How is Errors & Omission, (Professional indemnity) calculated within the construction industry?

So, as we have seen a shift in the insurance market, it usually comes with a flurry of questions. The most common one is as titled, but of course, I shall delve into a few others in the conclusion. Please note that there is a key focus on the D&C, A&E & Surveyors sectors. But of course, Miscellaneous and Accountants are also subject to the below factors.

How are the insurers looking to rate E&O insurance policies now?

Other than your traditional, turnovers/fees, & “activities” insurers are taking a keen interest in the below;

·????????Issue with supply chains.

·????????Delays in project completion

·????????Labour shortages

·????????Overspending on budgets, which effecting Project managers, co-originators & Quantity surveyors

·????????Housing contractors

·????????Total contract values

·????????subcontractor* vetting of own staff and subcontractors ?

·????????Management of the principal firm

·????????General performance of the company, with respect to changes in activities, staff etc etc

·????????Risk management/claims management

·????????Terms and conditions

·????????Fraud claims due to pending recession / what audits are undertaken.

·????????Usually, large claims are not of a concern as the insured amend their previous protocols to mitigate risks

·????????Changes in legislation – are the insured up to speed with such changes?

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1)??????Issue to supply lines & Delays.

Although the Western world may have opened its doors shortly after the pandemic, our Eastern partner still suffers from lockdowns and a large socioeconomic crisis resulting in distribution to supply chains. Also, the war in Eastern Europe is directly impacting supply routes.

2)??????Overspending.

Naturally, if there is an issue with delays in the project, this will directly affect the project's overall cost, build, etc. How is the insured looking to ensure that costs remain at agreed rates or pre-empting such changes. ?

3)??????Total contract values.

As we are aware, insurers may have caps on the TCVs they are able to “insure”. This can either be a direct result of binder adherences, reinsurance capacity, or general appetite.

4)??????Subcontractors

Insurers are certainly demonstrating more interest in subcontracts the insured employs. Of course, understanding if “X” subcontractors hold their own form of liability is a given. However, they insurer is also keen to understand the vetting process of said contractors. On this note, given how we are inevitably going to enter a recession, this will become pivotal. How will the insured ensure that their standard of work is upheld?

5)??????Management of the principal firm & General performance.

Like that, of a D&O insurer, E&O insurers are always keen to understand how the company is looking to develop & which direction they are heading in. Are the principles ensuring they are steering their ship into smooth waters, or rocky shores? Are they making viable decisions or jumping into works that they have not traditionally undertaken? Or, if they are, are they employing the right person to do so?

6)??????Terms and conditions.

The tragedy at Grenfell highlighted the need to readdress the state of PII market (this will be highlighted further in a future article). However, when difficulties arrive, adaptation tends to take place. Noticeably the T&Cs between parties are becoming more stringent, therefore having sight of these allows the insurer to see how the principal firm will look to limit their liability. Of course, this will have a direct correlation with the insured’s risk management.

7)??????Changes in legislation

Like the above, when tragedies strike, there must always be a period of evaluation. As an example, there shall be changes to the building safety act regarding Cladding (or equivalent) due to be legislated shortly. Which shall impact the majority of trades. Therefore, how is the insured ensuring they adhere to such changes? This directly relates to sections 4 & 5.

Summary.

We have noted there have been significant changes within the market. Certain trades appear to be reduced almost as quickly as they increased years ago. In some cases, this makes viable sense due to the risk performance & activities being less “risky”. Albeit, those within the higher-risk occupations are still seeing the effects of the hard market. Those within the market, feel that this is unlikely (or at least shouldn’t) change in the future.

I hope this helps the insureds further understand a little as to how their policy is being rated & that insurance is not such a black-and-white approach as it perhaps is thought.

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