A single-Project (Design & Construct) Professional Indemnity prerequisite……

Your company is the owner of the project with one of the main building having just collapsed, or something like the collapsed roof belonging to the Terengganu Stadium (The Sultan Mizan Zainal Abidin Stadium). On the other hand, what if you are the contractor or consultant for that project…. probably having many nightmares by now. Leaving aside the Sultan Mizan Stadium, you would probably be spending alot of time re-looking at the insurance policies having purchased for the project. Now whether those losses relating to the building collapse is covered or not, would depend on the following…..

Bukit Antarabangsa - massive slope failure - design related?

Sultan Mizan Stadium - Design failure or Shoddy workmanship?


 

 

 

 

 

:-) If the event occurred whilst in the course of construction or within the project period, chances those losses are covered in the Contractor All Risks insurance policy. However, if those losses are directly relating to designs :oops: , these may fall outside the ambit of the policy coverage; but this may not be too bad if resultant damages coverage is extended into the basic CAR policy – at least those indirect losses to design faults are covered :roll: . But if the project has been completed and falls under the maintenance period or handled over to the owner or possibly in operational, then chances such collapse is not going to be covered :oops: within the CAR policy.

In this connection, whether you are the owner or the contractor or consultant, you and your company are damned! The only thing to work on would be to go after each others’ throat and blood….and if the contractor and consultant turned bankrupt, there would be nothing that the owner can recover, thus, the end game is a lose-for-all situation.

 

Cracks beneath the Highway - Design failure?

Coming back to the Sultan Mizan Stadium, our Works Minister had already declared in the news that “Shoddy works” and the “Use of sub-standard building materials” were the real cause of the collapse. In addition, he also mentioned elements concerning building as hastily built and lack or possibly no proper supervision was carried out. Now just like what we have earlier described, the blame game starts…. the contractor would be disputing the so called shoddy job and the use of substandard materials, and would be seeking proof that all the necessary tasks had been carried out, including complying with all design parameters. Ultimately, the government would probably win but gets nothing out of it, except and maybe, just to blacklist the contractor(s) or consultant(s) concerned, which the latter would probably choose to take it towards the litigation process. Just a thought, would the whole episode looks better, sounds more intelligent if a Project (D&C) Professional Indemnity Insurance  is made a prerequisite for all contractors and consultants before commencement of the project?

Perhaps, it is good if we can also refresh our memory in respect of “Cracks appearing on the MRR2 Highway” that resulted in a shut-down of major sections back in mid-2004. In 2006, it was closed again and in 2008, it was the third closure! Every other consultants and contractors were arguing over design defects and not complying with various engineering standards….

Now what exactly is this Single-Project (Design & Construct) Professional Indemnity (PI) covers?

Firstly, this would depends on the contractual obligations (the extent of design & general construction aspects) as prescribed for completion of the project, and secondly, insurance cover hinges along the “Professional Activities” line.

The insurance generally covers the consultant or contractor’s legal liability in respect of any claim first made against them and notified to the insurer during the period of insurance. In regards to the term, ”legal liability“, this must arose from any negligent act, error or omission committed or allegedly committed by the Contractor / Consultant (professional staff or professional party engaged) in their conduct and execution of the Professional activities directly relating to the Project mentioned. Costs and expenses involve in any defence, settlement or investigation of any claims within policy coverage are payable.

While having put the operative clause of the policy cover in simplistic form, it is good practice if we learn up some terms of reference used in the policy wordings:

1. Approved Designs means designs must be approved by the relevant government authorities.

2. Professional Activities – meaning condensed as follow:

Professional Activities
“…preparation of detailed design documentation in accordance with those preliminary designs as provided to the Contractor / Consultant by the project owner, and the inspection process involved during the construction stages to ensure that those designs are being complied.”

3. Professional Staff and Professional Party engaged – condensed as follow:

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Professionals with relevance to designs
“…..those professional qualified personnel (those having a relevant bachelor degree in an appropriate construction design related discipline such as architecture or engineering, or personnel currently certified, licensed, registered or authorised under the the relevant legislation or industry codes of practice governing such relevant profession…). These professionals may also include professional sub-contractors and External Design consultants.

…..for consulting brief, this shall include advice given in respect of designs, testing and research and development of designs and verification of designs”

Thus Project PI would only be made available for those contractors that operate with a designated Design Department in place. Such PI would be most relevant to Turnkey Contractor and Consultants with direct involvement with designs.



How is the demand and supply situation for Single-Project PI?

Currently, very few owners and principals request for single-Project PI from contractor or consultant – what is commonly requested in respect of any PI cover (annual policy) would be from the consulting engineers or perhaps architects….All such annual PI policies are usually purchased to cover consultant’s consulting portfolio, thus there would be issues of “gaps”, adequacy of cover and relevancy of cover to project may be brought into dispute in any event of a claim. But then what about the contractor, especially those that are engaging sub-consultants or play significant roles in design applications?

If there are any current demand from the Malaysian marketplace, these are mainly driven by insurance broking fraternity. Such demand tends to be on a term basis aggregated across the project including maintenance and run off over a period of 6 to 10 years period – Single PI cover. High limits are usually needed – it is standard for large contractor companies to purchase limits in excess of RM20million for PI insurance, with contractual terms often dictate that the PI must be carried for up to 6 years post-completion. The main contractor could also request that their sub-consultants and sub-contractors to likewise take similar PI cover.

