Specialist contractors often work to designs and specifications prepared by others. But what happens when contractual obligations, technical decisions or changes on site create responsibilities that their professional indemnity insurance may not cover?
A drylining contractor is appointed to install partitions on a commercial refurbishment. The drawings and specifications have been supplied by the main contractor’s design team, and the subcontractor’s responsibility appears straightforward: install the specified system.
During construction, a detail needs changing to accommodate building services. The contractor is asked to propose an alternative arrangement recommended by a manufacturer. The change is approved and work proceeds.
Months later, questions arise about whether the completed partition achieves the required fire performance.
Who was responsible for confirming that the revised solution was suitable? What did the subcontract require? And would the contractor’s insurance respond if a claim followed?
For specialist contractors, the answers can have significant financial consequences.
Working to someone else’s design
Many businesses in the finishes and interiors sector operate as subcontractors, installing systems in accordance with drawings and specifications prepared by architects, engineers or other members of the project team.
However, responsibility is not always as straightforward as the original scope of works suggests.
A subcontract may require a specialist contractor to develop construction details, coordinate interfaces, verify aspects of a design or achieve specified performance requirements.
These activities do not necessarily carry the same responsibilities. Preparing installation drawings based on an established design, for example, is not automatically equivalent to accepting responsibility for the underlying design.
Much depends on the work undertaken and the contractual terms.
FIS has highlighted the importance of clearer responsibilities through its work on improving the drylining design process. Incomplete information and poorly defined design obligations can create difficulties for specialist contractors.
The insurance concern is that a business may accept additional responsibilities through its subcontract or subsequent project instructions without recognising how those obligations differ from its usual activities.
What does the subcontract actually require?
One important consideration is the standard of responsibility imposed by the contract.
An obligation to exercise reasonable skill and care generally requires professional work to be undertaken with the competence and diligence expected of an appropriately qualified practitioner.
A fitness-for-purpose obligation can be considerably more demanding. Depending on its wording, it may require a particular result to be achieved, even where reasonable skill and care has been exercised.
This distinction matters because professional indemnity (PI) insurance should not be assumed to cover every contractual promise.
PI policies generally provide protection against specified civil liabilities arising from professional activities, subject to their terms and exclusions. Contractual obligations extending beyond the liability a contractor would otherwise have incurred may fall outside the intended scope of cover.
The consequences of contractual performance obligations were illustrated in the 2017 Supreme Court case MT Højgaard v E.ON. Although the contractor had followed an identified technical design standard, the Court upheld the effect of a separate contractual performance requirement concerning offshore wind turbine foundations.
The case did not concern interior fit-out or determine an insurance coverage dispute, but it demonstrates why contractors should examine their full contractual commitments.
For specialist subcontractors, the question is whether they are simply installing an agreed design, undertaking defined design services or accepting responsibility for achieving a particular outcome.
Fire safety: an important insurance consideration
Fire performance is particularly relevant to the finishes and interiors sector.
Drylining, partitions, suspended ceilings and associated systems can form part of a building’s fire safety strategy. Their performance depends on appropriate specification, installation and compatibility of components.
Some Design and Build PI policies contain Combustibility and Fire Safety Exclusions.
For example, an exclusion may restrict cover for claims or losses arising directly or indirectly from the combustibility or fire safety requirements of internal wall systems, including ceilings.
The precise wording is critical. Exclusions differ between insurers and policies, and the existence of a fire-related issue does not automatically determine whether a claim is covered.
Consider a hypothetical situation where a drylining contractor is asked to propose an alternative plasterboard specification for a fire-rated partition.
The contractor relies on manufacturer information, but the suitability of the complete system for that particular application has not been adequately established.
If the completed installation subsequently fails to achieve the required performance, questions may arise about who selected the alternative, who was responsible for verifying its suitability and whether the contractor accepted a design obligation.
Any resulting insurance claim would depend on the allegations, legal liability and applicable policy wording.
