Understand your Professional Indemnity Insurance (PII) contract with this guide from Clarke Williams, tailored specifically for professionals in the construction and design industry, such as electrical engineers, architects, and contractors
PII is essential for protecting your business against claims arising from errors, omissions, or negligence in the course of your work. In this blog, we’ll break down key concepts, including the differences between Errors and Omissions (E&O) and Civil Liability cover, the claims-made basis, retroactive dates, coverage limits, legal costs, and more. We aim to simplify these terms so you can confidently manage your coverage.
What’s the difference between errors and omissions and civil liability?
The main difference between Errors and Omissions (E&O) and Civil Liability cover is that E&O explicitly outlines what is covered, typically financial losses resulting from negligence, errors, or omissions during your work.
In an E&O policy, three things must be proven to make a valid claim:
- You owe a duty of care to the claimant.
- You’ve breached that duty.
- Your breach caused loss to the claimant.
A Civil Liability policy offers broader coverage, including unintentional or inadvertent acts that could lead to financial losses. It covers more than just negligence, which is why these policies tend to be more expensive.
Example: You’re an electrical engineer responsible for designing the wiring of a new office building. After completion, a fault in your design causes the electrical system to fail, leading to property damage and business interruption.
Under an E&O policy, your client must prove that you owed them a duty of care, that your design breach caused the system failure, and that this failure directly resulted in their financial losses.
Under a Civil Liability policy, the same situation may be covered, but it might also include unforeseen issues like improper advice or design errors, even if they weren’t directly your fault.
What is a claims-made basis?
Professional Indemnity Insurance is written on a ‘claims-made’ basis, meaning the insurer in place at the time a claim is made—not when the work was completed—responds to the claim. This also means you must have active cover when a claim arises.
Example: You’re a structural engineer who supervised a project two years ago. A defect is discovered, and your client files a claim today. As long as your PII is active, your current insurer will handle the claim, even though the error occurred in the past.
What is the retroactive date?
The retroactive date in your policy is crucial—it indicates how far back your cover applies. Your policy will cover work completed after the retroactive date, ensuring that claims for past work are included.
Example: If you’re an architect who started working in 2020 but only purchased PII in 2023, your retroactive date will be set to 2023. Any claims arising from work done before this date (in 2020-2022) won’t be covered.
In the aggregate vs. each and every claim
In the aggregate: The insurer will pay up to the limit of indemnity for all claims in a policy year.
Each and every claim: The full limit of indemnity applies to each individual claim.
Example: You’re a project manager with a £1,000,000 limit on an aggregate basis. You face two claims of £600,000 and £500,000. The policy will only cover the first £1,000,000, leaving the second claim underfunded. With an “each and every” policy, both claims would be fully covered.
Are legal costs included?
Legal costs, including the investigation and defence, are typically covered but only with the insurer’s consent. It’s essential to clarify whether these costs are included in your indemnity limit or if they sit outside it, as this can affect how much is left to pay compensation.
What is the geographical limit and jurisdiction?
Your policy will specify both the geographical area it covers and the jurisdiction under which claims can be pursued. For those working abroad or dealing with foreign contracts, ensuring that your work aligns with your policy’s legal boundaries is vital.
Example: If you’re an engineering consultant based in the UK but involved in a project in Spain, ensure your policy covers both UK and European projects, and check the legal jurisdiction it specifies.
What to do if you stop trading
If you stop trading, you should convert your PII to a “run-off” policy. This ensures you’re still covered for any claims related to past work, even after you’ve closed your business.
Can I cancel my policy after a contract ends?
Given the claims-made nature of PII, cancelling a policy immediately after completing a project leaves you exposed to future claims. Many contracts require that PII be maintained for several years post-completion.
What is a material fact?
A material fact is any information that could influence the insurer’s decision to provide cover or the terms of the policy. Failure to disclose a material fact, such as prior claims or project changes, could invalidate your policy.
Example: As a construction contractor, failing to inform your insurer about prior claims for faulty design could result in future claims being denied.
Understanding these critical components of your Professional Indemnity Insurance helps protect you from costly claims that can arise in the construction and design fields. If you need assistance with securing the right coverage or have further questions, feel free to reach out. We’re here to support you.
