Single Project Professional Indemnity Insurance Growing
As the number of construction projects increase, brokers should consider AIG’s expertise in Single Project Professional Indemnity Insurance.
The demand for Single Project Professional Indemnity (SPPI) is growing for 2 main reasons:
- Construction output in Ireland was close to €21 billion in 2018, which represents growth of almost 64% in the last three years.
- Construction project owners often require such a policy to be in place for larger, more prestigious projects.
SPPI is an end to end solution that can be provided from the first provision of professional services on a construction project, right through to completion with an extended claims reporting period of up to 10 years. It is designed to cover all project participants with responsibility for professional services rendered in connection with the construction process. This includes contractors and consultants alike, whether working individually, joint venture or consortia.
Globally AIG is one of the largest Professional Indemnity (PI) insurers. We have the ability to tap into our global network to combine both local knowledge and expertise along with the quality and responsiveness of our international reach to ensure the best possible solution is delivered to our clients.
Why Single Project Professional Indemnity?
Given the amount of parties that can potentially be involved in a construction project, there are various angles to consider why a SPPI policy should be purchased:
From an owners perspective
An owner will often prefer to purchase a SPPI policy covering the professional acts, errors or omissions of the various parties employed on a project. This gives the owner control over the scope of cover, the policy duration and the limit of indemnity that can been purchased for a particular project. By engaging in a SPPI the total cost is known from the outset, providing certainty and removing any additional costs from contractors and consultants that may be encountered on these projects. The main benefits of this type of policy include:
- Avoidance of dispute between the various contractors and sub-contractors as all parties are covered under the one policy.
- Avoidance of additional costs involved with each construction professional defending its own position.
- The scope of coverage for all contractors and consultants is consistent.
- The project specific limit remains in force irrespective of the erosion of the individual contractors/consultants own annual PI limits.
- Assured policy response for an agreed discovery period after the completion of the project.
From a contractors or consultants perspective
When a contractor and/or consultant join together to perform a joint venture consideration may well be given to a SP PI policy. Joint ventures are an effective way for contractors and consultants to pool resources and expertise on large sophisticated projects. Parties working on a joint venture may have differing levels of annual PI coverage, deductibles and limits. In some cases members of a joint venture may have no PI insurance at all. If joint venture members were to rely solely on separate PI policies this could create problems. Various insurers may take differing stances on how a claim should be dealt with or how the claim should be paid. This may contribute to delays in settlement and potentially additional costs to insurers, the insured and the owner. Where a joint venture operates on an integrated basis it may be impossible to determine who is responsible for the error. A SPPI policy eliminates this issue by providing a wrap up policy for joint venture members with a specific, dedicated limit and for a specific period of time. The main benefits would include:
- Avoidance of disputes between the joint venture members.
- Consistent scope of coverage for all joint venture members.
- Project limit remains inforce irrespective of erosion of the individual members own annual PI limits.
- The total cost of the PI coverage for the project can be budgeted for and charged to the project.
- Claims experience of the joint venture is less likely to impact the individual joint venture member’s own PI limit.
SPPI V Construction All Risks (CAR)
There can be a common misconception in the market place that a CAR Policy will provide adequate cover in respect of defect design. A CAR policy is a material damage policy – set out to cover loss or damage to the property in which the insured has an insurable interest. This policy is only to cover loss or damage to the one specific property. Generally the basis of cover would include the following; contract works, construction plant during the course of construction and whilst being erected and dismantled, goods in transit and damage to employees property.
CAR policies
- Cover defects but only where there is physical damage to the works.
- Provides coverage during the construction and maintenance period.
- Does not cover consequential losses.
- CAR is on a claims occurring basis.
Professional Indemnity policies
- Indemnify against liability to third parties.
- Provide cover resulting from professional acts, errors and omissions.
- Cover the costs to rectify damage.
- Cover consequential losses.
- PI Insurance is on a claims made basis.
From an overall view, a SPPI policy can typically provide the following:
- Non-cancellable limits of indemnity that are dedicated to the project.
- Certainty of coverage for the project, with a period of insurance of up to 10 years.
- Certainty of cost for PI Insurance.
- Wrap up coverage for all construction parties engaged in the provision of construction professional services.
Claims:
SPPI is known for its severity of claims as opposed to the frequency of claims. Our claims handlers have expert knowledge of SPPI insurance enabling AIG to resolve claims quickly while keeping the interruption to a particular project minimal. Our long term experience in this area indicates that claims tend to be made at or near the completion stage of a construction project with the average being six months post completion.
The following hypothetical scenarios demonstrate the types of claims that may occur during the design and construct of a sophisticated project:
- A SPPI responding to the construction of timeshare units in the Pacific Islands- Mould infiltration to some of the timeshare units was discovered shortly after the opening. This occurred during the rainy season. The units developed internal mould formation as well as moisture ingress through the exterior walls. The policy would potentially respond to provide coverage to all consultants and sub consultants for their roles in the design and construction of the project. It would be estimated that the costs could reach €17M to repair and replace the units.
- The design and construction of a tunnel for traffic comprising two tubes underneath a waterway- Problems arose with the design of the concrete tunnel lining elements. The result of this was too high stress levels were caused which in turn had an adverse bearing on the joint seal between the elements, requiring many of the elements to be replaced. In this scenario a SPPI policy would be triggered to cover all consultants and sub consultants for their roles and responsibilities within the project. Construction delays and re-design costs would be sought with the total cost potentially reaching €10M.
- A loss arises when a construction company is involved in the design, manufacture, delivery, erection, installation and commissioning of a combined heat and power plant- When assembling errors were found in the welding applied to the boiler walls which were outside the required formal standard and therefore non-compliant. The insured had surveyed the construction of the boiler and signed a Certificate of Conformity stating the boiler was fit for its purpose and compliant with the required standard. As these activities fall within construction professional services the cost of remedial works to rectify the faults would be covered under a SPPI policy.
More Information
For more information please contact :
Email: Ciaran.Reddin@aig.com
Phone: 01 208 4966