Heading for cover

There is increasing pressure to review the insurance provisions in the JCT standard forms. Rising professional indemnity insurance premiums are adding to consultants' costs.

A recent House of Lords decision (Co-operative Retail Services v Taylor Young Partnership Ltd and Others) has highlighted an anomaly in the JCT insurance provisions that could leave consultants exposed. Meanwhile, the latest report by Sir John Egan's strategic forum, Accelerating Change (April 2002) recommended a move to "whole life" insurance that would cover the first 35 years of a building's life.

The anomaly highlighted by the Co-operative Retail Services case is as follows. Under the JCT scheme, only the employer and the contractor are co-insured under the joint-names policy taken out to cover loss or damage to the works during the course of construction. One co-insured cannot be sued by another for losses covered by the joint-names policy.

If both the contractor and a consultant are responsible for the same damage during the course of construction, the employer's insurer can sue the consultant but he cannot sue the contractor.

The House of Lords decided that the consultant cannot recover a contribution from the contractor, despite the fact that they were both to blame, because the JCT insurance provisions excuse the contractor from liability.

In practice, the question of liability will be an argument between the contractor's all-risks insurers on the one hand, and the consultant's professional indemnity insurers on the other, which is unnecessary when consultants and contractors could all be covered by the same insurance policy.

Project insurance, whereby the employer takes out insurance cover for the works in the joint names of the contractor, subcontractors of any tier and the design team, is already commonplace for major projects.

It would not be so difficult or radical to make provision for such insurance in the JCT forms. The extent of cover for faulty design found in project policies is almost the same as professional indemnity insurance if the highest level of design exclusion is chosen.

That would certainly deal with the anomaly exposed by the Co-operative Retail Services case because employer, contractor and consultants would all be co-insured under the same policy during the course of construction.

Rising professional indemnity insurance premiums are adding to consultants’ costs, and a recent House of Lords decision has highlighted an anomaly in the JCT insurance provisions which could leave consultants exposed

Moving on to the period once the project is completed, Sir John Egan has recommended a scheme that would provide cover for all members of the project team for up to 35 years or the whole life of the building. However, transition to such a scheme is fraught with difficulty.

Latent defects insurance, which typically covers the first 10 years of the life of a building, is available now, but it is not co-extensive with contractors' and consultants' legal liability for latent defects, which may last for considerably longer than 10 years.

Latent defects cover does not usually extend to all the building components, certain types of financial loss are usually excluded and insurers may charge an additional premium for waiving their rights of subrogation against contractors and consultants.

Even if latent defects cover – co-extensive with contractors' and consultants' legal liabilities and with rights of subrogation waived – were available at a reasonable price, consultants would still have to maintain professional indemnity cover for their portfolio of completed projects and for new projects without the benefit of project and latent defects insurance.

Professional indemnity insurance is, typically, on an annual "claims made" basis. That is to say the insurer providing cover in any one year picks up all the claims received in that year of cover, regardless of when the project was carried out. The premium is renegotiated annually on the basis of a consultant firm's claims record. The more claims received in the previous period, the higher the premium and vice versa. The cost of maintaining professional indemnity cover, based on the consultant's claims record, is therefore reflected in consultants' fees for new projects.

If project insurance became the norm, an employer might take the view that it was being asked to pay for insuring a consultant's liability for other clients' current and completed projects within the consultant's fee, as well as paying single premiums for its own project and latent defects cover. To some extent that seems inevitable.

However, consultants should achieve a reduction in professional indemnity premiums to reflect the benefit of project and latent defects insurance. They could pass that on to clients that take out project insurance cover and recharge that element of their professional indemnity premiums that represents cover for current projects, to those clients that do not take out project and latent defects insurance.