Death by exposure

In the past few years, the cost of obtaining professional indemnity insurance has risen significantly. This affects all professionals, not only those in the construction industry, and includes contractors who carry PI insurance. The increased cost of this and other types of cover reflects a rise in the value of successful claims and the reduced capacity of the insurance market generally. Fewer insurers are underwriting this type of business and some PI insurers have gone into liquidation. Several professional firms found themselves uninsured last year as a result of the liquidation of HIH and Independent Insurance. It is unlikely that insurance costs will come down substantially in the near future.

Some professional firms have been considering changing insurers to find cheaper cover. This has its dangers: the cheapest insurance is unlikely to provide the most extensive cover and there is a greater risk that claims made against those insurers will be disputed or not paid at all because the policy is avoided. Furthermore, the financial standing of the new insurer may be in doubt, and cheaper insurance usually comes with additional exclusions or restrictions. For example, it is more likely that the insurance will cover claims for negligence only rather than any legal liability incurred by the firm.

This could mean that some obligations often undertaken by professionals in their contracts may not be covered. So, a professional may undertake an obligation to comply with procedures or programmes. If they fail to comply, they will be liable; but if they have not been negligent, a negligence-only policy will not cover the claim. Although insurance has been available for pollution and contamination claims on an aggregate basis, these could be excluded altogether.

Some insurers are considering excluding the standard contracts of some bodies because their terms are too onerous, and they may refuse to insure particular projects where claims have been notified.

Firms will be finding that they have to fund many claims themselves, with no insurance cover at all

A wide-ranging exclusion relating to acts of terrorism is being introduced into some policies.

There has also been a significant rise in the amount of excess payable by the insured in the event of a claim. These are now at a level of about 1% of turnover. Where these would have been in the order of tens of thousands of pounds, they could now be well over £100,000. This could have a disastrous effect on the firm's cash flow, and if several claims are made in one year, they could be enough to put the firm out of business. A substantial number of all claims made are below £500,000. Firms will be finding that they are funding many claims themselves with no insurance cover at all. The increased excess also has the effect of exposing the insured to the legal costs incurred in defending the claims. When there were lower excesses, most of these costs would have been paid by insurers.

Obligations concerning maintaining insurance in existing and future appointments will also need to be looked at. Many include the obligation to tell clients and others if PI insurance is no longer available at commercially reasonable rates. Professionals may not be able to comply with other restrictions imposed by clients, such as the insurer having to be reputable or approved by the client. What is "reputable" in the current market? Some clients stipulate an amount of excess that the professional may not have. If a certain type of cover is required that does not fall within the restrictions currently imposed by PI insurers, the professional may not be able to comply.