Engineers and PI insurance
There are many variations of engineering including for example, chemical, civil, mechanical, electrical, electronic, structural, soil and geo-technical which apply to different areas of design and construction. Engineering encompasses any type of activity which aims to either solve a problem, or complete a task related to the definition, design and specification of a structure or product.
What do insurers look for?
First and foremost insurers will look for a combination of qualifications and experience. If a consultant is unqualified insurers will want to see a CV. They will also analyse the fee income of a practice and break it down into the following common categories:
- Civil engineering
This is the oldest branch of engineering and is classed as a medium hazard activity. Examples include the design and supervision of the construction of roads, airports, tunnels, bridges, water supply, sewage systems and buildings. Civil engineers employ the latest concepts in computer-aided design (CAD) during design, construction, project scheduling and cost control. They are also problem solvers, meeting the challenges of pollution, deteriorating infrastructure, traffic congestion, energy needs, floods, earthquakes, urban redevelopment and community planning. Each project is custom designed. Qualifications and relevant experience are essential.
- Structural engineering
Structural engineering is classed as a medium hazard activity. It is the science and art of designing and making buildings, bridges, frameworks and other structures, so that they safely resist forces to which they may be subjected.
- Soil and foundation work
This is seen as a higher risk area of work. The potential consequential loss has produced some of the largest paid claims in this area of the insurance market. By definition, constructs tend to be built above the work done by the soil and foundation engineer. Therefore, if this work is incorrectly carried out, the entire project may be damaged.
A lower hazard area of work, this is an engineering discipline that involves mechanical design, energy conversion, fuel and combustion technologies, heat transfer, materials, noise control and acoustics, manufacturing processes, rail transportation, automatic control, product safety and reliability, solar energy, and technological impacts on society.
Mechanical engineers study the behaviour of materials when forces are applied to them, such as the motion of solids, liquids, and gases, and the heating and cooling of objects and machines. Using these basic building blocks, engineers design space vehicles, computers, power plants, intelligence machines and robots, cars, trains, aeroplanes, furnaces, and air conditioners. Mechanical engineers work on jet engine design, submarines, hot air balloons, textiles and new materials, medical and hospital equipment, refrigerators and other home appliances. Anything that is mechanical or must interact with another machine or a human being is within the broad scope of the mechanical engineer.
The work of mechanical engineers varies by industry and function. Large numbers carry out research, test, and design work, while others work in maintenance, technical sales, and production operations. High technology companies seek mechanical engineering graduates for product design applications such as plastic enclosures, thermal analysis and electromechanical. Insurers will shy away from any form of automotive, aeronautical or marine specialists so it is essential to use a specialist PI broker like Hammond PI to source receptive insurers.
This is seen by insurers as a lower hazard activity. Electrical engineers design new products, write performance requirements and develop maintenance schedules. The usual functions in electrical engineering include research and development, planning, designing, construction, operating, and maintaining a variety of electrical apparatus and systems. They also test equipment, solve operating problems, and estimate the time and cost of projects.
- Heating and ventilation
Viewed as a lower hazard activity, this engineering function usually involves low contract values and has a good claims record. However specialists undertaking work in temperature sensitive areas such as computer rooms and food storage units, may find their premiums loaded to reflect the nature of the work.
- Any form of survey or valuation work
This is seen as a high hazard area in which an engineer needs specialist qualifications. Proposals for insurance will ask for details of average and largest values in order to provide the appropriate coverage and to evaluate risks. Engineers rarely carry out surveys for lending purposes and are far more likely to do a condition survey as part of a job. If valuation work is undertaken, it is important to advise insurers accordingly as a failure to notify may lead to an exclusion being made.
Other areas of interest to insurers include:
- Contract sizes
There is a direct relationship between the size and complexity of the job and the exposure to risk and size of potential loss.
Is a firm using 'cutting edge' technology or standard, tried and tested processes?
- Overseas exposure
Does a practice carry out work for overseas clients? Careful consideration will be paid to such work and cover could be excluded for work carried out for US or Canadian clients. The Territorial and Jurisdiction limits are very important in these instances and care should be taken when accepting a policy wording.
- Retroactive exposure
Does a practice have an exposure to claims arising from past work, whether in the current firm or from a former practice?
- Work no longer undertaken
Has a firm undertaken work in the past, either in its nature, size or geographical location, which is outside of the scope of the presentation submitted (proposal form) for insurance at this time.
Example of claims
- Civil works to embankment
Embankment collapsed due to unstable sub-surface conditions not being detected by a geo-technical engineer. Following pursuance of fees, the client launched a counter claim alleging that they had been supplied with misleading estimated costs for the project. This is a typical tactic used by clients to delay paying fees or to reduce fees.
