• 10 April 2024

Are you asking the right questions of your subcontractors to make sure that the professional indemnity (PI) insurance they hold covers them appropriately for the services they are providing? Miller’s Construction PI team share key areas to check.

Limit of indemnity

It is particularly important in the current market to ask what limit of indemnity your sub-contractor has purchased, including any sub-limits. In some cases, firms operating in the built environment have decided to reduce their limit of indemnity due to large premium increases. 

If a subcontractor you engage with has a lower limit of indemnity than you agreed to under the main contract, you could leave your policy exposed for claims that exceed the subcontractor’s limit of indemnity.

Scope of cover 

As a result of the PI market hardening, firms experienced a reduced level of cover to that previously enjoyed. It is therefore essential to understand a subcontractor’s scope of cover, including any relevant exclusions. 

In recent years we have seen exclusions relating to multiple exposures such as fire safety, pollution and projects involving basements. Where possible, try to ensure that a subcontractor’s policy coverage is in line with your own and appropriate for the services they are providing.  

It is also important to check a subcontractor’s retroactive cover to ensure that any liabilities arising from past work performed by the subcontractor are adequately covered. This helps mitigate potential risks and liabilities associated with past work, thereby safeguarding the interests of all parties involved in the project.

Policy period

Knowing the policy period for your subcontractor’s PI policies can be hugely important. Given PI is written on a claims made basis, the policy that is in force at the time a claim is made will be the policy that responds. Therefore, if there is any change in coverage from one renewal to the other, the terms that your subcontractor had initially confirmed when you first undertook your procurement process, could now be invalid. 

As such, we suggest ensuring that you mandate that any material changes to a subcontractor’s policy terms and conditions at renewal, are declared to you.

Claims history 

Knowing the claims history of your subcontractors can not only give you a good idea of whether they are the right firm for the job based on their previous experience, but it can also let you know how much limit they might have available if their policy is subject to an aggregate limit. Given the long tail nature of PI policies, it can take years for claims to be fully settled and paid out. So whilst notifications on their claims history may not have any incurred amount, it could mean that the limit available could be eroded through costly defence or indemnity payments, meaning the amount left available in any one indemnity year could be partially or fully depleted if you ever need to make a claim against them.

Asking for a copy of the sub-contractor’s up to date claims history will allow you to understand any past issues they may have had and any they might currently be fighting.

Financial stability

Understanding the financial stability of a sub-contractor is incredibly important when considering their suitability for employment. As has been explained, PI in the UK is underwritten on a claims-made basis, meaning there must be a policy in force at the time a claim is declared for payments to be made by the insurer. 

Most employers would want to ensure that PI cover is in force during the construction phase and for a period of time after to allow for any issues that present themselves after completion. However, this relies on sub-contractors maintaining their insurance cover for a set number of years, which might not be possible if the firm becomes insolvent. There have been a number of well documented instances of contractor insolvency in recent months owing to macro-economic pressures, highlighting the potential issues of a financially unstable supply-chain.