Why construction businesses need professional indemnity insurance

There’s a lot at risk if you’re running a construction business in Australia. 

Chances are you already have the full suite of compulsory insurances for the building and construction industry, plus some of these:

• Construction works insurance
• Public & products liability insurance
• Structure defects/builders’ indemnity insurance (also known as home warranty insurance)
• Vehicle and heavy machinery insurance
• Tools, plant and equipment insurance for tradespeople

Increasingly, professional indemnity (PI) insurance is a must-have for construction professionals. Should you already have this cover, have you checked if the policy adequately protects you now and into the future?

Protection in your line of professional duty

Professional indemnity insurance works for when you provide professional advice or services to your clients, and there are acts, omissions or breaches of that duty that lead to them suffering damages. 

You’ll need this insurance to protect against claims of alleged or actual professional misconduct, malpractice or negligence. It also helps to reduce your legal costs and claims from third parties, so you’re defending your business and curbing escalating financial bills.

And, if you’re a designer or building practitioner working in NSW, you must have PI insurance and be registered. That’s thanks to the passing of the Design and Building Practitioners Act 2020 (NSW). And, in Queensland, building certifiers must have professional indemnity insurance without exclusions to be licensed. 

PI ideal for these professions

Professional indemnity insurance usually covers people in these roles:

• Building surveyors, certifiers, designers and inspectors
• Fire, heating, ventilation, hydraulic, plumbing, electrical and mechanical engineers
• Builders
• Sub-contractors
• Draftspeople
• Architects
• Town planners
• Landscape architects
• Interior designers
• Engineers
• Project and construction managers.

Risk protection

For example, this cover would give project managers’ peace of mind when something they do in their professional duty jeopardises the project’s success, and there are negative financial consequences. That might be the case whether they were able to control the issues or not. Such professionals might only be 10% to 20% responsible for the loss. However, the cost of legal defence and proportionate liability judgement could sting you for $100,000-plus.

Here’s how professional indemnity insurance minimises project managers’ risk profile, but the inclusions are similar for professionals in the construction sector. Your PI cover could include protection against claims for: 

• Breach of duty (including act, error, omission, misleading statement, breach of confidentiality)
• Defective design
• Defence costs for actual or alleged breach of duty
• Accusations of misleading or deceptive conduct
• Loss of documents
• Public relations expenses
• Breach of privacy or confidentiality

But it’s not one-size-fits-all cover. If you work on large commercial projects such as for local or state governments, your risk is higher, so you’ll need greater limits and more flexibility with the terms & conditions of cover. The premiums may also be higher. Taking out cover for a single project might make sense at times, especially for principals and financiers. 

For the long haul and beyond

This insurance covers you for legal liability claims made during the period of the policy, not when the error was made. You won’t be able to claim for those facts or circumstances that you knew about before your policy started. When you’ve left the industry, chances are you’ll need to keep a form of insurance called ‘run-off’ cover. 

As your broker/adviser, we’ll be able to advise on a best-fit policy and explain your options about the scope of cover including standard and optional extensions. Talk to us for details about limitations such as:

• Inquiry costs
• Loss mitigation
• Proportionate liability where state or federal laws operate to limit liability based upon fault
• Insurance market conditions
• Policy exclusions

The construction sector is under the spotlight internationally, meaning it’s increasingly challenging to get adequate PI insurance due to hardening market conditions. It pays to talk to us as your broker/adivser and keep tabs on the Building Ministers’ Forum. It’s working to harmonise building regulations and standards across the country.