- Design of highways and service roads
This example related to a £2,000,000 superstore project. A failure to locate previous pilings in the area along with insufficient access for articulated vehicles led to £80,000 in remedial costs.
- Design of heating system in factory
In this case, refurbishment proved inadequate following miscalculations. Extra units were required costing £29,000. Proceedings were issued against nine parties on the contract, for breaches of building regulations. This is a scattergun approach used by solicitors which will incur costs.
- Engineer provided wrong specification
Inaccurate specification for an electricity supply to site contractors, led to the need for alterations and a temporary generator costing £28,000.
- Specification and supply of 'Load Cells'
The specification and supply had to be to a defined level of accuracy for testing purposes. However the cells were found to be under performing and were eventually rejected. This cost £42,000.
- Refurbishment of noise test facility
In this case, the contract was terminated citing delays due to design inadequacies. Complete refabrication was required in order to comply with Pressure Equipment Regulations 1999 and resulted in a claim of £1,500,000.
Main Bodies with PI Rules
The Institution of Electrical Engineers (IEE)
Association for Consultancy and Engineering (ACE)
The Institution of Civil Engineers (ICE)
The Institution of Mechanical Engineers (IME)
Society of Automotive Engineers (SAE)
The Chartered Institution of Building Services Engineers.
Hammond PI is not aware that the above bodies have a requirement for their members to hold or maintain professional indemnity insurance cover at any level. If an organisation is a member of a professional body, we would suggest a review of rules to ensure any requirement is met.
Whilst there may not be a compulsion to hold cover, most engineers find that they are required to hold and maintain cover to comply with contractual requirements such as collateral warranty agreements which they are asked to enter into as a condition of contract awards.
Some Insurers find engineers to be an attractive class of business. As engineers are not subject to mandatory Professional Indemnity Insurance rules, insurers often offer varied cover, particularly regarding pollution or collateral warranties. Organisations need to be aware that cover may differ from wording to wording and from insurer to insurer.
What is PI?
Areas requiring special consideration
Design and build jobs
In essence, these jobs occur when a client looks for a combined design/build contract. Frequently, the builder takes contractual responsibility for the design and if there is no in-house design department, sub-contracts the design work to the consultant architect and engineers.
Care should be taken that in these instances, that there is no formal consortium partnership created, under which the engineer might inadvertently incur a joint and several liability for other members of the design team. It is also important to ensure that the design consultants do not take on the contractor's role. If an engineer is simply acting as a sub-contractor under a contractor's design and build job, then the normal insurance policy coverage should suffice. If engineer consider they may be involved above and beyond a straight sub-contracting role they should consult insurers for clarification.
It is also common for clients to insist on collateral warranties or duty of care agreements on design and build jobs, because there is no direct contract between the client and the design team. (This is covered below.)
When making a submission for insurance is it important for the engineer to disclose whether the engineering firm is also a contractor. For example, a firm might be asked to offer a fixed price for a job. If this is achieved by the firm taking on the entire works, even if the physical work is sub-contracted out, (whether to bona fide sub-contractors or not), the firm is in effect acting as the contractor and this may well invalidate cover.
Insurers regard contractors as posing a very different risk to that posed by a pure consultancy firms. There is no-one else to carry blame when things go wrong and contracting is highly competitive - to the extent that under-priced jobs have a habit of going wrong.
Most proposal forms have a specific question regarding consortia. These generally occur on bigger jobs, often where a combined tender is put together by a design and build team covering all professional and building disciplines. Insurers will be looking to see whether or not there is an agreement whereby a separate legal entity is created for one or more jobs, or whether there is a partnership created between two or more of the participating firms, in which case the participants will need to establish how it is to be insured.
There are now more and more projects involving 'project partnering'. In respect of this activity, there is just one contract that is signed by all involved in a project. The intention is that everyone communicates more, there is less repetition of work (and less error), and less contractual ambiguity. Experience overseas has suggested that this type of approach does indeed reduce the number of problems. However, care must be taken to ensure that this kind of agreement is not drafted in such a way as to inadvertently create a form of single project partnership, or to expose anybody to liabilities that rightly belong elsewhere.
Collateral warranties / Duty of care agreements
In order to establish a claim for negligence, a claimant must first establish that the professional owed a duty of care. This may not always be possible if the claimant is not the professional's client, as in design and build jobs. This situation has led to a profusion of collateral warranties and duty of care agreements sitting alongside the main contract, and create a contractual line of attack for the claimant.
Lawyers have taken the opportunity to extend these agreements in an attempt to create many more liabilities than might be considered reasonable. For example, exposing the professional to claims from very remote third parties, extended limitation periods and guarantees. PI insurers generally accept claims arising from sensibly worded agreements.
