Friday, September 22, 2023

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Professional Indemnity Insurance: Construction Professionals & the Growing Deductible Dilemma

Although the market is starting to show signs of stabilising after a sustained period of hard market conditions (where demand exceeds the supply), Professional Indemnity insurers for Construction professionals (including Engineers and Building Surveyors) continue to see a high degree of claims against their portfolios. In response, insurers are seeking higher deductibles associated with Professional Indemnity risks to manage the escalating costs of claims. In this article, we explore the critical considerations for construction professionals when addressing deductibles and risk management.

How did we get here?

In recent years the construction industry has experienced a consistent wave of substantial claims associated with Professional Indemnity losses. This has been driven by a range of factors, including (but not limited to) contractual disputes, design errors, complex projects, growing claim management costs, and changes to legal standards. In response, insurers are considering their underwriting capacity carefully and deductible levels are playing a key part in their risk management strategies.


What is a deductible?

A deductible is the amount of money a policyholder must pay out of pocket before their insurance starts to cover the remaining costs of a claim. Values vary based on the coverage, insurer, and how much is paid in premiums.


In general, higher premiums usually come with lower deductibles. In the event of a claim, this means there is less to pay to activate the policy. Conversely, if the policy comes with a high deductible, the policyholder will pay lower premiums because they are responsible for more costs before the coverage starts.


Deductibles & premiums: Getting the balance right

With higher deductibles, a business will bear a larger portion of “self insurance” in the event of a claim. This means it is vital for construction professionals to assess the business’ financial capability to absorb increased deductible amounts while maintaining business continuity and cash flow. This makes it essential to strike a balance between minimising premiums and the financial exposure associated with higher deductibles. A good place to start is to analyse the projected premium savings against the business' ability to cover the increased deductible amount in the event of a claim through the year.


How risk management can help

In the face of higher deductibles, focusing on robust risk management and loss prevention strategies becomes critically important.  Insurers will view businesses with proactive risk management practices more favourably, potentially leading to better deductible options. Embedding rigorous quality control processes, having strong contractual terms, employing experienced professionals, and adhering to best industry practices can help reduce the likelihood of claims and improve the business’ risk profile in the eyes of insurers. Therefore, these proactive strategies should be clearly communicated to insurers.


Loss history & claims experience

Reviewing the business’ loss history and claims experience, as well as the broader industry trends can provide valuable insights into claim frequency and severity. If the business has maintained a favourable claims history, insurers may offer better deductible options, though insurers will have a minimum deductible limit.


Special considerations for specific projects

Certain construction projects may present higher risks or demand specific deductible levels as part of their contract requirements. Before agreeing to these terms, be sure to thoroughly evaluate the project's complexity, potential exposures, and the financial impact of the specified deductible. Negotiate deductible terms with your clients wherever possible to ensure these align with your business's risk management objectives.

How we can help

Given the shifting landscape of Professional Indemnity insurance, working with specialists who can offer tailored advice and understand the risk environment, as well as insurers’ appetite for certain risks can be highly beneficial. Feel free to reach out at any time to discuss your needs with our experts. 


James Machray

Client Manager

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Honan Insurance Group Pty Ltd is now fully owned by Marsh Pty Ltd. To find out more, speak to your broker or read the announcement