News & Media
February 03, 2021

Tell your PI insurer or broker that you use NEC and you might save money

Tell your PI insurer or broker that you use NEC and you might save money By Rudi Klein, NEC Users' Group President

Best wishes to all NEC users around the world for 2021. The resilience you have demonstrated last year has been outstanding, with unprecedented collaboration across all sectors of the construction industry throughout the Covid-19 pandemic. But as we finally start to emerge from one crisis we now face another: the market for construction professional indemnity (PI) insurance. Premiums have sky-rocketed for both contractors and consultants to the point where they are simply unaffordable. Last year I was told by one contractor it had been quoted a £75,000 premium for just £1 million of cover.

The reasons for the crisis in the PI market are manifold. They include the Grenfell fire, a high incidence of defects, water leakages and poor supply chain resilience. Over the last couple of years, 14 PI insurers have left the construction market, leaving many firms struggling to get contractually required cover.

Contractual PI requirement

For example, the NEC4 Professional Service Contract requires consultants to insure against their liability arising from a, ‘failure to use the skill and care normally used by professionals providing [similar] services’ (clause 83.3). The cover is to be maintained from the starting date until the end of the period stated in the contract data. On each renewal of the policy, consultants are expected to certify to clients that the policy has been renewed.

But if a consultant is unable to afford to renew its PI insurance with the same level of cover, the client has the option of making alternative insurance arrangements and charging the premium to the consultant. It is quite possible the client may only be able to secure alternative cover at an exorbitant rate that is completely beyond the consultant’s ability to pay. NEC Z clauses often qualify the obligation to maintain insurance in place with the proviso it is available at ‘commercial reasonable rates’, whatever that means.

Open dialogue with insurers

Either way, it is in the interests of all in the construction industry − clients, consultants and contractors as well as insurers – to address the PI crisis. I believe NEC users should open a dialogue with PI insurers and brokers, explaining why the structured and proactive approach to risk management of NEC contracts make NEC users a much better risk than other contract users.

Given the primary focus of NEC contracts is on minimising risk, this should form a solid basis for a discussion on how we can reduce PI premiums. A PI insurer is also more likely to derive greater comfort from the fact that all NEC contracts and subcontracts used on a project are unamended, having a minimum of Z clauses that do not seek significantly to alter the balance of risk.

If I, as a consultant or contractor, can demonstrate to a PI insurer that a significant part of my turnover is delivered under NEC contracts, I would hope that this would have a favourable impact on my premium. In effect it is like telling my home contents insurer that I have fitted the best possible locks to all my external doors and windows. Views from insurers and brokers would be most welcome.

'A PI insurer is also more likely to derive greater comfort from the fact that all NEC contracts and subcontracts used on a project are unamended, having a minimum of Z clauses that do not seek significantly to alter the balance of risk’
POSTED BY NEC Contracts
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