Professional Liability

Insurance & Limitation

Meggyn Marot
Aon Principal Broker
Overview

• Professional Indemnity Insurance

• Trends and Challenges
• Alternative Professional Indemnity Strategies
– Project Specific Professional Indemnity
– Consultants Own Resources – Own Annual PI / Balance
Sheets
– Client Protective Professional Indemnity Insurance
• Contracting & Limitation of Liability
Professional Indemnity Insurance (PI)
• Covers any liability, whether in contract or through a civil code, that arises
out of the professional services of the organisation insured under the
policy, including consequential losses.
• Policy triggered by Professional Negligence - Reasonable Skill & Care is the
usual standard used to determine whether a professional firm/individual
has been negligent.
• Losses claimed could include:
– Cost of Redesign.
– Cost of Repair/Rectification.
– Direct Losses.
– Indirect Losses such as financial, consequential and economic losses.
Professional Indemnity Insurance (PI)
• certain financial, consequential and economic losses can only be insured
under Professional Indemnity Insurance, and there are other areas where
Professional Indemnity Insurance would be the sole policy for certain
losses after the construction and maintenance period.

• It should be noted that Professional Indemnity insurance limits can be

eroded by the legal costs and expenses often necessary in order to prove
that professional negligence has occurred and these expenses can be for
significant amounts.

• For these reasons we believe that a broad form Professional Indemnity

Insurance has an important part to play in the risk financing armoury of
any Engineering firm
Trends and Challenges
• Risk analysis before the project
• Sufficient Limits and affordability of Insurance – how much is enough
• Complexity of project and delivery deadlines change how we are being
appointed – Joint Ventures, Alliances and Sub-consulting
• Poor understanding from clients of project delivery – poor tender
documents – warped expectations
• Fee Discounting
o Reality of free market
o Obligation is not diminished by fee reduction
o Inherent danger of undertaking appointment where the client is not
prepared to pay for a properly designed and safe project
o Use of junior staff without proper supervision
o Decline in investment in training and innovation
o Increase in PI claims – but decrease in premium collection
o Long term result - crash of PI market
• Admitted Insurances
Alternative PI Insurance Strategies

Project Specific
Rely on Professional
Consultant’s Indemnity
own resources (PSPI)
Annual Fixed

Client’s
Protective
Professional
Indemnity
Alternative PI Insurance Strategies
• Default Position - majority of
consultants already carry Professional
Rely on Indemnity for a number of reasons,
Consultant’s which may include:
own resources – A requirement of their profession.
– A requirement of the local legislation.
– A contractual requirement.
– To protect their balance sheet.

• Consulting firms asset value and use of fees as working capital

means it can be very difficult for professional services firms to
obtain bonds or surety(s) and balance sheet cannot support large
claims.
• Accordingly, the amount of Professional Indemnity Insurance is
important when engaging consultants on projects, especially on
large and complex projects.
Alternative PI Insurance Strategies
• If the Client engages with consultants
at an early stage, they are able to
Rely on influence the amount and type of
Consultant’s Professional Indemnity Insurance that
own resources a construction professional has to
purchase for their project.
• It is important that this is enshrined
within any contracts/agreements
with the consultants.
REASONS FOR USE
• Where the Client is satisfied that consultants’ Professional Indemnity
cover is sufficient and satisfactory for the risks within the project and they
will have no difficulty in procuring Professional Indemnity insurance in
future years
• Where Client does not need to cover any ‘in-house’ design or project
management work undertaken by themselves
Alternative PI Insurance Strategies
• A long period policy effected for the
Project Specific length of the contract plus a ‘run-off’
Professional period(in case of a fixed term),
Indemnity covering the consultants, purchased by
the Client on behalf of all parties.
(PSPI)
• Annual / Fixed
Annual Fixed

Reasons for Use:

• Where the Client favours control over cost
• No need to “point the finger at the guilty party” - albeit legal liability has
to be established against one or more of the ‘professionals’
• Where a ‘professional’ does not carry its own PI insurance
• Where a Joint Venture requires separate insurance protection
Alternative PI Insurance Strategies
Look out for:
Project Specific • What if liability extends beyond policy?
Professional • Who pays policy deductible?
Indemnity • Duplication of cover
(PSPI) • Maximum period 15 years
Annual Fixed • Expensive
• Policy coverage limited – no cost
overruns or consequential losses
• Aggregate limit for period shared for all
parties – dilution of cover
• The potential loss of an insurer due to insolvency, change of appetite or
potential claim means that this is a very unattractive proposition for the
Client.
• Whether Fixed Period or Annually Renewed - Insurers can be very
selective when considering projects in a certain territory, stadia projects
and projects which carry any new or prototypical elements.
Alternative PI Insurance Strategies
• An “umbrella” policy purchased by the
Client’s Client for their own benefit, sitting in
Protective excess of the consultant’s own policies.
Professional We believe that available Indemnity
Indemnity Limits could be in excess of
USD150million, which should be in
excess of the consultants own
insurance policies.
• CPPI policies were developed to provide Clients of projects a means to
purchase limits above the insurance provided by the consultants.
• CPPI coverage, acts as both first and third-party claims arising out of acts
of neglect, error or omission of the consultant, with no risk of dilution of
coverage that could occur if the consultant were the insured parties under
the policy. Because the consultants own policies are intended to serve as
“underlying coverage,” the CPPI is underwritten from an “umbrella”
perspective, giving rise to significant premium savings compared to
PSPI
Alternative PI Insurance Strategies
• CPPI coverage is most commonly
Client’s implicated when:
Protective – the client brings a claim against the
Professional consultant, and the damages exceed the
insurance carried by the Consultant.
Indemnity
– third-party claims brought directly against
the Client alleging direct liability arising
out of the negligent acts of a consultant
hired by the Client.
Reasons for Use:
• Where the Client wishes to exert a certain degree of control with a cost
effective solution
• Where the Client wishes to procure cover for a potential large loss over
and above the usual limits effected by consultants
• Where the Principal requires protection for their contingent risks, excess
liability and difference-in-conditions (DIC) cover should the consultants
policies fail to respond to a claim
Contracting & Limitation of Liability
• Contract is “King”
• Insurance Provisions MUST be in Contracts/Agreements
• Open-ended liability is not an answer for the Client
• Limitations of liability (Do not confuse with Limit of Indemnity)
– Contained in the FIDIC Model Forms (White book)
– Duration
eg. SA is 3-5 years but negotiable
• Statute of Limitations
– Quantum
eg. SA is twice fee / fixed amount

• Incentivise Limitation of Liability for our clients with deductible discounts

– rewarding best practice
Thank You
Meggyn Marot | Principal Broker
Aon Professional Risks
t +27 11 944 7914 | f +27 11 944 8045
meggyn.marot@aon.co.za | www.aon.co.za

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