Professional Indemnity Insurance
Covers your legal bills and any compensation awarded if you’re alleged to have made a mistake in your professional service.
Definition
Professional Indemnity Insurance is defined as protecting you and your business against claims for alleged negligence or breach of duty arising from an act, error or omission in the performance of your professional services.
It will only cover your liability for the specific activities described on your policy schedule, so it is critical that this is accurate.
Why Should Building Contractors Have It?
Under the Building Act builders have a “duty of care” to build something that is “fit for purpose”. This duty of care applies to all trade professionals as it is also an established principle in cases of negligence.
A duty of care can be owed by:
- a trade professional to their client
- a builder to subsequent purchasers of the property
- sub-contractors to the principal or owner, and subsequent owners
Professional indemnity insurance will pay your legal bills (and any compensation awarded to the other party) if you’re held responsible for a mistake in your professional service.
Most insurers in New Zealand offer cover that is limited to certain professional services:
- Design
- Engineering specification
- Land surveying
- Quantity surveying
- Project management services (where you are project managing someone else’s contract for a fee)
For electricians, plumbers, drainlayers, gasfitters and HVAC installers it can cover liability for errors & omissions in certification, specification and design services.
However, Builtin has secured cover that is tailored for contractors, whether or not design is included in your service. You may be:
- Full Design & Build (design is done by your company)
- Full Design & Build (but the design part is subcontracted out to someone else)
- Design Only
- Construction Only
- Project Management Only
As your insured professional service will include these activities it means your cover is much broader and can include liability for:
- Mistakenly specifying the wrong product
- Allegations of negligent project management
- Loss mitigation costs arising from defective products
- Failures related to building performance (commissioning/validation/functional testing)
Compared to standard professional indemnity policies a design & construction professional indemnity policy also has much narrower exclusions related to defective workmanship and the supply of products. Although these are still excluded, the circumstances that trigger the exclusion are fewer.
For example, if a product fails as a result of being poorly designed or specified a D&C PI policy is more likely to cover it compared to a standard PI policy.
Similarly, defective workmanship is more likely to be covered under a D&C PI policy, in situations where it can be attributed to an error in the design, specification or project management.
While there are still exclusions for errors in the physical building work and the failure of products, these exclusions are narrower and cover is available where errors arise from the insured professional service.
Products that are non-compliant with New Zealand legislation, regulations, standards or codes are excluded.
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Claim Examples
DESIGN, SUPPLY & CONSTRUCT
An insured was instructed by the main contractor to design, supply and construct the timber frame for a new primary school. A claim was brought against them after a structural failure was assessed, leading to the school’s closure, remediation and associated costs. Initially thought to be related to the failure of a glue used, the claim was later amended to include defects in the design.
FAULTY CLADDING SUPPLIED AND INSTALLED
A contractor designs a building façade and specifies a particular type of cladding. The contractor then supplies and installs the cladding through a subcontractor. Two years later, the cladding began to delaminate due to a manufacturing defect. The building owner sued the contractor for $800,000 to replace the façade. If the insurer can establish that the choice of cladding was negligent (eg. inappropriate for the local environment), then cover may apply for the design error. However, costs directly arising from product failure or poor manufacturing are still excluded.
POOR DRAINAGE DESIGN CAUSING WATER INGRESS
A contractor designs a stormwater drainage system for a commercial development and builds it as specified. After a heavy rain, water pools against the building and causes interior flooding. The subsequent investigation revealed that the design calculations for the catchment area were wrong – pipes were undersized. $450,000 in damages was claimed by the property owner for loss of use and remediation. This was covered because the claim arise directly from an error in the contractor’s professional service.
PROJECT MANAGEMENT FAILURES DURING CONSTRUCTION
A contractor takes responsibility for the design and coordination of trades on-site. The structural design is sound, but they fail to properly coordinate installation timelines, leading to wet area linings being installed before waterproofing, causing long-term moisture damage. The owner sues for $300,000 in rectification costs and business interruption. Because a D&C PI policy includes construction-phase professional services like project coordination and supervision this claim would be covered.
