Communique June 2017

Levels of PI Cover, and Excesses

We all have Professional Indemnity (PI) insurance cover to varying levels; in some cases, particularly on larger projects, the client advises us what the minimum level of cover needs to be. Whilst we may have higher cover available to us, we need to tailor that cover to the project and to the assessed risk of it. Each year when we renew our policies, we also need to consider what might be an appropriate level of excess.As a general proposition, for each project we should have PI insurance in place for an amount no less than the maximum amount we can be liable for under our Agreement. We should also consider the possibility of multiple claims in a year that in aggregate exceed the amount of cover carried including any reinstatements. Remember, multiple claims have multiple excess contributions, and that possibility requires to be budgeted for: in the event that you cannot meet the excess, the policy may not respond. The risk of increased excess contribution against the premium cost saving needs to be carefully considered: the cost benefit may not be worth the risk. Additionally, there is the monetary cost of unproductive office time in your attendances on the claim, and this also needs to be budgeted for.How is that level of liability and PI insurance determined? Who decides what is appropriate?The NZIA Agreement for Services default position is $250,000. For an average architecturally designed residence or small commercial project this may be adequate. For many buildings it will not be. Residential projects attract unlimited liability: a $1M cover for a high-budget residence may be a reasonable reflection of the perceived or inherent risk of that project.Time needs to be spent on assessing the risk and determining an appropriate PI cover amount.An assessment should consider aspects such as:

• the limit of liability in any agreement should not exceed the amount of PI insurance cover we each carry.
• complexity and innovation of the project.
• is it conceivable that a major issue occurs such that the entire house has to be rebuilt?
• likelihood of being "last man standing"?
• actual responsibilities given that there might be sub-consultants that we have engaged, and the amount of PI cover they carry.
• The client type and their litigation appetite. Are you likely to be novated to an unknown building contractor?

We should look towards limiting our liability, and not disclose to the client what PI insurance is in place. Whilst it is important to ensure cover is not too low, it should not be unnecessarily high. You may be guided by the information set out in the Chairman’s letter which is sent out as part of the renewal process.