Understanding the difference between public liability insurance and professional indemnity insurance
As discussed last month, there is concern in the industry at the increased accountability that will come with the being a Licensed Building Practitioner.
Members have reported that their insurers are telling them that they either “don’t need” or “can’t get” professional indemnity insurance or, if they can, it’ll cost too much to be a realistic option for them.
Many think the public liability (PL) insurance they currently have will suffice.
Let’s discuss the difference between PL insurance and professional indemnity (PI) insurance.
Some say that PL insurance is for those who “do”, and that PI is for those who “say”.
Most PL cover in the construction industry will provide protection against claims for compensation for unexpected and unintended personal injury or property damage for which you may be legally liable arising out of your business activities.
It will also cover the costs of defending these claims in court, as well as any necessary investigations or negotiations.
House is a ‘product’
Importantly, liability for alleged defective workmanship is not covered because most insurers deem the house to be a product upon which you have been working, and most PL policies exclude cover for the product itself.
A leaky building has been confirmed as being a product in a recent insurance case, Arrow International Ltd v QBE. This would suggest that Product Liability insurance should be sought.
While some PL policies already offer extensions for workmanship, most still contain exclusions for water ingress or weathertightness claims, as most PI products do.
PI covers you and your staff for breach of professional duty, ie, liability for acts, errors and omissions that you make in your business activities, legal costs and expenses investigating and defending claims against you.
Builders are already subject to a duty of care. It has been argued that holding a licence and issuing a memorandum that you have “carried out or supervised” restricted building work might increase that liability. But the duty is already there, and builders are liable if they breach it.
The question is, can this be characterised as a professional duty such that PI should be the norm?
It is time to do away with the myth that PI only covers the “traditional” professions such as lawyers and accountants.
One current PI policy describes professional as “anyone who gives another person advice and/or services of a skilful character according to an established discipline”. Sounds like a builder, doesn’t it?
Do any of these situations sound familiar? Have you ever given advice to a client, using your experience, skill and judgment, about the building project?
Have you ever used some or all of the features from another firm’s plans, perhaps at the request of the client? Ever needed to “fill in the blanks” of the architect’s detailed drawings once the project was under way?
These are PI risks, and you take them every day.
The other important distinction to be made between PL and PI policies is that public liability policies are generally “occurrence” based — ie, you have cover if the accident/damage occurs during the term of the policy.
PI policies differ in that it is not the damage event itself that triggers the policy, it is the “claims made”, ie, when the claim is lodged.
To ensure you’re covered for the duration (up to 10 years) you need to consider “run off” insurance.
Additional insurance needed
The every day risks in the construction industry make it clear that a composite policy covering the “usual” liability suite of public, statutory and employer needs to be strengthened by the addition of professional indemnity insurance, preferably obtained through the one advisor to ensure there are no gaps in cover.
There are products available to the construction industry that tick all the boxes. However, getting it can be problematic.
An insurer will assess you to determine your risk profile. What’s your track record, what kind of projects do you do and what is the nature of the risks?
At a recent Department of Building and Housing (DBH) seminar on the current Building Act Review, the presenter acknowledged that the DBH is talking to the insurance council about the insurances available in New Zealand for building professionals, and the prospect of sureties and warranties being desirable or even mandatory.
No statements have been made yet on this subject that is crucial to the success of the Licensed Building Practitioner scheme.
The RMBF has also been in discussion with insurance providers so that it can ensure there are insurance offerings available to members that provide them with the confidence that their risks are covered.