VALUE ENGINEERING ADVICE CAUSES BUILDING DEFECT
To save costs, a contractor suggests substituting a specified fire-rated cladding with a cheaper alternative, assuring the client it performs similarly. The substitute product is installed, but later fails a compliance audit due to insufficient fire rating. The owner seeks $500,000 to remove and replace non-compliant cladding. As this falls within design and specification advice provided by the contractor, especially if the contractor assumed responsibility for performance, it would be covered.
PILING FAILURE
The contractor was appointed to provide piles to support foundations for a luxury residential property. After cracks started to appear it was discovered that many of the piles were not capable of supporting the load from the building, causing the foundations to settle and the building to crack.
ELECTRICAL INSTALLATION
The insured sub-contracted the electrical installation work for part of a large shopping centre project. The design and construction work was alleged to be performed in breach of contract and urgent remedial works were required.
ARCHITECTURAL DESIGN
The claimant (the development’s management company) alleged that the Insured had breached its duty to exercise reasonable skill and care in the design and supervision of the construction work and to ensure that the development was reasonably fit for its intended purpose. The claimant sought substantial damages.
Policy Key Facts
This is meant as a summary of the most important items in the policy. For a complete understanding of what it does and doesn’t cover you should always read the full policy wording.
WHAT'S COVERED - STANDARD PROFESSIONAL INDEMNITY
- Your liability for errors or omissions in architectural design, engineering specification, land and quantity surveying
- Payment of associated costs and expenses such as legal fees
- Costs incurred by you through mistakes made by your subcontractors and consultants on a job (in relation to the insured professional services)
- The cost of defending complaints made to statutory disciplinary boards
Because your liability extends for 10 years under the Building Act, cover is available even after you stop trading or retire. This is known as “run off cover”.
Only the activities specified in the policy schedule are covered. For building contractors this is typically limited to design, engineering specification and quantity and land surveying services. It can also include project management, but this is only where project management is provided as a fee for service (ie. managing someone else’s building contract, not your own).
WHAT'S COVERED - DESIGN & CONSTRUCT PROFESSIONAL INDEMNITY
- Your liability for errors or omissions in the insured professional services (eg. design, technical specification, construction management & project management, surveying and quantity surveying, technical advice and inspection)
- Payment of associated costs and expenses such as legal fees
- Costs incurred by you through mistakes made by your subcontractors and consultants on a job (in relation to the insured professional services)
- Loss mitigation (reducing the overall cost of a potential claim)
Because your liability extends for 10 years under the Building Act, cover is available even after you stop trading or retire. This is known as “run off cover”.
Only the activities specified in the policy schedule are covered. Because this is a tailored policy for design & construction it has narrower exclusions where losses are due to the failure of products or workmanship.
WHAT'S NOT COVERED
- Your liability for damage to actual property (for this you need public liability insurance) unless it arises from an insured professional service
- Claims arising from products that are non-compliant with New Zealand legislation, standards or codes
- Claims associated with products (unless under a D&C PI and the claim is related to an error in the insured professional services)
- Weathertightness (unless under a D&C PI policy and the claim arises from an error in the insured professional services)
- Faulty or inadequate installation, workmanship or construction (unless under a D&C PI and the claim is related to an error in the insured professional services)
OTHER THINGS YOU SHOULD KNOW
- An excess is payable for each claim
- The policy is a “claims made” one. This means cover must be in place when the event occurred (eg. when you constructed the building) and then continuously until you are first advised of a potential claim and the insurer is notified. The policy schedule will include a retroactive date, and only events that occur after this date are covered.
- If you cancel the policy, or fail to renew it for a period, you will lose cover for any past events
How Much Does It Cost?
The cost of being held liable for a mistake that causes someone else a financial loss could easily run to tens of thousands of dollars in legal bills and damages. Compared to this, professional indemnity insurance is an essential investment in managing your risk.
Request a quote today to see how much your own cover could cost.
Terms & Conditions
View our current policy wordings. Existing policyholders may be on a previous version. Specific endorsements to this wording will be individually noted on your policy schedule. In some cases we may recommend an alternative insurer, if so we’ll send you their policy terms & conditions.