18 May 2020

Professional Indemnity Insurance

BY: Lewis Breslin | IN: Articles


Contracting strategies for major infrastructure projects have seen a transition from traditional Design-bid-Build towards an EPC/Design and Construct strategy. Design is often conducted at pace with a short lead-in to construction.

Complexity is added through the arrangement of multiple subcontracted design agreements that offload the design obligations and create interface risks for which the Insured may be vicariously liable. Design obligations, which may be considered as minor components in isolation, ultimately form a significant part of project delivery and have the potential to expose the project to substantial risk.

Professional Indemnity Insurance is a third-party liability insurance, designed to indemnify the Insured against claims arising out of a breach of professional duty. The intent is to recover losses associated with; errors in the design at tender stage, late provision of design information, failure to coordinate design obligations with others, errors in design at construction stage, and errors in design manifesting themselves after completion of the project.

The losses flowing from such breaches are often complex and need to be assessed in various ways. Putting a claimant back in the position they would have been in but for the breach depends upon the stage of the project in which the breach occurred. For example, for design breaches prior to parties entering into a construction contract, would the contract sum and construction programme have been different had the design been correct? If the breach was during construction, what is the actual impact in terms of cost and delay? There are other matters to consider in terms of how to mitigate the cost of correcting the design during a complex construction project and balancing direct costs with overall delay to completion and achievement of commercial operation. If the breach manifests itself post-completion and during operation, the assessment of loss and getting the asset operational again requires a different approach.

CCi has a global team of technical, cost, and delay experts who engage with Insurers and the Insured, often providing these as an integrated service to efficiently manage the claim scenarios and disentangle the various complexities. Our construction and engineering expertise ensures we establish reliable analysis by which to ascertain liability, quantum of loss and delay(s) as a consequence of breaches of professional duty.

An example scenario follows:

During the commissioning of a power plant turbine, a rotor fractured sending debris into the turbine and steam pipe system causing extensive damage. The investigation attributed the rotor failure to the provision of incorrect performance specifications. The professional failing of the designer was proven to have been the cause.

The incident was considered to have caused a delay to the operation of the steam turbine and achievement of commercial operation. A claim was made for damage and reinstatement resulting from the negligently designed component, with a key part of the claim relating to the delay to commercial operation. At the time of the incident, four months of commissioning remained until the achievement of commercial operation. The rectification works took nine months, before the remaining four months of commissioning could commence.

A preliminary delay claim was submitted for the nine-month reinstatement period.

CCi, appointed by Insurers, worked collaboratively with the Insured to establish the hypothetical commercial operation date based on the assumption the incident had not occurred. It was identified that during the rectification works, the project was beset by non-incident related delays, including client variations, inclement weather, and defective welds. These non-incident delays had occurred concurrently with the reinstatement works over a period of six months. They were not initially identified by the Insured as having a potential impact on commercial operation, due to the focus on the critical path works associated with the turbine reinstatement. Through analysis of the critical path and supporting project records, it was demonstrated that the non-incident related delays would have taken place in ‘any event’ and had a critical impact on commercial operation had the turbine incident not occurred.

The valid period of delay solely attributed to negligent design was agreed as three months.

Establishing the delay period resulting from a professional failure on a construction project is often a complex undertaking. Analysis of the critical path is not a conclusion in itself, but rather a means to establish the consequences of an incident. It requires review alongside the relevant project documentation and correspondence to determine the delay as a direct result of the incident.

CCi’s approach of working collaboratively with the Insured immediately following a Loss allows us to; maximise the likelihood of insurance coverage responding efficiently, for the claims process to be less protracted, cashflow to be secured sooner, and for claims to be settled as early as possible.