A ‘hard insurance market’ is the result of a reduction in capacity – the number of insurance markets available becomes greatly diminished and those insurers left holding the fort do so at an increased risk of claims. Consequently, insurers cut back cover by way of exclusions which carve out cover for common claims.
In our January 2025 market update we discussed the return of capital and insurers to Australia leading to a long-awaited softening of the market. Some long-standing insurers now have the ability to increase the scope of cover and reduce premiums, resulting in a win-win for our clients.
As we have seen before in previous softening markets, the focus on market share, leading to premium competition, can adversely affect your business by way of reduced coverage, particularly when a policy is issued by new or returning insurers. Generally, new and returning insurers do not have the same level of market knowledge and experience as those who remained, often offering policies with insufficient policy coverage and usually wordings which replicate hard market exclusions.
Choosing the right insurers for your business is a combination of various equally important factors including coverage, claims handling ability, experience and, of course, premium and excess. A risk advisor with specialist knowledge in your industry and product class is best placed to assist you in comparing options.
We note below 7exclusion clauses to watch out for:
Broad cladding exclusions
There are good cladding exclusions, moderate cladding exclusions and then down-right unacceptable exclusions.
Since cladding exclusions started appearing in construction professionals’ PI policies in 2019, we have seen many variations and iterations. Policyholders should check that any cladding exclusion includes a link to combustible materials or the fire safety of the non-compliant cladding products. If the exclusion is worded to the effect that non-compliant “cladding” is excluded, the broadness of this wording could exclude a claim for glass, stone or even steel cladding.
Broad building materials exclusions
Even worse than a broad cladding exclusion is a vague “building materials” exclusion.
One of the most remarkable developments we observed from the hard market, which is making a re-appearance on some newer policies, are exclusions that carve out cover for “building materials” – a phrase which is often undefined within a policy wording. In the absence of a definition, it should be noted that building materials make up every single element of a building’s physical structure, so the exclusion of any claim arising in relation to non-compliant building materials renders a policy worthless. Policyholders should not accept this exclusion.
Costs estimates exclusions
It is often expected that architects and engineers will discuss costs or estimates of construction costs at the outset of a project. It is a risky area for consultants as they are generally not experts in construction costs. Many PI insurance policies will have an exclusion which does not provide cover for cost estimates unless they are provided by a quantity surveyor. Whilst it is best practice for construction professionals to avoid costs estimates it is not always possible, and they are often drawn into costing conversations. Accordingly, it is best practice to have cover for costs estimates, either by deletion of this exclusion or by a write-back. If this cannot be done, then we would advise finding another policy.
Extended duty of care under the D&BP Act exclusions & Class 2 Buildings exclusions
On 1 July 2021 the Design & Building Practitioners Act was introduced in NSW. The Act requires designers and builders of certain classes of buildings to be registered and sign-off on compliance certificates. The Act also introduces an extended duty of care to subsequent owners of the building, which previously did not exist at law. At its introduction, during the height of the hard insurance market, the increased risk and uncertainty about how the Act would impact construction created increased perceived exposure for insurers and some insurers chose to apply an Act exclusion. There are variations of these exclusions so we advise policyholders to keep an eye out and be vigilant, particularly because the intention is that the DBP Act will eventually apply to all buildings. Again, such an exclusion is unacceptable.
Consequential loss exclusions
A professional indemnity insurance policy is designed to cover you for any errors or omissions that might arise on a project and the subsequent claim brought against you for that error or omission. A consequential loss is a loss that arises as an indirect result of a primary insured even. Some examples of consequential loss could be loss of revenue, loss of profit, loss of benefit, loss of reputation, loss of contract and loss of opportunity. Consequential loss claims in a PI insurance claim are common. Whilst it is best practice to delete consequential losses from your contracts, that is not always possible. Consequential loss exclusions are therefore also not acceptable in a professional indemnity policy but are commonplace.
Contractual liability
PI policies traditionally include an “Assumed Liability exclusion” which excludes cover for a claim where you may have agreed to extend your liability, beyond your common law liability, to your client or a third party by way of your contract with them.
The Assumed Liability exclusion excludes cover for an indemnity, warranty, hold harmless, and waiver of subrogation clauses. These terms and their application to contracts are traversed in our article here. Some insurers can write back cover into your policy to provide some cover for such clauses. We would recommend policyholders insist on these extensions to their cover, particularly if they are signing client drafted agreements.
These coverage extensions are often complex, so it is important that your advisor is an expert in consultancy agreements and insurance.
Waiver of the right to proportionate liability.
Part 4 of the Civil Liability Act 2002 (NSW) deals with proportionate liability. This Act replaces the traditional common law of “joint and several” liability where all defendants are equally liable for the totality of the loss, irrespective of what percentage of fault has been attributed to them by the Courts.
Proportionate liability reverses this common position, so each defendant is only liable for their percentage of fault. Unfortunately, in NSW, WA and Tasmania you are permitted to contract out of this legislation. Your client may request that you contract out of your right to proportionate liability in your contract with them, leaving you exposed to more than your actual proportion of their loss.
This additional liability is an assumed liability and excluded under a traditional professional indemnity policy. Some insurers can write back cover for “contracting out” and we would suggest that this is an important extension of cover for construction professionals to consider.
Summary
When selecting your PI policy, it’s important to remember, new insurers need to build up their premium pool quickly to be profitable, and more importantly, to be able to pay claims when they arise in 3 to 5 years’ time. If an insurer has not built up enough premium to pay claims in that time, due to recklessly cheap premiums, it’s likely they will pull out of the market which will trigger a hard market due to reduced capacity.
Your Bellrock Advisor has the experience, knowledge and strong market relationships to negotiate the right coverage for your business. While cost savings are attractive and should be rigorously pursued by your advisor, it is essential to consider price as only one component of the decision making process. In many cases “You get what you pay for”, when choosing your advisor and your insurer. Contact your Bellrock Advisor today.
