Design-and-build contractors often have to remedy design flaws quickly to prevent third-party claims down the line. But will their insurer pay their costs?
few contractors who undertake design-and-build construction projects do so without professional indemnity insurance cover. So the recent demise of Independent Insurance will have left many contractors having to meet design claims for which they are uninsured.

In assuming design risk, contractors will incur liabilities if the design proves to be defective, and the tendency of employers is to transfer much, if not all, of this risk to the main contractor. It is common for the main contractor to be compelled to assume fitness-for-purpose responsibilities. Furthermore, the main contractor will be responsible to its employer if the design is defective, even if the error was the result of the failure of a consultant employed by the contractor.

PI insurance policies will insure against claims made by third parties, and will usually insure against any losses incurred by the contractor in its attempts to prevent such claims, such as putting a project on hold to make design adjustments for the long-term good. However, the contractor can only claim compensation for such an action if it has obtained the prior written consent of the insurer's underwriters.

Although problems caused by defective design often emerge years after a project has been completed, many design deficiencies are identified during the course of construction. Urgent measures have to be taken in order to overcome any deficiency. Even though there is inevitably delay and disruption to the project while the redesign is undertaken – and consequent additional cost, no doubt – this is preferable to the defective design being incorporated and the building suffering major structural deficiencies (which would lead to larger third-party claims later on).

However, the problem for a contractor is that it often does not have time to seek the prior written consent of insurers before instigating remedial steps. It cannot afford the delay while underwriters consider whether they can authorise the expenditure. Significant costs will accrue on a daily basis. Whatever the view of underwriters, the contractor knows that it is liable to its employer and has a responsibility to lessen delays and disruption as much as possible. Thus, ordinarily, the bad design is remedied and it is only subsequently that attempts are made to recover losses from insurers.

Unfortunately, insurers will be entitled to say that there is no third-party claim, and any money the contractor has spent on resolving the problem cannot be said to be with the consent of underwriters. Even though underwriters may be correct as a matter of law, the contractor will consider that the premiums paid entitle it to fairer treatment.

Indeed, some insurers are prepared to take steps to avoid potential iniquities. Alan Nugent, a director of brokers Alexander Forbes, says: "Any prudent contractor should always comply with its policy conditions. However, when effecting its PI insurance, it should state that it requires its underwriters' agreement that it can immediately carry out whatever measures are necessary to remedy defects without their agreement – on the understanding that it is to reduce the insured's and underwriters' exposure to the loss.

"However, the insured will need to demonstrate that the measures it has implemented are appropriate and reasonable in the circumstances, and must give an undertaking at the time of renewal that it will do this.

"A proposal for such an undertaking should be put through the contractor's brokers, and it shouldn't present a problem to underwriters who have experience in risks of this nature."