We are seeing a significant increase in requests for higher limits of insurance in the construction industry. Industry standard professional indemnity (PI) insurance limits for architects, engineers and other construction professionals is $20M for practices working on large projects.
We have seen a significant increase in the number of requests coming through from government agencies, predominantly in NSW and QLD for PI limits of liability of $50M or more which is causing significant issues in the insurance industry.
For consultants and contractors this additional insurance comes at a significant cost on projects that already have tight margins. Given the nature of construction projects and the long-tail nature of PI insurance, these increased limits of liability will need to be maintained for at least 12 years. That is, 5 or so years of construction and typically 7 years of insurance post construction.
Traditionally on larger projects, the government or the project owner would take out a project specific professional indemnity insurance (PS-PI) or principal controlled PI policy (PC-PI) which would cover all parties including the contractor, lead consultants and the sub-consultants.
There are various advantages of PS-PI and PC-PI, including:
- A dedicated policy limit and coverage: it provides a specific, ring-fenced limit of liability for a single project, preventing a large claim from exhausting a firm’s annual PI policy.
- Consistency and control: it ensures all contractors and consultants are covered under a single consistent policy with broader policy coverage.
Brisbane Olympics 2032 – insurance issues
We are starting to see the Brisbane 2032 Olympics construction “need” impacting the supply chain and availability of tier one contractors and consultants. The construction clock is ticking, and the general market feeling is that construction will come down to the wire.
The overall quality of the building works will likely take a backseat to speed of construction, as is always the risk in fast tracked projects. This will inevitably lead to an increase in professional indemnity claims and Insurers are watching this space very carefully.
Rather than the Games Authority taking out PS-PI or PC-PI for the project, contractors and consultants are being asked to increase their PI policy coverage. Sometimes via increased limits such as $30M or $50M if available, or via an increased number of re-instatements or a higher aggregate limit.
We are seeing many consultants and contractors seeking quotes for increased levels of cover which is leading to significant aggregation issues for the limited number of insurers who have the capability to insure large projects.
Others states and territories – transport, hospitals, infrastructure projects
We are seeing the same issues around the country particularly with transport projects, hospitals and the like.
Structuring insurance programmes to provide the requisite level of coverage
At Bellrock we are helping many clients obtain quotes and place policies to satisfy the increasing needs of the market. Whilst we are of the opinion that PS-PI or PC-PI is a better option, we are delivering solutions to our clients via various insurance structures, including:
- Project specific excess layers – For example, adding a $30M excess layer onto an existing annual PI policy of $20M to provide $50M cover in total. This can be project specific to help reduce the cost of this extra insurance.
- Stand-alone project specific PI policies – Some clients are preferring to separate the project from their annual PI policies and purchase a separate PI policy for the specific project.
- Increasing the limit of liability of the annual PI policy – This is generally less preferred as it is more expensive. The cost can be reduced by making the increased limit only apply to “new” projects post-inception.
- Negotiating with our customers’ clients to reduce or otherwise amend the levels of cover that are being sought – It is very helpful to have your insurance advisors in the room early. The significant cost of this additional insurance can make projects unprofitable (if your principal does not pay for the extra insurance) so early engagement is key.
- Placing Project Specific or principal controlled PI policies for all participants in the project.
For further information or to discuss restructuring your existing programme please contact Simon Gray or Carina Boogard.
