Contact The Team


Subscribe

* indicates required

Updates to professional indemnity insurance provisions of Irish public works contracts


Wednesday, March 2, 2022

The Department of Public Expenditure and Reform published a new circular on 9 February 2022 (the “Circular”), indicating a more pragmatic approach to dealing with issues raised by the current professional indemnity insurance market. This was subsequently followed by the publication of a new Guidance Note 1.1.2 (the “Guidance Note”) that expands on the issues raised by the Circular.

What has happened in the PII market?

The renewal of professional indemnity insurance (“PII”) policies has become a significant issue for the construction industry. The withdrawal of many insurers from the PII market, combined with the aftermath of the Grenfell Tower disaster has resulted in many contractors and design team members (particularly fire safety consultants) experiencing significant increases in their premia or even a refusal to provide cover for “each and every claim”.

Why was the Circular published?

Whilst this issue is not new – the private sector construction market in Ireland has adapted to agree more commercially reasonable PII provisions in building contracts and design team appointments – the position has not changed in public works tenders, as contracting authorities are prevented from amending the insurance provisions of the Capital Works Management Framework which require cover on for “each and every claim”.

This has led to a range of scenarios:

  • Contractors and consultants do not bid for public tenders, as they are unable to provide the level of insurance required or provide insurance on for “each and every claim”;
  • Contracting authorities award a tender to a contractor/consultant only to discover the preferred tenderer is unable to provide the level of insurance required, requiring the contracting authority to agree a lower level of insurance cover, revert to the second placed tenderer or collapse the competition (all of which can create procurement issues);
  • Contractors and consultants are unable to comply with the terms of existing contracts; and
  • Sub-contractors are unable to provide the required form of collateral warranty due to the “each and every claim” requirement.

What does the Circular and Guidance Note do?

The Circular and Guidance Note flag a number of changes made (and changes that will be made) to the Capital Works Management Framework to allow contractors and consultants to temporarily offer PII cover in the “aggregate” rather than for “each and every claim” – provided that if “each and every claim” cover becomes available at commercially reasonable rates during the term of the contract, the contractor/consultant will be required to maintain “each and every claim” cover. These changes can be broadly categorised in two ways:

  • The template tender documents will be updated[1] to temporarily waive requirements to hold cover on for “each and every claim”, provided that the tenderer:
    • holds a specified “aggregate” level of insurance; and
    • pledges to take out cover for “each and every claim” if it becomes available and the payable premium is within 125% of the premium rates currently payable by the consultant/contractor.
  • For consultants and contractors that have already entered contracts with public bodies, Model Forms 2.11[2] and 1.29[3] (respectively) provide a similar option for contracting authorities to waive the requirement for “each and every claim” cover.

It is also useful to note that the Guidance Note also provides “recommended” levels of PII cover for consultants and contractors, based on the value of the construction works undertaken. The Guidance Note indicates that contracting authorities can deviate from these levels where it is justified “by the particulars of the project” – and as such insurance advice should be obtained by contracting authorities in setting such levels – but we suggest that the levels of insurance required would be lower than we would typically expect in private sector projects of comparable value.

Finally, the Guidance Note notes that a contracting authority can take out single project PII cover if it determines that it cannot obtain a suitable level of PII cover from consultants/contractors. Whilst this has a number of benefits to the contracting authority (it cannot be cancelled, it covers all aspects of the design and construction of works and includes a ring-fenced “aggregate” limit), it is typically only available for larger (€100m+) projects and is expensive both in terms of premiums and excesses payable in the event of a claim.

Commentary

Despite the fact this issue has existed for a number of years, these changes can only be welcomed by contracting authorities and tenderers alike and reduces the likelihood of insurance issues creating problems in procurement processes going forward. As contractors and design team members will normally rely upon one PII policy across their business (rarely taking out specific cover for a particular project), contracting authorities will need to monitor contractors/consultants with “aggregate” cover to ensure that the specified “aggregate” limit is not close to exhaustion within a particular year. Seeking updated information on this, particularly for larger construction projects, will therefore be important.

These gradual reforms to the CWMF in 2022 should be welcomed. The indexation and inflation amendments, these insurance amendments and the upcoming consultation to include a liability cap within the public works contracts and conditions of engagement go some way to addressing some common concerns with the suite of documents that have been voiced over recent years. Other amendments identified in the accompanying press release note some beneficial changes for contracting authorities where tenderers rely upon the resources of third parties and greater use of the eESPD during tender procedures.

 

 

 

[1] The tender documents for consultants have already been updated – with the tender document templates for works contractors to be updated “by the end of February”. These documents have not been published yet but we will update the article once they are published.

[2] Letter to Consultant re Temporary PI Insurance Arrangements, available here

[3] Letter to Contractor/Specialist re Temporary PI Insurance Arrangements, available here.


Author

Kerri Crossen

PARTNER


Patrick Kane

SENIOR ASSOCIATE

Top.