Project professional indemnity insurance has not always been popular. But it is coming back into favour and it doesn’t need to cost the Earth.
Project professional indemnity (PI) insurance has never been popular with the construction industry.
Perceived as expensive, with a big lump sum payable upfront and few brokers operating in the market, it has been something to avoid. But with more and more major projects coming on stream, demand is rising.
“There continues to be high demand for project PI as project owners often insist a project PI policy is in place for the larger, prestigious projects,” says insurance broker Marsh senior vice president Martin Stubbs.
Typically project PI requires the client to pay a lump sum premium for up to 10 years of cover that it either then spreads across its supply chain or simply pays for itself – with suppliers reducing their rates accordingly.
Rates are historically higher than annual PI rates, yet there is still a continuing demand, thanks to the peace of mind it offers – to the client and to its consultants and contractors. Ultimately, project PI offers a known cover which is not subject to changes at each annual renewal, with a dedicated limit to the project – usually up to 10 years. In contrast, contractors’ and consultants’ annual policies may have limits that could be eroded by claims from other unrelated projects, leaving no coverage for the project in question.
Clients may baulk at the cost – but where consultants and contractors use their own PI cover the cost for this coverage is usually included in the contract price tendered anyway. The client does not know the full cost of this PI insurance, but its ultimately paying for it anyway.
When each individual contractor or consultant is responsible for its own PI and meets this responsibility with their annual policies, the client can also never be sure that these policies will be continually renewed.
There is the risk of these annual policies’ limits being exhausted by claims from other projects, or there to be no coverage in place after the project is completed.
Following completion of the project, the owner has very little control over whether or not the contractor renews its cover.
If you’re thinking about buying increased limits of insurance, now’s the time to buy them
Tim Payne, Marsh
To consultants and contractors, project PI also provides an effective way to pool resources and expertise in joint ventures on a large project. The respective JVs are likely to have differing levels of annual PI coverage, excesses and limits. In some cases they may have no PI insurance in place at all. If they were to rely solely on their separate annual policies each JV member would have to seek indemnity from its individual insurers. But each insurer may take a differing stance on how claims should be dealt with or paid, creating problems, delays in settlement and potentially additional costs to insurers and the insured.
An annual contractor’s or consultant’s PI policy often fails to provide full cover for JVs and an insured JV partner is unlikely to want its annual policy impacted by claims from another member of the joint venture.
A project PI policy avoids these problems by providing a separate wrap-up policy for JV members with a specific, dedicated limit and for a specific period of time.
These are clear benefits, with the only disadvantage really the cost, and even this is often overstated, says Stubbs.
“It’s never going to be cheap. A premium of £1M upfront sounds like a lot of money, but spread that over 10 years, it equates to an annual cost of £100,000.”
“We will get quite a lot of orders. Yes, it adds to the project’s upfront costs. But £1M for protection on a £200M project is we believe a solution worth paying for.”
Marsh hopes to make project PI more competitive through a new facility it has just launched on the market. It hopes to build on expertise gained from its role as broker for project construction all risks (CAR) policies. In the last 12 months Marsh has placed CAR policies on 96 projects with a combined contract value of almost £14bn.
“We have a number of quotations out there,” says Stubbs, and the cover hasn’t even been formally announced yet. “We expect it to be very successful.”
“We hope to meet a need in the construction market with a consistent product, at a reasonable price, giving insurers the potential for long-term profitability. It is our intention to provide a reasonably priced product that meets a need in the market.”
The Marsh facility placed with Lloyd’s and London company insurers, will initially provide liability limits of up to £20M and will provide for total insurance periods of up to 10 years, including discovery period.
Projects with total contract values in excess £25M are likely to be particularly suited to Marsh’s cover. What project insurance is not, however, is a replacement to a firm’s own PI insurance, stresses Marsh senior vice president John Doe. “It’s not a replacement. “Project policies are often a bit narrower in coverage than the annual policies. So it’s another vehicle to help manage risk and control risk, but it doesn’t replace an annual policy.”
He also warns that project insurance limits could be exhausted by large claims – and you would want your own insurance should that happen. “If somebody buys a £10M project insurance, and then it’s eroded, you’ve got no cover. And you wouldn’t necessarily know that somebody else has eroded the limit. So you’re sitting out there uninsured. It’s nice to have, because it helps protect you, but it doesn’t replace your annual policy. Certainly not.”
Marsh PROJECT PI facility details
- Liability limits up to £20M Liability limits in excess of £20M may be available on certain risks
- Territorial limits and jurisdiction worldwide but excluding USA
- Insurance up to 120 months with options for mid-term extensions subject to satisfactory project progress and claims experience
- Design and construct and consultancy wordings
- The availability of an independent consultant to monitor progress throughout the course of construction at no extra cost to the client
- Comprehensive user friendly policy wordings and proposal forms
- Initial non-binding premium indications normally available within 72 hours of fully completed short form questionnaire