be expected to outline the entire policy in a certificate of insurance. From a due diligence perspective they tend to be a request for proof of the level of PI cover, nothing more. The problem is, all insurance documentation for a specific policy really must be read together to get the full picture, but more often than not you don’t get to see the policy terms and conditions. You take what you have to be the whole story.
What can be done to tick all the boxes?
Several parties can learn lessons here. Firstly, the consultant or contractor should be familiar with the underlying policy documents so he knows exactly what level of cover he has and any aggregations that might not be immediately evident. Any discrepancy in cover actually available against what he is warranting under contract documentation can easily put him in breach of that contract and perhaps not knowingly so.
Second, those carrying out the due diligence exercise might want to probe a bit further than the surface documentation. In some instances a certificate confirming the level of insurance may not be quite enough. Arguably, questions as to the existence of specific aggregation clauses contained in the underlying policy documentation should be raised. In many instances a commercial view can be taken on these and any risk may be neither here nor there, but at least parties will be in full knowledge of what is being offered. Sifting through underlying policy documentation is not a job anyone really savours and it’s not a set of documentation that you are likely to be readily offered from insurers. A few probing questions to the contractor/consultant to put past their insurers would be enough here. Policy documents are usually standard issue, so it hopefully shouldn’t provide for too much in the way of legwork from the insurer’s end to answer the queries. Go easy though – have it in your mind exactly what you want to know. One thing insurers don’t want is to spend their time solely answering queries on policy documents.
Our advice? PI is a minefield so tread carefully. Also, take a pragmatic view on things. Your average contractor or consultant has enough of a headache getting insurance in place these days so don’t come down too hard on them if a sensible, commercial view on cover can be taken which negates perceived risks. Lastly and most importantly, satisfy yourself that you have all the information – a few extra questions just to be sure doesn’t do anyone any harm to avoid any unexpected surprises.