Professional indemnity insurance for builders

Can builders benefit from professional indemnity insurance?

Professional indemnity insurance offers builders many benefits. As building projects become more complex, development firms have come to rely more on outsourcing and subcontracting. With more parties involved in a project, there is an increased risk.

Professional indemnity insurance covers the legal costs and damages if a client claims the firm's professional negligence, design errors or incorrect advice caused them a financial loss, such as losses from project delays. It generally doesn't cover the cost of fixing or redoing the builder's own faulty work. Professional indemnity insurance gives builders security against any financial fallout resulting from a breach of professional duty. Given the number of risks a builder is exposed to, PI is highly beneficial to maintaining the builder's financial stability.

How much does professional indemnity cost?

The cost of professional indemnity insurance for builders depends on factors such as the type of building work you do, your annual turnover, your claims history, the limit of indemnity you choose and your excess. The best way to find out what you'd pay is to compare quotes from a few insurers or talk to a broker.

Why is professional indemnity insurance essential for builders?

Professional indemnity insurance protects builders from the risk of litigation. Construction is a high-risk industry and it is crucial for a builder to be prepared against the costly impact of a negligence claim. If a builder gives negligent advice, breaches client privacy or loses vital documents, they may face legal action. The scale and investment of a construction project means that any negligence on behalf of the builder is likely to have severe financial consequences.

Professional indemnity insurance is essential for providing builders with a financial fail safe should something terrible happen. Aside from the financial security provided by PI insurance, the policy also has other advantages for builders. These include:

• Business continuity. As part of professional indemnity insurance, a builder may also be covered for public relations expenses. This means any negative press generated by the claim can be countered to help protect the reputation of the builder and their business.
• Work opportunities. Purchasing professional indemnity insurance is a condition of employment for many work opportunities within government bodies and the private sector. By having PI insurance, you have access to greater employment options.

What does professional indemnity insurance usually cover?

Professional indemnity insurance, which is a type of business cover, provides cover for claims made against you for breaching your professional duty. These claims most commonly involve acts of negligence and behaving in a way that is wrongful and/or misleading.

A typical professional indemnity insurance policy will provide cover for the following:

• Legal representation. With professional indemnity insurance, you are covered for the cost of your legal fees including legal representation, advice and court attendance.
• Compensation. If a client is awarded damages for financial losses caused by a breach of your professional duties, professional indemnity insurance will cover the cost of the payout. If the case is settled, the policy will also cover the settlement payment.

Professional indemnity insurance will provide cover for builders who breach their professional duty in respect to common, statute and/or contractual law. This includes cover for unintentional slander, libel and defamation, loss or damage of documents, unintentional breaches of the Competition and Consumer Act 2010 (including the Australian Consumer Law), employee liability such as unfair dismissal and harassment, dishonest acts of employees, run off protection for outgoing partners and unintentional breaches of copyright law.

Each professional indemnity insurance policy is tailor-made to address the risks of each industry. Builders working in the construction sector would have access to coverage that is specific to their workplace and clients.

How does professional indemnity insurance benefit builders?

Professional indemnity insurance benefits its user by providing financial security from expensive professional indemnity claims. Its primary objective is to protect working professionals like builders from financial loss. According to the Insurance Council of Australia, approximately 70% of uninsured and underinsured small businesses do not recover from a major insurance claim.

Having protection against potential legal claims, a builder can work without worrying if their actions or advice is in breach of their professional duty. This is useful for a builder who wants to innovate but is concerned by possible financial ramifications.

Professional indemnity insurance also benefits its user by mitigating the risk of human error. Clerical mistakes are inevitable in most work situations. Documents can be lost or damaged, not out of malice but from human error.

Professional indemnity insurance ensures that a builder is not financially punished for these mistakes.

Professional indemnity insurance for builders general exclusions

Professional indemnity insurance is subject to some exclusions. These may change depending on the specific policy. Examples of typical exclusions may include:

• Cyber liability. Claims that arise from acts of cybercrime are not covered by professional indemnity insurance. This means that if the claim brought against you relates to a virus, worm or any other harmful code or software, you will not be covered. Find out more in our guide to cyber liability insurance.
• Occupier's liability. If the claim against you arises from the management, ownership or control of your property and not from your professional services, professional indemnity insurance will not cover the expenses of the lawsuit.
• Prior claims. Claims that were made either formally or informally before your insurance period are exempt from cover.
• Employer's liability. While professional indemnity insurance protects you against claims made by clients, it excludes claims made against your liability as an employer.
• Terrorism. A claim that arises as a result or consequence of an act of terrorism is not covered by professional indemnity insurance.

