Question:

We are reading through a contract for a large project just won where we are acting as principle contractor and designer. It is asking for a professional indemnity at £5M held at that level for a period of 12 years.

Would this be considered normal or excessive?

Replies:

1. Normal on large government projects.
2. From our experience its low as we normally have to include £10m cover, just as designer never mind as PC.
3. That is normal.
4. If acting as principal contractor then I would say that’s reasonable, but it depends on the total value of the project, most main contractors/principal contractors would hold more like £10 million. If acting as just the kitchen supplier its excessive, we have had £1million PI for the last 15 years and have only just upped it to £2million.
5. Generally, the insurance levels might vary according to the nature and value of the contract.  We hold £10m PI cover as standard, as this level is required on a high proportion of our design consultancy projects – we wouldn’t view £5m as excessive.
6. I assume this is to cover the collateral warranty period which can be up to 12 years – may need to check the warranty details etc!
7. In my experience (particularly within office fit-out and refurbishment), the only excessive part is holding the Professional Indemnity for a period of 12 years. £5m is not abnormal as it very much depends on the size of projects. Most employers will accept a temporary increase in PI for the duration of the project so that the specific project is covered. This means the ceda member can pay their insurer a one-off premium to increase the cover.
8. We were recently asked for 10m for 12 years and then after some negotiation, we were asked for 5 years, which I still felt disproportionate to the size of the project, which I am still in ongoing discussions about. This was for a global company and apparently this is standard for all of their projects. It doesn’t appear to be standard across the board and in my personal opinion it is excessive when you look at the cost of the insurance policy over that period in relation to the project.
9. £5m PI isn’t excessive but having to hold it for 12 years is both excessive and highly unusual (I’ve literally never seen it and it makes no commercial sense to have that as a criteria).  Unless it’s a typo, certainly worth challenging.
10. Depends on the value of the overall contract but not excessive
11. We were faced with this for a £500k contract & have examined the necessity of Professional Indemnity on a number of occasions. There is no aspect of the design work which we do which falls into these requirements. In itself the premium is not unaffordable but as your member is aware that has to continue for 12 years. The danger is that if a claim arises for any aspect of the contract, the Main Contractor will make a blanket claim over all the sun-contractors carrying the cover even if not related to spread the risk to themselves. That advice was given to me by a senior insurance professional & we negotiated ourselves out of it & stood our ground. We asked what aspects of our design they needed cover on & no one was able to come up with anything. It was established that we were a specialised supplier. My advice would be to get a copy from your broker of a PI policy, go through it carefully & see if any of it is applicable to your scope of work
12. Yes, this is normal. In fact we hold £10 million which is normal for contracts these days.
13. I’d say in part in depends on the size of the overall contract, what elements have they designed, just kitchens or building as well, and what’s the project value? Our usual level is lower than this and at times we’ve had to argue over levels of PI, currently doing a £440k project where we’ve been asked for £10m PI which is absurd, and we’ve told them so.
14. Can you tell the member that we had to have professional indemnity cover for £2 million, not specified for any length of time, when we were accepted onto a National framework for turnkey projects. There was no upper limit on the value of those projects.
    I hope that helps. The insurance is very expensive!
15. Unfortunately, we used to be able to do this type of contract based on £2m, but in 2019 the norm became £5m.  In fact, we are finding that an increasing number of clients are asking for £10m, which makes the cost of the premiums on £5m look like they are good value! Around 50% of our turnover is D&B, so we automatically renew our PI cover annually.
    If this project is a one off for this ceda member, it will be difficult to justify the cost of 12 years premiums.  In those circumstances we would be looking to raise the price of the contract to cover the difference between £2m and £5m of cover for 12 years.