TIME FOR A TOP-UP?

Insurance
Are high insurance demands stopping you doing a job? Does the client like your ideas but want higher PI than your practice carries? Tell it to get its own, says Peter Godfrey

As we settle into the next decade, the same issues continue to affect the architectural profession, particularly problems of workloads and income. At the same time we are seeing increasing demand for higher levels of PI insurance with £10m, £20m and even £50m starting to be requested.

High insurance demands rule out most practices from tendering for a project, reducing the number of potential architects who can be employed and thereby the creative talent that can be drawn upon.

One possible solution for an architects’ client to consider is Owners’ Protective Professional Indemnity (OPPI) insurance.

Excess coverage
OPPI insurance provides coverage to the principal above that insured by the professional designer(s). Its major purpose is therefore to provide excess coverage for any losses the principal experiences as a result of a professional designer’s negligence in its provision of professional services. As indemnity under the OPPI policy is for the benefit of the principal and not the professional designer, it is ‘first party’ coverage.

The policy must remain confidential to the principal to avoid any negotiated settlement which otherwise would not have included any contribution from the OPPI policy. Therefore the design professional must not know of its existence.

In some instances, usually an insolvency, the OPPI policy will drop down to cover losses which otherwise would have been insured by the professional designer.

When this happens it usually drops to a minimum level agreed with insurers. This is a second reason why the professional designer should not be aware of its existence and is potentially a significant benefit to the owner.

The OPPI policy can be provided on a project specific basis. It can run for a long term period – generally the design and construction period, the defects liability period, or for up to five years’ extended reporting period. The policies can also be annually renewable, either project specific allowing changes to the cover to reflect the changing risks or covering multiple projects.

Flexible friend
There are many instances where this could be a valuable option for the party procuring the development, the ‘owner’ of the OPPI policy.

One example would be a client who wished at the outset of the project to have insurance in place to a particular level, £10m for example, but where its preferred professional designer carried only £5m. Rather than force the designer to increase its own professional indemnity insurance to £10m, the owner can take out the OPPI to provide the additional cover. This policy would only be triggered when the professional designer had contributed the first £5m from its insurance.

This scenario gives the owner greater flexibility in choosing which practice to employ: it can broaden the variety of firms and gain greater competition for ideas and designs, or it can use a specific practice whose work it admires but would be otherwise unable to use because of internal procurement rules relating to insurance levels.

Cheaper options
A second example might be an owner that has agreed contractual terms with its professional designer at the start of a project, including an agreed limit of indemnity for its PI, but where additional funders brought in during the contractual period impose a higher limit.

In this case the owner can either ask the professional designer to increase its insurance or can take out its own OPPI.

Here, an owner asking its professional designer to increase its limit of indemnity could face a considerable additional bill. OPPI may be a more economic route to take and would avoid having either to fund the professional designer’s additional insurance costs, or pay an increased fee to cover them.

While professional designer should not be aware of the existence of an OPPI policy, it is something that they can highlight to their clients as a potential option. This insurance is available for most project types, and to those procured by the public or private sector.

Peter Godfrey is director of the RIBA Insurance Agency

Other options

OPPI has lots to offer but there are other options to consider if you are faced with the need for higher insurance coverage.

Single project insurance
A stand alone single project insurance policy can cover all the professional designers and the contractor for professional services, but it is only available for the largest projects. The terms of the insurance are also usually more restrictive than the professionals’ own insurance programme.

Increasing the architects’ insurance
If an architect needs to increase its insurance because of one project there are some insurers who would consider providing additional cover for just that one job rather than insuring all work. For example, you could need £2m cover for your normal work but have a potential client who wants insurance for £5m. It is sometimes possible to buy the additional £3m cover for one project only, a sort of top up layer, which may be cheaper than buying it for all work but would nevertheless be an annually renewable policy.