Make sure you read the Product Disclosure Statement (PDS)

2022 Finder research shows that 23% of Australians can't be bothered reading the PDS. The PDS contains a comprehensive list of all the exclusions of a policy.

Making a professional indemnity insurance claim

The building sector comes with many litigation risks. Whether you are part of a small, medium or large construction firm, you may be held liable for financial losses as a result of a breach in your professional duties.

For instance, if a large building and construction firm is contracted by a developer to build an office building and in the process of completing this project, the firm hires a subcontractor to design the electrical system. The system proves faulty and the developer sues the firm for failing to deliver the project as promised. In this situation, the firm can seek cover from PI insurance.

For a builder or private contractor, a claim may arise if exceptional circumstances such as poor weather conditions prevent a contractor from complying with their professional duty to complete the project by the set deadline. Other claims may arise due to negligence, damaging documents and misleading conduct.

Learn more about the different types of professional indemnity insurance available

Choosing professional indemnity insurance for builders

When choosing a professional indemnity insurance policy, builders must consider various factors. The first factor to consider is the insurance provider. Ideally, a builder should look to find a provider with previous experience in the construction industry.

Understanding the risks that are specific to your industry will help ensure the insurance provider covers all eventualities. A provider should also be chosen on the basis that they can provide adequate professional insurance for your business.

So do your research. Compare the cover offered by various providers to find out how comprehensive a policy is and then weigh up the costs.

Once you have chosen a provider, be sure to read the terms and conditions. Most business insurers will be able to tailor the policy to your needs.

Also consider your long term plans. As your business grows, you will need an insurance policy that can grow with you. Think about how your risks and circumstances may change and find an insurer who can provide professional indemnity insurance that accommodates your business plans.

Talk to a broker about professional indemnity insurance for builders

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FAQs

• Is professional indemnity insurance mandatory for builders in New South Wales?

  Not for all builders. Registered design practitioners and professional engineers in NSW must already hold professional indemnity insurance. Under the Design and Building Practitioners Act 2020, registered building practitioners must also be indemnified under an insurance policy for their work as a registered building practitioner from 1 July 2027, according to Building Commission NSW.

• Does professional indemnity insurance cover the cost of rectifying a builder's own faulty workmanship?

  No, professional indemnity insurance generally excludes the cost of re-performing or rectifying faulty work itself. It is intended to cover legal fees and damages awarded to a client who suffers financial loss resulting from your professional negligence, design errors or incorrect advice.

• Are builders' professional indemnity policies usually claims-made or occurrence-based?

  Professional indemnity insurance is almost always a "claims-made" policy. This means the policy must be active at the time the claim is made against you, regardless of when the building work or advice was actually provided.

• Can a builder be held liable for professional errors made by their subcontractors?

  Yes, you can be held vicariously liable for the errors or omissions of architects, engineers and other design consultants you engage. It is critical to ensure your policy includes a vicarious liability clause to protect you against claims arising from the professional services of third-party consultants.

• What is run-off cover in professional indemnity insurance for builders?

  Run-off cover provides insurance for claims made against you after you have retired or ceased trading for work completed while the business was active. Because PI is a claims-made policy, you need this extension to remain protected against future legal action related to past projects.

Written by

Gary Ross Hunter

Journalist

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Gary Ross Hunter has over 6 years of expertise writing about insurance, including life, health, home, and car insurance. Having reviewed hundreds of product disclosure statements and published over 800 articles, he loves simplifying complex insurance topics for everyday readers. Gary has contributed to major outlets like Yahoo Finance, The Sydney Morning Herald, and news.com.au, and holds a Bachelor of Arts (Honours) in English Literature from the University of Glasgow, along with a Tier 2 General Advice certification, ensuring his work adheres to ASIC’s RG146 standards. See full bio

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Gary Ross has written 519 Finder guides across topics including:

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