Building Blocks: Professional Indemnity – who needs it/why? And how does it work?

Professional indemnity insurance (“PII”) is one of the most important insurance policies within the construction industry. This specialized form of insurance is designed to protect both professionals and developers from financial losses stemming from claims alleging errors or omissions, breach of professional duty and sometimes wider civil liabilities. This insurance is particularly relevant to any professional team member on a project with a responsibility for any design work, particularly the design & build contractor, architects, engineers and other specialist designers involved in the project.

Here's how it works:

Imagine a construction project where a firm of architects has been appointed to design a building, comprising of detailed plans and specifications which the contractor will use for the construction of the building. Construction then begins but a critical error in the architect’s plans has gone unnoticed, leading to structural instability and safety concerns in the nearly completed building. It is thought that this will cost a substantial amount of money to rectify, as well as delaying the project.

So what happens next?

Typically, when a claim is made against the architect by the developer or contractor, it will make a notification to its insurers in accordance with the obligations contained in the PII policy. Assuming the PII policy provides cover for the claim, the architect and its insurers will investigate and respond to it. To the extent that the architect has a liability which has caused the alleged loss, the insurance policy will provide an indemnity to the architect for any damages and costs which it may become liable to pay.

The PII in this instance protects both parties – the architect does not have to pay out the cost of rectification themselves (and potentially risk going insolvent), and the developer has a recourse to recover their losses. For a developer, ensuring its professional design team has a contractual obligation to hold the appropriate level of PII cover for the full period of potential liability under the contract (usually 6 or 12 years) is essential in providing comfort and confidence that it should be able to address any unexpected problems which may arise without compromising the project’s success or the developer’s financial interests.