Navigating the Complexities of Professional Indemnity Insurance in Design-Build Contracts

In the realm of construction, design-build contracts have emerged over the past 30 odd years as a popular choice for delivering projects efficiently and collaboratively. However, navigating the complexities of professional indemnity (PI) insurance within these contracts presents unique a thorny challenges, particularly when concerning the standards of "fit for purpose" versus "reasonable skill and care."

Clients increasingly mandate strict design liability continuing for many years after completion and use collateral warranty contracts such that the Contractor or Consultant has ongoing liability following completion & must maintain PI insurance often for 10 or 12 years following completion of the project.

Traditionally, the construction industry has operated under the principle of "reasonable skill and care," where professionals are expected to perform their duties to a standard expected of a reasonably competent practitioner in their field. However, in design-build contracts the mention of "fit for purpose" which is often seen in consumer contracts introduces a higher level of responsibility, requiring deliverables to meet specific objectives or criteria defined by the clients as something is required to be ‘fit for purpose’ means that a good or service must fulfil a customer’s needs or achieve a particular outcome.

Professional indemnity policies usually exclude contractual liability, where that liability only arises because of an agreement the insured has entered into. If that liability would otherwise not exist (for example, because the insured has not been negligent, but has failed to be right) that liability may be excluded.

This means that a professional indemnity insurer can refuse to cover the liability of a business for liability for loss and damage arising from a breach of a ‘fitness for purpose’ obligation. The impact on that business can be substantial because it means that it has no insurance to meet the claim and must itself pay claim made against it.

The FIDIC 2017 suite of contracts explicitly addresses the issue of PI insurance and liability. They require consultants and contractors to maintain PI insurance covering their obligations under the contract, including liability for "fit for purpose" design where the purpose is described in the Employer's Requirements or where not described for its 'ordinary purpose'. This places significant difficulties to both contractors and consultants as their PI insurance does not cover any fit for purpose obligation leaving the responsibility of those parties to ensure adequate coverage for potential claims arising from design deficiencies.

In contrast, the NEC4 contract takes a different approach by providing for secondary clause X15 and a lesser obligation of reasonable skill and care. While the contractor remains responsible for design under NEC4, the contract liability is considered against skill and care used by professionals designing works similar to the works in question. Contractors and Consultants should therefore always insist on the X15 clause being incorporated into their design-build contracts and that it applies in construct only contracts when a variation is issued which requires contractor design.

It should be noted that obtaining PI insurance is becoming increasingly challenging in today's market even with a lower threshold of reasonable skill and care, this was most notable after the Grenfell Tower disaster in London in 2017.. Insurers are tightening underwriting standards, leading to higher premiums and stricter coverage terms. Additionally, consultants are often limiting their own liability to such claims as no more than the design fee value or a small multiple of it rather than a set insured value, leaving contractors potentially exposed to uninsured risks if they employ consultants as subcontractors.

This shifting landscape underscores the importance of proactive risk management and clear contractual liability in design-build contracts. Contractors must carefully assess their exposure to liability and work closely with consultants, clients, and insurers to value these risks effectively and seek the appropriate level of PI insurance.

Open discussion, transparency and reasonable risk management strategies at an early stage and realistic expectations are essential for Clients, Consultants and Contractors navigating the complexities of PI insurance in design-build contracts.