Design and Construct Professional Indemnity Insurance an International Perspective

1
15th November 2006
Design and Construct Professional Indemnity
Insurance an International Perspective Tim Smith
2
Agenda

• What is DC?
• Differences between Consultants and DC PI
• Who benefits from DC PI?
• What does it cover and how does it apply?
• Annual or single project cover?
• Contract requirements
• Claims
• International market practice

3
What is Design and Construct?

• Simply put, Design and Construct contractors
  undertake projects on a Turnkey basis.
• Principal contracts with just one party, the DC
  Contractor (can include several contractors
  working in joint venture).
• The DC Contractor takes overall responsibility
  for project delivery
• Liable to make good any defects - including those
  caused by sub-contractors and/or sub-consultants

4
Traditional Contract Structure
Project Manager
Principal
5
Design and Construct Contract Structure
Principal
6
Differences between Consultants and DC PI

• More onerous liabilities under DC contract
  e.g. implied or actual warranty of fitness for
  purpose
• Often more onerous standard of skill and care
• Contingent exposure the DC contractor assumes
  up-front responsibility for the entire
  construction process - can any liability be
  successfully passed down the supply chain to the
  sub-contractors and/or consultants?
• Grey areas where does professional activity
  stop and normal contracting activity start?

7
Who benefits?

• Contractors
• Coverage for specific design/specification and
  other professional obligations taken on under DC
  Contract (e.g project management)
• Recognition of specific DC contractor exposure
  to prior to handover loss mitigation costs

8
Who benefits?

• Project Owners
• Project Owner is NOT covered by DC PI policy
• Policy provides assurance that Contractor is
  insured for professional negligence arising from
  performance of professional services
• Need to ensure cover maintained during post
  completion period of liability for defects
• Ability to satisfy Lender requirements
• Ability to satisfy future project users/owners
  (Collateral Warranties)

9
Who benefits?

• Consultants
• Generally recommended that Consultants maintain
  own annual professional indemnity insurance
• DC Insurers will have rights of recourse against
  consultants where consultants errors have caused
  a loss under Contractor DC policy.

10
What Does PI Cover?

• Indemnity for the errors and omissions of the
  professional members of the contractors
  project design and construct (DC) / consulting
  teams.
• The covered professional activities include
• design, specification, surveying, technical
  supervision (as opposed to the general
  supervision of construction and labour normally
  under taken by a general construction
  contractor), project co-ordination and project
  management

11
What Does PI Cover?

• Annual DC PI normally covers the named insured
  contractor including their vicarious up-front
  liability for their sub-contractors and
  sub-consultants with PI insurers maintaining
  rights of recourse against all sub-contractors or
  sub-consultants

12
What Does PI Not Cover?

• DC PI does NOT provide cover for all defects or
  losses that may arise from a construction
  project.
• It does not cover losses arising from pure
  contracting activities

13
What Does DC PI Not Cover?

• - Defective workmanship
• - Defective materials
• - Defective manufacturing
• - Failure to complete a project on time / within
  budget (other than that part of any delay or cost
  over-run directly attributable to a professional
  error or omission otherwise covered by the
  Project PI policy)
• - Liability arising solely due to failure to meet
  performance warranties and guarantees
• - Losses otherwise indemnifiable under a CAR or
  TPL policy

14
How Does DC PI Coverage Apply?

• Policy wording clearly defines professional
  activities that are covered
• Normal contracting activities are not covered

15
How Does DC PI Coverage Apply?

• The DC policy has two Insuring Clauses

16
How Does DC PI Coverage Apply?

• Insuring Clause 1.
• Coverage for claims made against the DC
  Contractor arising from legal liability to third
  parties due to professional errors
• Operates in much the same way that an engineers
  or architects PI policy would operate.

17
How Does DC PI Coverage Apply?

• Insuring Clause 2.
• First party mitigation of loss coverage for the
  DC contractor
• DC contract means the DC Contractor owns the
  contract works until such time they are completed
  in accordance with the contract specifications
  and the Principal has accepted handover of the
  works.

