- Birodh Bhatta
Contractors All Risk (CAR) and Professional Indemnity (PI) insurance cover different risks in a construction project. While CAR covers physical loss or damage to the property and third-party liabilities on-site, PI covers financial losses caused by design errors, bad advice, or professional negligence. Which means- PI ensures protection against against claims of poor design, calculation errors, and professional mistakes which could lead to economic loss without necessarily causing immediate physical destruction in site.
How do they Distinct from each other?
While CAR is a comprehensively designed Insurance Policy that covers construction-related risks. It provides financial security against/covers property damage, third-party injury/damages during construction projects. This insurance is necessary for any entities involved in construction, a contractor, subcontractor, or even a project owner. Its prominent areas of coverage are: Damage to Property, Injury to Workers, Third-Party Injuries or Damage, Loss of Equipment
Who Needs Contractors All Risk Insurance?
Construction companies, contractors, subcontractors, and project owners involved in construction or renovation projects should consider purchasing this type of insurance. It is particularly important for large projects where the risk of property damage, injury, or equipment loss is higher.
Why Professional Indemnity Insurance?
PI policy is basically designed to financially protect businesses against legal claims arising from professional advice or services. In construction firms PI policyprovides covers against negligence, errors, omissions, or inadequate advice that may lead to a financial loss for a client or third party. It’s particularly important for professionals who provide consultancy, design, or engineering services.This policy is best designed for anyone offering professional advice or services in the construction industry, such as architects, engineers, project managers, and consultants being responsible for the planning, design, or management of construction projects.
Key Coverage Areas
- Negligence or Errors in Professional Advice:Covers legal costs and compensation if your professional services or advice are found to be negligent, resulting in client dissatisfaction or loss
- Omissions or Mistakes:Protects against errors or omissions made in the delivery of your services such as incorrect design specifications or calculations
- Subcontractor Faults:If a subcontractor makes a mistake that you are held responsible for, Professional Indemnity Insurance can cover the resulting costs
- Breach of Duty or Contractual Terms:Covers lawsuits arising from failing to meet contractual obligations or professional standards
Perils and Common Claims
CAR
Property Damage: Third-Party Injury, Worker Injury, Damage to Equipment
PI
Design Negligence, Subcontractor Mistakes, Incorrect Advice, Failure to Meet Standards
Do You Need Both Contractors All Risk Insurance and Professional Indemnity Insurance?
The answer to this question is certainly yes, in today’s world most construction businesses need both policies because CAR onlyprovides covers for physical risks like property damage, injuries, and equipment loss; while PI Insurance covers risks related to professional advice or services. It is important that ifsomeone is a contractor or builder responsible to handle the physical aspects of a project and also have to provide design, planning, or management services, you will need bothCAR and PI insurance.It’s like CAR covering the tangible aspects and the PI covering the immaterial one.
Legality behind PI Insurance:
Clause 19 of FIDIC (International Federation of Consulting Engineers) contracts is related governing insurance obligations which requires both the Employer and the Contractor to protect the project by maintaining specific policies including insurance for the Works, plant, materials, contractor’s equipment, injury to persons, and third-party property damage, Professional Indemnity requiring design responsibilities.
Professional indemnity insurance on construction projects:
When contractor holds no design role he might regard PI cover as unnecessary; however, if he is responsible on design parts PI policy engages and it becomes wise to buy it.
Prominent coverage extensions
With PI Insurance Insurers often provide optional or built-in extensions to tailor the policy to the realities of D&C projects (Design and Construct). Following are the major four extensions:
Principal’s indemnity
This extension provides the policyholder’s client (the principal) to be indemnified under the policy where they might be dragged into a legal claim due to the actions or omissions of the policyholder. It is particularly useful in large-scale developments/projects where the principal may be sued as a co-defendant in a design-related dispute.
Commensurate liability
In some contracts involving private or large government projects the contractor may be exposed to 100% of the liability for damage, even if another party (such as a consultant) was mostly involved in the fault.
Novated/replaced contracts
This contract situation occurs when a client appoints a designer directly (e.g., architect or engineer), and on later period transfers that contract to the design and construct contractor mostly in design and construct procurement. This coverage ensures the contractor is covered for design services performed prior to novation, even though the contractor was not responsible for them at the inception.
Fitness for purpose
Many Design and construct contracts include an express or implied obligation that the design will result in a building or system that is “fit for its intended purpose.” In absence of this specific extension, such obligations may not be covered under standard PI policy wording. Here this extension provides cover for claims alleging that the design failed to deliver the required performance or outcome, even in the absence of negligence.
(Bhatta is Deputy Director (Legal) of Nepal Insurance Authority. This article is Author’s personal view.)
