[2 Minute Read]

It is no secret that the Professional Indemnity insurance market is going through a period of significant hardening where rates are increasing, and insurers are reducing their limits of indemnity. This hardening is particularly acute within the construction space, where construction sector policyholders are finding it progressively more difficult to maintain professional indemnity cover at levels that they have committed to in existing contracts with their clients. Maintaining a certain limit of indemnity, which in previous years was affordable, in today’s hard market now can now be prohibitively expensive.

Additionally, a particular area of cover being affected by the current market conditions is the ‘basis of the limit of indemnity’;

Many construction sector policyholders have signed up to quite onerous contractual requirements during soft market conditions, which oblige them to carry limits of cover on an ‘Any One Claim’ (AOC) basis as opposed to an “In the Aggregate” basis. The difference between an AOC limit and an Aggregate limit is considerable. For example, a policy arranged on “Aggregate limit of £1m” will limit an insurer’s liability to £1m during the policy period. Once the £1m limit is exhausted on a claim, the liability of the insurer ceases (its risk exposure is capped at £1m). Whereas with “£1m AOC” a policyholder could potentially have ten or twenty claims at £1m each meaning that the insurers risk exposure is unlimited.

Now that the market has turned, many insurers are reluctant to offer the much wider AOC cover, and are instead offering renewals based on Aggregate limits, which immediately causes issues for construction sector policyholders who have contractually promised to their clients to maintain AOC Professional Indemnity cover.

If AOC cover is becoming unattainable for your construction sector business, there are still a number of things you can do;

1. Relook at your policy excesses - If you can afford to carry a higher excess, your insurer might be more willing to maintain AOC cover.

2. Renegotiate your contract - Speak to your client to see if they would be willing to retrospectively amend the contract. Many construction contracts have it written in that insurance requirements are subject to the cover being available at “commercially reasonable rates”. Arguably some of the premiums being quoted are no longer commercially reasonable.

3. Higher Limit of Indemnity on an Aggregate basis - If AOC is not possible, would your clients accept a higher limit of indemnity but on an Aggregate basis? Some clients may take a pragmatic view on this.

4. RTC Reinstatement - If AOC is not possible, with agreement from your client and using the services of a specialist insurance broker, it might also be worth investigating ‘round the clock’ (RTC) reinstatement of limits which is similar to AOC, but is easier for insurers to provide. This means that once the limit is exhausted on a claim, the insurers limit is reinstated thus providing more cover. You would usually need to arrange an “excess layer” policy (or even a number of layers) that sit above your primary insurer’s limit, before the primary insurer would agree to RTC Reinstatement. This is because excess layer policies create a buffer before your primary insurers have to reinstate their limits and get involved in the claim again.

If you have been affected by the hardening Professional Indemnity market, and would like expert advice on your risk management programme, please contact us on info@championpi.co.uk or 0330 128 9828