How to better protect yourself against construction supply chain professional indemnity risks

The increasing number of construction professional indemnity (PI) claims relating to supply chain issues are a key factor, alongside corrective actions from underwriters, behind the continual struggles for those operating in the sector to secure the insurance they need. This article discusses the issue and how insured’s can benefit for increasing their due diligence around supplier’s insurance.

State of the market

It is fair to say that construction PI insurers have taken a very conservative underwriting approach over the last two to three years. Policy coverage has narrowed substantially (examples include moving from “any one claim” to “aggregate” limits of indemnity and applying substantive restrictions around cladding and fire safety) and sub-standard pricing has been corrected with sharp rate/premium increases. Whilst these symptoms of the “hard market” are expected to remain for the foreseeable future, we are starting to see cautious signs of conditions and pricing beginning to level out.

One of the key drivers for the correction of the construction PI market is poor claims performance. Whilst there are no consolidated industry claims figures to speak of, we know from our discussions with numerous insurers and clients that claims payments over the last 10+ years have far outstripped the premium paid, so much so that insurers have had no option but to take the corrective action described above.

Supply chain claims

What may come as a surprise to some, is that a sizeable proportion of construction PI claims emanate from the supply chain rather than from errors or omissions on the part of the insured themselves. What was previously dubbed ‘contingent risk’, which insurers have historically not charged high premiums for, has become one of the biggest source of claims. Examples include failure of sub-consultants to carry out their work properly and, insureds being held vicariously liable in contract by their customer and insured’s not properly managing the activities of sub-consultants. 

Economic factors have also put strains on the supply chain. With an increasing number of construction firms going out of business due to liquidity issues, there is a greater risk of claims not being passed down the supply chain either through contract or via insurers looking to subrogate and recover from a supplier’s insurers. PI insurers are acutely aware of this and have an ever-increasing focus on understanding how their insureds procure, appoint, engage and manage their suppliers so as to avoid potential claims.

What PI insurers are now looking for from insureds

A key point of interest to PI insurers is having their insureds demonstrate that, as much as possible, they are backing off contractual liability to suppliers. Insurers take comfort from the fact that contractual terms and conditions are pushed through to suppliers, and that those suppliers evidence having suitable levels of PI cover in their own right. This helps to prevent mis-guided claims against their insured’s policies where suppliers have sub-standard cover themselves and provides reassurance that there is an insurance policy to potentially subrogate against if there are grounds to seek some form of contribution or recovery. This has become even more important as the basis on which terms are offered in the PI market have changed so drastically over the past couple of years. The conversation has moved way past whether your sub-consultant has sufficient levels of cover to what onerous exclusions might be lurking within the policy terms and conditions and whether you might be left with the liability.