Professional Liability Insurance & Limitation Meggyn Marot Aon Principal Broker
Overview Professional Indemnity Insurance Trends and Challenges Alternative Professional Indemnity Strategies Project Specific Professional Indemnity Consultants Own Resources Own Annual PI / Balance Sheets Client Protective Professional Indemnity Insurance Contracting & Limitation of Liability
Professional Indemnity Insurance (PI) Covers any liability, whether in contract or through a civil code, that arises out of the professional services of the organisation insured under the policy, including consequential losses. Policy triggered by Professional Negligence - Reasonable Skill & Care is the usual standard used to determine whether a professional firm/individual has been negligent. Losses claimed could include: Cost of Redesign. Cost of Repair/Rectification. Direct Losses. Indirect Losses such as financial, consequential and economic losses.
Professional Indemnity Insurance (PI) certain financial, consequential and economic losses can only be insured under Professional Indemnity Insurance, and there are other areas where Professional Indemnity Insurance would be the sole policy for certain losses after the construction and maintenance period. It should be noted that Professional Indemnity insurance limits can be eroded by the legal costs and expenses often necessary in order to prove that professional negligence has occurred and these expenses can be for significant amounts. For these reasons we believe that a broad form Professional Indemnity Insurance has an important part to play in the risk financing armoury of any Engineering firm
Trends and Challenges Risk analysis before the project Sufficient Limits and affordability of Insurance how much is enough Complexity of project and delivery deadlines change how we are being appointed Joint Ventures, Alliances and Sub-consulting Poor understanding from clients of project delivery poor tender documents warped expectations Fee Discounting o Reality of free market o Obligation is not diminished by fee reduction o Inherent danger of undertaking appointment where the client is not prepared to pay for a properly designed and safe project o Use of junior staff without proper supervision o Decline in investment in training and innovation o Increase in PI claims but decrease in premium collection o Long term result - crash of PI market Admitted Insurances
Alternative PI Insurance Strategies Rely on Consultant s own resources Project Specific Professional Indemnity (PSPI) Annual Fixed Client s Protective Professional Indemnity
Alternative PI Insurance Strategies Rely on Consultant s own resources Default Position - majority of consultants already carry Professional Indemnity for a number of reasons, which may include: A requirement of their profession. A requirement of the local legislation. A contractual requirement. To protect their balance sheet. Consulting firms asset value and use of fees as working capital means it can be very difficult for professional services firms to obtain bonds or surety(s) and balance sheet cannot support large claims. Accordingly, the amount of Professional Indemnity Insurance is important when engaging consultants on projects, especially on large and complex projects.
Alternative PI Insurance Strategies Rely on Consultant s own resources REASONS FOR USE If the Client engages with consultants at an early stage, they are able to influence the amount and type of Professional Indemnity Insurance that a construction professional has to purchase for their project. It is important that this is enshrined within any contracts/agreements with the consultants. Where the Client is satisfied that consultants Professional Indemnity cover is sufficient and satisfactory for the risks within the project and they will have no difficulty in procuring Professional Indemnity insurance in future years Where Client does not need to cover any in-house design or project management work undertaken by themselves
Alternative PI Insurance Strategies Project Specific Professional Indemnity (PSPI) Annual Fixed A long period policy effected for the length of the contract plus a run-off period(in case of a fixed term), covering the consultants, purchased by the Client on behalf of all parties. Annual / Fixed Reasons for Use: Where the Client favours control over cost No need to point the finger at the guilty party - albeit legal liability has to be established against one or more of the professionals Where a professional does not carry its own PI insurance Where a Joint Venture requires separate insurance protection
Alternative PI Insurance Strategies Project Specific Professional Indemnity (PSPI) Annual Fixed Look out for: What if liability extends beyond policy? Who pays policy deductible? Duplication of cover Maximum period 15 years Expensive Policy coverage limited no cost overruns or consequential losses Aggregate limit for period shared for all parties dilution of cover The potential loss of an insurer due to insolvency, change of appetite or potential claim means that this is a very unattractive proposition for the Client. Whether Fixed Period or Annually Renewed - Insurers can be very selective when considering projects in a certain territory, stadia projects and projects which carry any new or prototypical elements.
Alternative PI Insurance Strategies Client s Protective Professional Indemnity An umbrella policy purchased by the Client for their own benefit, sitting in excess of the consultant s own policies. We believe that available Indemnity Limits could be in excess of USD150million, which should be in excess of the consultants own insurance policies. CPPI policies were developed to provide Clients of projects a means to purchase limits above the insurance provided by the consultants. CPPI coverage, acts as both first and third-party claims arising out of acts of neglect, error or omission of the consultant, with no risk of dilution of coverage that could occur if the consultant were the insured parties under the policy. Because the consultants own policies are intended to serve as underlying coverage, the CPPI is underwritten from an umbrella perspective, giving rise to significant premium savings compared to PSPI
Alternative PI Insurance Strategies Client s Protective Professional Indemnity Reasons for Use: CPPI coverage is most commonly implicated when: the client brings a claim against the consultant, and the damages exceed the insurance carried by the Consultant. third-party claims brought directly against the Client alleging direct liability arising out of the negligent acts of a consultant hired by the Client. Where the Client wishes to exert a certain degree of control with a cost effective solution Where the Client wishes to procure cover for a potential large loss over and above the usual limits effected by consultants Where the Principal requires protection for their contingent risks, excess liability and difference-in-conditions (DIC) cover should the consultants policies fail to respond to a claim
Contracting & Limitation of Liability Contract is King Insurance Provisions MUST be in Contracts/Agreements Open-ended liability is not an answer for the Client Limitations of liability (Do not confuse with Limit of Indemnity) Contained in the FIDIC Model Forms (White book) Duration eg. SA is 3-5 years but negotiable Statute of Limitations Quantum eg. SA is twice fee / fixed amount Incentivise Limitation of Liability for our clients with deductible discounts rewarding best practice
Thank You Meggyn Marot Principal Broker Aon Professional Risks t +27 11 944 7914 f +27 11 944 8045 meggyn.marot@aon.co.za www.aon.co.za Offices Located in: Bloemfontein Cape Town Durban East London George Mafikeng Nelspruit Pietermaritzburg Polokwane Port Elizabeth Pretoria Randburg Gaborone Harare Manzini Maputo Windhoek 120 countries worldwide