In the construction industry, where errors and omissions are common, Professional Indemnity (PI) insurance is essential for protecting contractors from claims related to mistakes in their work or that of their supply chain.
With rising construction costs due to inflation, as reported by Statista [1], PI insurance helps mitigate financial risks from errors or unforeseen issues. Often held accountable for construction errors, main contractors face additional risks when claims against subcontractors or other parties are transferred to them.
The importance of PI for main contractors
Main contractors are typically the first point of contact when issues arise, making them vulnerable to claims of negligence or errors. PI insurance offers protection, covering remedial work, legal costs, and court expenses, without the risk of insolvency.
Case studies further demonstrate how PI insurance can safeguard contractors from significant financial and reputational damage.
PI main contractor scenario case studies
Main contractor – claims regarding public buildings and design defects
Consider a scenario where a main contractor is involved in a design and build project for a public building. During the course of construction, an adjacent property settled, requiring demolition and reconstruction of part of the structure. An investigation revealed that the design provided by a subcontractor was high risk, inaccurately designed, and lacked clarity, due to a lack of sufficient analytical assessment, inspection, or testing.
As a result, the competency of the subcontractor was called into question, exposing the main contractor to potential claims from the client. This led to court hearings and the need for remedial work. In such cases, the main contractor may need to "pass down" the claim to the responsible party—whether it’s the architect, designer, or engineer—depending on the nature of the error. The PI insurer plays a key role in identifying who is responsible for covering the claim.
In this case, the claim was related to the design and analytical assessment, which involved both the architects/designers and the main contractor. As the insured party, the main contractor received PI coverage, which helped cover legal fees and enabled them to attend court hearings as co-defendant alongside the architects/designers.
Main contractor – sports stadium grandstands project
Another case study uncovers an event where a main contractor being the insured faced a claim concerning the design and construction of two grandstands for a sports stadium. Faults were discovered in the design, fabrication and erection of the structural steelwork supporting the upper terraces, which resulted in extensive in-situ remedial works. The insured’s subcontractor undertook the remedial works at their own cost, however, the main contractor lost confidence in their ability to complete all the required work within the timeline. As a result, the main contractor employed additional workers to finish the job.
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Consequently, the client faced significant financial losses, as not all the seats in the stadium were available for public use on match days, which impacted ticket sales, concession revenue, and sponsorship/advertising deals. The insured main contractor also missed the deadline for completing the work, which led to further revenue losses for the client.
The subcontractor eventually became insolvent, and independent experts were appointed to investigate the causes of the failure, including forensic accountants to evaluate the financial losses. The main contractor engaged an expert to review the architect’s original design (which had been novated to the insured) and to help identify the errors made by the subcontractor.
The main contractor – being insured- agreed to demolish and rebuild the upper tiers of the grandstands, and practical completion was eventually achieved. Recovery actions against both the subcontractor and the architect were pursued as a result.
Throughout this process, the main contractor's PI policy contributed to covering a range of costs, including:
- Remedial works
- Expert fees
- Forensic accounting costs
- Costs claimed by the client
- Legal costs related to the recovery actions
These cases highlight the value of having PI coverage when facing complex and high-cost claims, ensuring that you, as the main contractor, are protected from potentially devastating financial consequences.
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The insured main contractor also missed the deadline for completing the work, which led to further revenue losses for the client.