18
How Does DC PI Coverage Apply?

• In the event of a defect arising in the works
  prior to the handover it will fall upon the DC
  Contractor to remedy the defect to ensure the
  project is completed in accordance with contract.
• Principal will not bring a professional
  negligence claim he will simply look to the
  contractor to rectify and complete the project in
  accordance with the contract

19
Difference from Contract Works cover

• CAR policy may cover rectification cost arising
  from damage due to defective design but check
  cover!
• CAR does not cover defects where there is no
  damage
• CAR does not cover liability for losses suffered
  by the Project Owner (but Delay in Start Up may
  cover some areas)
• CAR cover expires once the project is complete

20
Difference from Third Party cover

• Third Party policy may cover legal liability for
  damage to third party property
• Will not usually cover project owners loss
• Usually requires accidental damage to have
  occurred

21
Annual vs Single Project Cover

• Project Policy
• Limited to one single project
• Long Term policy covering liability post
  completion during run off period
• Underwriting focussed on project specific
  exposures
• Very limited market insurers find it difficult
  to underwrite policies longer than 18 months
• Premium cost reflects scarcity of market.
• Cover in place for entire policy duration

22
Annual vs Single Project Cover

• Annual Cover
• Covers all of a contractors activities
• Based on underwriting long term history and
  performance of a contractor
• Most cost effective solution
• Subject to annual renewal degree of uncertainty
  for Project Owner
• Limits may be eroded by claims from a number of
  projects

23
Contractual Requirements

• DC PI is generally only available with an
  aggregated Limit of Indemnity (with options for
  one or two reinstatements).
• In common with other PI policies coverage applies
  on a claims made basis NOT on an occurrence
  basis
• Contracts should establish requirement to
  maintain coverage for a defined period post
  completion (e.g. 12 years).
• single project PI policy or
• an annually renewable PI policy

24
Joint Ventures

• One or more of the joint venture members may not
  carry adequate annual PI limits or may indeed
  carry no PI at all
• Differing Excesses may apply.
• Different strategies for meeting contractual
  requirements
• Need to ensure JV parties PI policies provide
  adequate cover for activities in JV

25
International Project Examples

• Hong Kong Airport projects
• Hong Kong West Rail projects
• Singapore Deep Tunnel Sewerage System
• Portuguese Roads
• Dutch High Speed Rail
• Athens Ring Road
• Egyptian Port project

26
Claims Examples

• Defective design of multi-storey car park serving
  retail mall.
• Contract Value USD USD10m.
• Total PI Loss USD50m comprising temporary
  shoring/support, demolition and complete
  re-design and build.
• Project owners consequential losses exceeded
  contractors PI limit.

27
Claims Examples

• Main Sub-Contractor sub-let piling works in
  respect of office/retail complex to specialist
  sub-contractor
• Piling sub-contractors works failed due to his
  defective workmanship
• Main sub-contractors PI policy paid loss of
  USD17m for loss and delays caused to Main
  Contractor arising from failure to inspect and
  manage sub-contractors works

28
Claims Examples

• Under-performance of waste water treatment plant
  due to alleged design fault and
  under-specification of filtration equipment.
• Required additional chemical dosing over
  operational life of plant to make good filtration
  design deficiencies
• Loss USD17m - only USD10m was insured

29
Approaches of Different Insurance Markets

• Local Insurers currently offer competitively
  priced BUT restrictive PI policies (both annual
  and Project PI). For example -
• Requirement for damage
• Requirement that works are carried out by a third
  party (consultancy style wording)
• Limited or no prior to handover mitigation of
  loss coverage

30
Approaches of Different Insurance Markets

• International Insurers able to support local
  insurers in offering broad bespoke DC PI
  coverage
• Higher cost and deductible than local insurers
• Main interest in larger contractors and projects
• Better understanding of legal and commercial
  environment could assist in improving premium
  rating

31

• Thank You