A contractor could therefore hold PI insurance with a substantial limit of indemnity while facing restrictions affecting particular fire safety exposures.
Another important consideration is whether fire safety cover extends to work undertaken in previous years.
Even where a PI policy provides fire safety protection, a specific retroactive date or other restriction may limit cover for earlier work. A contractor could have protection for current projects without necessarily being covered for claims arising from design services undertaken before that date.
The insurance market has become more receptive to broader fire safety protection, and in some circumstances cover extending back to earlier work may be available. However, this should never be assumed. Contractors should establish both the scope of their fire safety cover and the period of past work to which it applies.
Not all PI policies provide the same protection
The basis on which professional liability cover is arranged also matters.
Some policies provide relatively broad civil liability cover arising from defined professional activities, subject to exclusions and conditions. Others cover more specifically identified categories of professional wrongdoing or liability.
A contractor primarily installing to supplied specifications may have different insurance requirements from one regularly undertaking design development, calculations or specialist system design.
Contractors should ensure their declared activities accurately reflect the services they provide, including any design responsibilities undertaken through external specialists.
Appointing a separate designer does not necessarily remove the contractor’s contractual responsibility to its client.
Other considerations include exclusions, limits of indemnity, excesses, defence costs and claims notification requirements.
PI insurance is commonly arranged on a claims-made basis, making continuity of cover and timely notification of claims or circumstances particularly important.
When a project changes, responsibility can change too
Even where the original subcontract clearly defines the work, responsibilities may evolve during construction.
A specified product becomes unavailable. An installation detail proves impractical. Additional services require a revised ceiling arrangement. The main contractor asks the specialist subcontractor to recommend an alternative.
These situations are familiar across the sector, particularly on refurbishment projects.
Problems can arise when a technical solution progresses without an equally clear understanding of who has accepted responsibility.
Approval by another project participant should not automatically be assumed to transfer or remove contractual liability.
Before undertaking additional design work, contractors should establish who is responsible for the revised design, what technical verification is needed and whether the change affects their contractual or insurance arrangements.
Clear records of instructions, design decisions, approvals and changes can prove valuable if questions arise later.
Five questions before accepting design responsibility
Before signing a subcontract or accepting additional design work, specialist contractors should consider:
- What are we responsible for? Are we installing to an agreed specification, developing details or accepting responsibility for a particular design or performance requirement?
- What does the contract say? Are there fitness-for-purpose obligations, guarantees, broad indemnities or responsibilities relating to designs prepared by others?
- Do we have the necessary competence? Can the business undertake the required work, or should specialist design advice or verification be obtained?
- Does our insurance reflect the exposure? Have the activities been disclosed, and have exclusions, fire safety restrictions, retroactive dates and contractual liability provisions been reviewed?
- What happens when the design changes? Is there a clear process for recording revised responsibilities, technical approvals and any additional insurance considerations?
For contractors involved in fire-rated systems, particular attention should be paid to the scope and historical extent of any fire safety-related PI protection.
Understanding the risk before accepting it
Specialist contractors contribute valuable technical expertise to construction projects, often helping resolve practical challenges that arise between design and installation.
Accepting design responsibility is not inherently problematic, provided the business understands its obligations and has the competence and appropriate arrangements to manage them.
The concern arises when responsibilities develop through contractual wording or project changes without the consequences being properly considered.
A business may not regard itself as a designer, yet aspects of its work or contractual commitments could create professional liabilities that its insurance was not intended to cover.
Understanding the relationship between the work undertaken, the responsibilities accepted and the protection available is an important part of managing that exposure.
The best time to establish that position is before the contract is signed or the additional responsibility is accepted.
Clear Insurance Management Ltd is a Chartered Insurance Broker and member of FIS. This article provides general information and does not constitute legal or insurance advice. Contractual obligations and insurance protection should be assessed against the relevant documents and circumstances.
For more information, contact David Woolford (david.woolford@thecleargroup.com) or Joel Bird (joel.bird@thecleargroup.com) at Clear Insurance Management.