The British Property Federation (developers' trade association), has agreed standard templates with most construction-related professional bodies (RIBA, ACE, RICS included), which most insurers will accept. Insurers regard the acceptance of contractual liability beyond that normally owed by a professional to be beyond the cover provided by a PI policy. Therefore, the more unreasonable agreements could have very damaging effects on professionals, leaving them without cover.
Most PI policies address the issue of collateral warranties by clearly setting out the limits beyond which cover will not apply. This should avoid the need to submit each and every agreement for sanction by the insurer. Some of the more restricted policies offer very little cover in connection with this type of agreement, not even covering British Property Federation agreements.
Of course, the 'claims made' nature of PI policies causes some difficulty. If an engineer signs up to a collateral warranty having reassured himself that it is within the scope of his PI cover, what if he later chooses to (or is obliged to) change insurer?
The Housing Grants, Construction and Regeneration Act 1996
The biggest issue here for PI policies is the introduction of a standardised adjudication process to speed up the resolution of construction industry claims, cutting to a matter of weeks a process that has historically taken years. It is beyond the scope of this commentary to go into detail on the Act, but insurers generally require notification of adjudication claims within a day or two.
Insurers will not allow insured organisations to compromise any right of appeal. They must not enter into any contracts that allow the adjudicator to finally determine a dispute. Most policies incorporate a number of crucial clauses relating to the handling of adjudication claims. As ever, engineers must read their policy very carefully to ensure that they do not fall foul of any of the requirements, in particular with regard to this Act.
Wordings are usually, but not always, offered on a standard engineer's civil liability wording. Where the practice is involved with contracting or the construction or building aspect of a project a design and construct wording may be more appropriate. If the engineer is unqualified, or qualified only to a limited extent, cover may only be offered on a more basic miscellaneous errors and omissions wording.
The usual cover
Usually the limit of indemnity will be 'any one claim' with legal costs payable in addition. However, sometimes the cover will be limited in the aggregate. The excess will not normally apply to insurers' costs and expenses but again this can be amended to include costs and expenses. See our glossary of terms for more detail.
The usual exclusions
- Death or bodily injury
- Loss or damage to physical property (but fidelity and loss of documents are covered)
- Punitive or exemplary damages (many policies have no geographical or jurisdiction limitations)
- North American offices
- Liability to other insured organisations
- Nuclear risks
- Claims and circumstances known at inception of the cover
- Acting as a contractor
- Onerous collateral warranties
Presenting your proposal for insurance
The presentation of your business to insurers is very important - both in respect of the facts i.e. the elements for which cover is required, and the way in which you carry on your business, both of which influence an insurer's perception of your business and the risk it poses to them.
We would always recommend that in addition to the proposal form you are asked to complete, you provide supporting documents with your proposal such as:
- A CV showing the principals' qualifications and experience in the areas of business to be covered
- Any Terms of Business or Terms of Engagement used
- A copy of your corporate brochure
- Details of your website
- An insurance history listing all material changes to your business since you first had professional indemnity insurance. For example, mention any previous businesses for which you require cover. It is possible you may be asked for a claims history from the previous business or a copy of its last completed proposal form.
Don't forget to include the names of any businesses with which you have merged, or any that you have acquired, as these will need historic cover. Likewise you may have ceased to offer certain services for which cover is still required.
Keep a written record of all requests for cover to be extended and any historic or material changes to your business. This information can be updated each year and provided as an addendum to the proposal. Any certification the business may have i.e. accreditation by a governing or standards council, is also well worth disclosing.
Keep your presentation neat and tidy. Bear in mind that an untidy presentation may be construed as an untidy business. Allow yourself time to complete the presentation and remember that a hard copy always look better that a faxed one sent in at the last minute.
The Professional Indemnity Insurance market is relatively small so at the point of renewal, concentrate on asking only one or two specialist brokers to quote. Bombarding the market with requests can result in your proposal being locked out of some markets.
Renewal is an ideal time to review your insurance requirements. As your business grows and your contract values increase, it is wise to consider what could go wrong and how much it may cost to settle a claim - and also cover the attendant legal costs. Some policy wordings provide a limit of indemnity with legal costs in addition to the limit. Others provide limits of indemnity which include the legal cost. However, the cost of litigation is high and can eat into the limit of indemnity provided if costs are inclusive.
Many professionals are obliged to carry PI by their professional bodies. Many of these bodies not only have specific requirements in respect of policy wording but also on the limits a professional must carry and the excesses they are allowed. Renewal is an opportune time to check your cover both in respect of your own requirements and those of your professional bodies.
Download and return a signed copy of this PI Proposal Form