Brokers considering breaking into the professional indemnity sector for engineers should ensure they get the specifics right from the beginning. Gordon Warnes explains that lack of presentation accuracy can be disastrous
Professional indemnity insurance for engineering practices can take many forms and generalising can be dangerous. Unlike many commercial combined policies, where generalisations are harmless and sometimes even encouraged, the repercussions of a lack of detail in PI presentations for engineers can be disastrous. The engineering industry is an area where it is easy to overlook details, simply classifying firms by general business categories such as civil, structural, mechanical or electrical. But this barely scratches the surface of today's engineering profession with its increasing emergence of new niche practices.
Over recent years there has been a growing number of engineering start-ups, many set up by those working beyond retirement, and the expertise of the consultants involved dictates the specialisms offered. In contrast to the larger engineering practices, which have developed over time to cater for a broad spectrum of disciplines, these newer firms tend to offer niche solutions and industry-specific services.
When requesting a break down of activities by income, the standard sectors of an engineering consultant's PI proposal form include civil, structural, mechanical, electrical, heating and ventilating, chemical and soil engineering.
Completion of standard proposal forms usually enables underwriters to offer a quotation, but a closer look at the individual activities of engineering practices shows that these categories are not sufficient. Clients often use the most appropriate heading on forms rather than providing their own categories, so brokers must ensure full explanations are made of all activities and their exposures to avoid non-disclosure problems later.
This is where the skills of a specialist wholesale broker can be utilised.
There are two main issues that emerge from the use of standard proposal forms: standard headings can hide an area underwriters would perceive as high risk; or a risk may appear high while closer inspection would show this to be untrue. An example of the former is failing to distinguish between electrical and electronic engineering, which may not be a problem until a claim arises. An example of the latter is rail-related risks that may be declined out of hand, but could be connected with non-safety-critical installations.
Clients often have a better understanding of the issues faced in a particular sector than underwriters or brokers - after all, this expertise is the very thing that allows them to compete. And brokers, who know what information underwriters need, must make every effort to extract this information from clients.
The current hard market means it is easy to attribute premium increases to current market conditions. However, a re-marketing of the risk after a thorough review often brings positive results. Indeed, even a re-broking with current insurers can achieve a reduction in premium.
It is also crucial that presentations are well laid out to start negotiations off on the right foot. If underwriters cannot easily understand a client's services they cannot be expected to investigate them. In the current market, underwriters can afford to be choosy and so a poor presentation is likely to get no-quoted. Brokers must present the underlying exposures correctly.
While some underwriters shy away from new and emerging classes, Lloyd's syndicates will usually look at anything, whether or not it has an underwriting history. But do not expect rates to be cheap for unfamiliar classes.
Brokers should not be misled into thinking that engineering PI business is easy to place. With statutory regulation by the Financial Services Authority, the emphasis will be on demonstrating competence in placing this business. The natural solution is to involve an expert firm of wholesalers which can mitigate exposures while allowing brokers to retain valuable clients.
Small consultants can be embroiled in large claims. The risks of this occurring may be higher when the engineer is working in a niche area and their input - although low in fee - will have a tremendous impact on the success, or otherwise, of the project.
Plant Construction v Clive Adams Associates and JMH Construction.
In this case, a sole practitioner consultant engineer, Clive Adams, found himself being sued by the contractor for circa £2m due to negligent design and monitoring of minor substructure works for the installation of two engine rigs and pits at Ford's Research Centre in Essex. JMH was the sub-contractor also being sued by the contractor (which had settled with Ford).
A large part of the roof collapsed during the course of the works as one of the principal roof support stanchions gave way into the newly excavated pit, causing substantial damage to the Centre. Clive Adams Associates fees reflected the fact that it was a small job but the loss caused far exceeded the indemnity limit carried by the insured. The matter was settled out of court.
- Gordon Warnes is divisional director of Holman Professional Indemnity.
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