Civil engineers: how to present your professional indemnity insurance to insurers
29 November 2016
When a particular insurer tells you that their professional indemnity insurance (PII) for Irish architects is their worst performing book of business in the world, it’s possible to put it down to bad luck. When another insurer tells you that their book of architects’ PI was in their top five worst in the world, you tend to take notice.
The former was told to me by a senior member of a UK insurer while I was based in Australia. The latter is from the Irish office of one of the largest and best-known insurers in the world.
These are insurers with hundreds, if not thousands, of books of business across the globe and taking in billions of euro of premium while paying out billions in claims. And architects’ PI, in our little country, has made its mark.
Earlier this month, CFC underwriting became the latest PI insurer to exit the market for architects PI in Ireland. This particular insurer is the market for hundreds of firms around the country, particularly for smaller practices. They become the latest in a long line of insurers to come in to the market and fail to turn a profit on architects’ PI.
Some, including Catlin, Dual, Travelers and WR Berkley have exited completely. Others have totally reined back on their appetite for these risks – some won’t consider new business enquiries and don’t offer renewal on certain risks, while others have minimum premiums of around €3,500-€5,000, effectively ruling themselves out for small practices.
Engineers have their own issues with limited capacity for certain areas. Most insurers like lower risk firms such as mechanical and electrical. However, civil and structural engineers are considerably higher risk from a claims perspective and some firms can struggle to obtain alternative quotations.
Many practices are multi-disciplinary e.g. carrying out architectural and engineering work. This is not favoured by some insurers; they see it as firms spreading themselves too thinly– they prefer specialists. (Obviously, this is not the case where there is an adequate number of qualified staff employed.)
What are the issues for engineers?
There are a couple of major ones. Firstly, Celtic Tiger-era claims. I recall speaking to a senior underwriter in around 2011-12 about their (poor) claims experience. His company carried out an analysis to see from where the claims were coming. Were they at the design stage, or planning related, or was it when the job went on site? The answer – they were coming from everywhere.
There was no one part of the process that they could pinpoint and say, “Okay, we need to charge higher premiums for this.” It was everything. These claims are mostly finalised. Insurers and insureds are both battle hardened and more experienced as a result.
The second issue, and one which won’t go away anytime soon, is the way that Irish law is structured. Please bear in mind the following is my own interpretation; I am not a lawyer! Ireland has a system which protects the ordinary person, the client in a contract dispute. The courts will look to protect their interests. So far, so good and surely no-one can have too much of an issue with this.
However, in practise this means that if a party to a contract is deemed even, say, 1% liable for an issue, they may have to pay 100% of any claim settlement. Here is the same story I have had retold countless times by architects and engineers:
I worked on a contract back in 20XX. There were issues with (insert the reason – e.g. cracking appeared) and I was called back on site to have a look. So-and-so – who the client appointed themselves – hadn’t followed my specifications/drawings which led to the issue. However, so-and-so is no longer trading/has returned from whence they came and I was the last one standing. I did nothing wrong and solicitors agreed, I wanted to defend but my insurers settled, against my will, for X.
Some of the details change, but the overall story remains the same. These settlement amounts are fairly mind-boggling. Here’s an example from one firm I spoke with recently – two such claims, one settled for (approximately) €125,000 and the other for €87,000 (with legal fees totalling €65,000 and €30,000 respectively).
This is a sole trader and in no way is this overly unusual. In both cases, the individual involved was dragged in for works he wasn’t contracted to do. However, insurers obviously felt that there was a grey area somewhere and made a commercial decision.
I’ll give another example of an engineer where the client had issues with cracking on an extension. The client claimed that the engineer supervised construction. Not only did they not do that, the engineer could prove that they were on holiday overseas at the time of the alleged supervision.
However, the client was claiming €90,000, the contractor was gone and insurers made a decision to settle for €50,000 plus costs. The engineer was working a couple of doors down from the claimant recently and had a look in – the extension still stands with no issues.
Learn from other professions
Larger practices have claims too! I’m not picking on the sole traders – these are just useful examples to highlight what even the smallest firms are experiencing.
At its core, insurance is about pooling together premium to protect against losses. However, it would take a lot of premium spread across a lot of claims-free practices to make up for these claims and legal costs. That is not what is happening – hence insurers exiting markets.
Almost every insurer is a publicly-listed company answerable to shareholders. Any notion that there are in it for anything other to make money is naïve. If someone wants to give me €100 million or so, we’ll set up a small, ethical mutual and we can give any profits back to members. Until then, we’re stuck with what we have got.
Any claim always has two sides and, in the cases above, I only get to speak with one. Courts can be unpredictable. It may not make sense to you or me on the face of it, but if insurers thought they would save money by taking these matters the whole way, then they would do it. When they make commercial settlements, it’s likely that they are doing so based on legal advice to keep costs down.
