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Professional Indemnity Insurances – Part 3

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Professional Indemnity Insurances – Part 3

We’ve mentioned in earlier articles, the need to do a proper risk assessment to determine the appropriate level of insurance cover. If for some reason you can’t effectively do that, it weakens your position should a tenderer indicate your required insurance cover is unreasonable. You may find that one or more respondents will seek to negotiate the $ level, so let’s look at what might then be discussed.

Let’s say you have nominally decided the Professional Indemnity insurance cover is to be $10 million. A party may simply dig in and say that $5 million is more than adequate and refuse to participate further. Some may propose that the associated liability (not to be confused with the insurance), be limited to a number of times the contract $ value. (This is an option that is more appropriate to goods and services. A level of 3 to 5 times the contract value is common.) This approach may work where the contract value is uncertain, but has risks e.g. if the contract value is quite low, then so will be the liability cover. For professional indemnity, a specific $ cover and liability is recommended in most cases. But note that the insurer will never pay more than the insured’s $ liability, regardless of whether the $ insurance cover is higher.

Another option may be to agree that the liability be limited to $x million or y times the contract value, whichever is the greater. Just watch out for attempts to edit the word ‘greater’ to ‘lessor’ as this will significantly change the impact. In any negotiation, watch out for attempts to limit the party’s liability (i.e. the contractor’s) to the amount recovered under its insurance policy. If the insurer plays difficult or even refuses to pay anything, the risk is back on council.

One reason $ levels of insurance cover are an issue is related to a party’s annual umbrella insurance policy. The insurer will wish to know the number of formal contracts in place and the associated $ liability for each contract. The higher the sum of each specific contract $ liability, the higher the insurance premium. At present, professional indemnity insurance policies are costly.

LGP faces all these issues when it tenders for new panels. At time of tendering, we have no firm indicator of the contract $ values likely to be established between councils and contractors. Hence LGP must take a risk averse approach, probably much to the annoyance of the market. Whilst we will seek to be reasonable in terms of insurance levels, we also seek to avoid limiting liability.

Finally, be conscious of Certificates of Currency of insurance. They are not an insurance policy but indicate that a policy does exist at that particular time. Of course, the policy could be cancelled at any time, but rarely would that occur. If the Certificate of Currency is issued by an insurance broker rather than the insurer, there is a further (limited) level of risk, but in most instances, it would be reasonable to rely on the Certificate’s detail.

So, in summary, there’s a lot to know about professional indemnity insurance. What makes it harder is that each party is seeking to protect their own position. This is not unreasonable but requires a sensible commercial approach to achieve practical contractual arrangements. Ultimately none of us can forecast what will or won’t go wrong during the course of the contract. But we must act reasonably.

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