Professional Indemnity Insurance: It pays to have a plan

It is no secret that shockwaves from the global combustible cladding crisis have rocked the Australian building industry to its core. One of the most devastating ripple effects impacting a wide range of building industry professionals is in the area of professional indemnity insurance.

Astronomical increases in premiums and excesses, and extensive policy exclusions are pushing many businesses to the brink of closure.

In this article we look at what PI insurance is and how these pressures are threatening the viability of operations across the industry.

Finally, we will outline some of the general strategies that we in the construction industry can put in place when preparing to initiate or renew a PI insurance policy.

What is Professional Indemnity Insurance?

Professional indemnity insurance protects you and your business against claims for alleged negligence or breach of duty arising from an act, error, or omission in the performance of professional services.

PI insurance generally covers events like:

• Breach of Duty
• Defamation
• Intellectual Property Infringement
• Breach of Privacy
• Claims investigation costs

Victims of the cladding crisis

Certifiers have been amongst the hardest hit by the cladding crisis, with spiralling insurance costs sending some out of business. Anecdotal evidence from a prominent Australian certifier describes premium hikes from around $24,000 per annum 18 months ago, to $110,000 last year, with a recent quote of around $185,000 to renew their policy.

The excess on the same policy has also increased by 150% from $20,000 to $50,000 over the same period. In addition to this, exclusions written into policies regarding combustible cladding are creating an increased risk of policy holders being left with no insurance cover at all if something goes wrong.

In a recent report in the Canberra Times, Institute of Building Surveyors chief executive Brett Mace explained:

“What the cladding issue did was highlight that the building regulations which the insurers thought were there to reduce the risk of things happening weren’t actually all that effective – and because certifiers are the only ones required to have mandatory PI we’re bearing the brunt of it.”[i]

Local insurance broker, Amit Verma compares the current dilemma within the construction industry to the situation which homeowners faced following the 2011 Queensland floods where large insurers had declined to insure homes for flood risk.

After paying out $150 million in claims and receiving only $4 million in premiums over a two-year period, major insurer Suncorp withdrew from writing new cover in the affected areas, calling on government to step in and act on disaster mitigation.

“Just as mums & dads were affected in 2011, small businesses with turnover of less than $200k per year are being affected now, with many examples of operators being unable to source PI cover.”

How to get Insurance in a hard market

According to Amit, despite increased pressures for building industry professionals seeking to secure affordable PI insurance, there are some straightforward strategies business owners can adopt which can help them meet the problem head on.

“For one thing, policy holders can expect a much longer turnaround time when looking to renew their PI cover. So, start your application a lot earlier. If you speak to your broker once a year, get on the front foot and contact them two months before the renewal date.”

There’s no better time to show your cards

Like everyone else, insurers like certainty. And nothing gives them more certainty than helping them understand your business. Everything in your business either reduces or increases the risk factors and insurers are trying to estimate them from the information you provide.

Insurers want to know who is the person or the group of people behind the business name – engineers, surveyors, inspectors, certifiers, project managers – are they a bunch of novices or seasoned professionals? Do you hold membership to any professional institutions? Have you had any adverse disciplinary proceedings against you by the relevant authorities? Have mergers or acquisitions resulted in new faces joining the team?

Insurers also want to understand the processes you have in place to manage risk. Do you have a documented Risk Management Plan? Do you always enter into a written contract with clients? What percentage of work is done by sub-contractors? How is their quality of work assessed? Is the proof of PI obtained? How often?

It pays to have a plan

While examining and documenting extensive risk factors may leave business owners feeling uncomfortably exposed to judgement from insurers, and feeling increased uncertainty around their policies, there are two main benefits of creating a comprehensive Risk Management Plan.

The first benefit is that by genuinely engaging with this process, you are likely to gain line of sight into areas where potential gaps or weaknesses may exist in processes, personnel, or common activities. This then creates an opportunity to refine your approach to risk management and optimise processes of ongoing improvement that are already in place.

The second benefit may come as a surprise and seem counterintuitive, but as Amit explains:

“The bottom line, from an insurer’s perspective, is that a clear and understandable higher-risk customer can be preferable to an ambiguous, seemingly lower-risk customer – and easier to price. Transparency is key to securing PI insurance in today’s market and is likely to benefit you internally as well.”

Amit Verma is Director of Cover Tradie Pty Ltd and has over 15 years’ experience working in the insurance industry. He now operates with an exclusive focus on providing insurance services to the construction industry. His clients include builders, surveyors, engineers, project managers and tradies. All the content contained in the preceding article is to serve as general advice and not personal advice. For a confidential discussion about your specific needs, Amit can be contacted via his company website: https://www.covertradie.com.au. You can also find him on Linkedin at https://www.linkedin.com/in/amit-verma-insurance-broker-melbourne-covertradie.

[i] From <https://www.canberratimes.com.au/story/6767472/building-certifiers-stunned-at-huge-insurancebills