We can learn lessons from solicitors’ PII, however. Back around 2012, claims-free sole trader solicitors’ practices were paying at least €15-20,000 per annum for their PII. The ones with claims and larger firms were either paying more or were unable to source terms. This didn’t happen overnight – premiums had been increasing for a number of years prior to that. The main insurer, the Solicitor’s Mutual Defence Fund, had collapsed. There were very few other insurers in this space and even fewer for sole traders or two partner firms.
The industry had lots of issues including conveyancing claims and, again, Celtic Tiger claims where solicitors weren’t giving sufficient time to each task and errors were occurring. A number of individual practices restructured to merge, but it all led to a huge focus within the industry around risk management, which continues to this day. Many firms carry out annual risk management audits or attend CPD run by risk-management firms.
Now, while still expensive, premiums are a fraction of what they were and solicitors regularly check what effect changes to their practice will have on insurance. In short, they are risk management focused. Claims are still coming in, but insurers are beginning to make money in this space and premium levels can best be described as steady for the past few years.
What can Irish engineers do?
We will presume that Irish law is not going to change any time soon. There are a number of steps firms can take to protect themselves and reduce their risk, however.
- Ensure contracts are crystal clear: lay out the scope of services provided and what services are not provided if it’s not clear;
- Where possible, work with reputable contractors, surveyors etc: make sure they carry adequate insurance and check that the insurance remains in force as it falls due;
- Learn from allegations/claims: you don’t have to be in the wrong to have suffered a claim, but what lessons were learned and what steps have been taken to prevent re-occurrence?
- Ensure you are adequately staffed for the level of work being carried out and that senior management sign-off on work carried out by junior staff: for sole traders, is it worth considering merging with others to improve risk management – are two or more heads better than one?
- In the event of an allegation being made by a client, do not admit liability: you may prejudice your insurance policy.
- Give adequate time to your insurance renewal: don’t leave it until the last minute and be forced to renew for restrictive terms. Take time to complete your submission properly. You’re presenting your risk, so type it or write clearly. Bear in mind it is going to be reviewed by individuals who are sifting through a lot of submissions every day. They are human and if they open a page of scrawls/half completed information/what is clearly last year’s form with the date changed, it gives the impression that you don’t value what they do;
- Don’t go to market every year: the pool of underwriters is small and they have good memories. They want business that they know they will have for at least 2-3 years, not something that will move for a small reduction in premium next year. If they think it’s worthwhile, they will put effort in to quoting;
- Value continuity of insurer – to a point: your premium payments build up over a number of years. If they are placed with one insurer, and a contentious claim is made, it could work in your favour to have that built up. However, in no way is this guaranteed;
- For those with prior claims/notifications, tell the insurers of lessons learned and show why they won’t happen again;
- If it looks too good to be true, buyer beware: cheap premiums are often the sign of either a poor policy wording or an insurer that doesn’t know what it is doing when it comes to premiums. If the former, you may not have adequate cover if a claim is made. If the latter, they will learn the hard way and those premiums won’t last long and you could be looking for a new insurer soon;
- Avail of expertise: insurance brokers regularly come out below car insurance salesmen in surveys around trustworthiness. However, there are around 28,000 people working in the insurance industry in Ireland – more good than bad! If you’re not sure about their expertise, ask. Place value in a broker that has technical expertise, has built up relationships with insurers and knows how to present your risk to the right markets;
- Understand how ‘claims-made‘ insurance policies work: take your office insurance. If some of the contents are damaged by a flood or fire in 2016, then your 2016 policy should respond. PII differs to most other insurances in this respect – the policy in force at the time of a claim being made is the one which responds. So if the work was carried out is say 2012, but an allegation/claim is made now – it is to be notified under the 2016 policy;
- If in doubt, notify your insurer: because of the nature of the insurance it is crucial to notify insurers of potential claims as you become aware of them. Don’t put your head in the sand. Seemingly small complaints can lead to big claims and this is why you purchase insurance. Ask your broker for advice; the key is not to prejudice your cover by doing nothing. If it leads nowhere then well and good; if anything, this shows insurers that you are risk aware and they can rest assured that they know of any potential issues you may have.
Brian O’Mara has specialised in professional indemnity insurance both in Ireland and abroad since 2008. He returned to Ireland in 2015 to work with Ireland’s largest independent broker, O’Leary Insurances. In that time, he has focused on sourcing insurer capacity for difficult to place risks, including PI for engineers of all sizes. Email: email@example.com or telephone 021 453 6860/083 842 4087.http://www.engineersjournal.ie/2016/11/29/professional-indemnity-insurance-engineering/http://www.engineersjournal.ie/wp-content/uploads/2016/11/engineering-insurance-1024x693.jpghttp://www.engineersjournal.ie/wp-content/uploads/2016/11/engineering-insurance-300x300.jpgCivilcivil,construction,finance,structures and construction