However from the supply aspect, the local Malaysian players are unlikely to have readily available treaty or any obligatory capacity to write such kind of risks. In most cases, insurers would only front for the risk and make large placements to the London markets. But then, if this Project PI is made compulsory in similar fashion as being applied for CAR, Workmen and Performance Bond, then the markets for such product are certain to grow exponentially……

Has this blog writeup interest you? You want to know more? Do contact the writer for more information…….

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21 comments for “A single-Project (Design & Construct) Professional Indemnity prerequisite……

  1. June 24, 2012 at 15:11

    Thank you very much for your interesting text. I have been looking for such content for a very long time. Not everything is fully clear to me, but it is definitely interesting and worth reading.

  2. su yong
    March 28, 2012 at 17:54

    Can i have the Writer’s Contact? Thanks.

  3. louisa
    April 20, 2011 at 09:29

    Is there any policy for E&O cover for project?

  4. RIZWAN
    February 25, 2011 at 13:47

    Thank you all for having such an informative talk here… really helpfull

  5. August 25, 2010 at 00:56

    There may be many cases where contract works involve also designs, so in event of a claim, how can the claim be made. What is the best method to apportion the works that are not covered and designs that are covered?

    • August 29, 2010 at 22:25

      Single Project PI is about liability directly resulting from designs. There may be difficult cases but with the correct level of engineering expertise it is not too difficult to tell and divide the various types of losses.

  6. Venugopal
    July 28, 2010 at 17:57

    I am also of the opinion that the Project specific PI is a dedicated project oriented coverage and it should take care of any claim from the specific project. Since the annual PI is also in place, care must be taken to ensure that the annual policy clearly mentions that it would be in excess applicable only after the Project PI Insurance limit is exhausted and that there is no contribution or sharing possible. Otherwise the Insurers take advantage of the policy wordings, even though the intent of taking Project PI Insurance is very clear.

  7. July 25, 2010 at 13:03

    I am having one rough Sunday! One the bright side, I can stop worrying about paying for my baby’s delivery. After shopping around, I got a plan from InsuranceFP that covers maternity, even though we’re already 3 month’s pregnant!!!

  8. hasmah
    June 17, 2010 at 11:59

    what if the client instruct the appointed engineering consultant to take single project PI while the consultant has already taken annual PI which covers the consultant firm’s indemnity for any project during the same period.

    • June 19, 2010 at 13:48

      People are saying it again and again, “Customer is always right!” The consultant would need to buy this single project PI specific for the particular job, if all negotiation with the client is not in their favour. The client has the right to call for a single Project PI despite the consultant has in place an annual PI simply because the annual PI covers a variety of projects the consultant is engaged in throughout the year, and the limit of cover may not be adequate. And also, single project PI is more specific and manageable from the perspective of the client (or principal). Only issue….. there may be issues of contribution in between policies, BUT this can be easily resolved with the single project PI terms excluding contribution with the annual policy cover.

      • Faizal
        December 28, 2010 at 19:35

        Quick Clarif re Single Project PI especially for Design Consultancy Workscope Only:

        a) What is the ideal sum-assured for this PI? Client will always ask for “per Full Contract Value” which seems does not make sense since Contract Value condense:

        1) Involves Preliminary and General element e.g Overhead, Profit, Service Tax, Project Management Personnel (e.g Project Manager, Secretary, Document Controller, Planner, Cost Controller, Supply Chain. Note: All these “Project Management Personnel” meant for Contractor/Consultant own affair)

        2) Involves Eng’g support team e.g Draughtperson

        3) Involves “Real” Professional personnel not limited to Discipline Engineer.

        b) What is the ideal coverage duration on-top of Contractual Project Duration especially if Client din’t specify any? Is there any by default period or ideally follow Main Fabricator/Constructor CAR period e.g (12mnths after Contract Completion Date)?

        Thanks to shed the light…

        • January 4, 2011 at 23:38

          To answer you…. a) no such thing as the ideal Sum Insured…. it is really up to the principal, usually enforcing the relevant (awarded) contract value is a good guide. b) Coverage duration for project PI is usually much longer than the usual CAR period, duration usually stretches for more than 6 years depending on the requirement of the principal. Duration of coverage may reach 10 years from the commencement date of the contract….

          • Rachel
            February 13, 2012 at 11:06

            Regarding the duration/period for the PI, shall it be bought during the preliminary stage of proposal/review of options which proposed to the Clients? Or only to be covered during the design stage for tendering purpose?

            • February 19, 2012 at 09:39

              Usually a quotation is obtained during the tendering stages and Project PI is normally purchase at commencement of the project.

  9. Anonymous
    February 11, 2010 at 19:54

    Appreciate if you can check some of the spellings before posting. Certainly can make reading fun and worthwhile!

    • February 11, 2010 at 23:58

      Blogging is unlikely publishing or journalism or news…… It is about feel and outpouring of the soul and the spirit into some landing space; here is in cyber-space… It is meant to de-stress the writer and not to stress him or her up. If to consistently check for spelling errors and various omissions is a must so that we can present everything in a superb and perfect form, similar to those found in the mainstream newspaper, then there is no reason to blog….. Therefore, please give room for some mistakes here and there as well as forgiving us for the bad grammar and “england” TQ

  10. Kelvin
    January 10, 2010 at 18:55

    Is there writeup on difference between Contractor All Risks and D&C Project Professional Indemnity?

    • January 12, 2010 at 00:49

      Dear kelvin, will do once someone here finds the time to work out a writeup…. tough right! to have to do work out to get to the write up.

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