What a £5m Construction PI Claim Really Looks Like and Where It Goes Wrong
In practice, major losses rarely stem from unusual risks. More often they arise from standard projects where contractual obligations and insurance cover are not fully aligned. This article outlines a typical £5m construction PI claim and highlights where issues commonly occur.
The Scenario
A Design & Build contractor is appointed on a mid-sized commercial development. Key features of the project include:
- Design responsibility partially subcontracted to external consultants
- Collateral warranties provided to the employer and funders
- PI insurance in place across the contracting chain
Looking at the above, the risk profile appears to be well structured with no obvious gaps in cover.
The Claim
Approximately 12–24 months after completion, defects begin to emerge. These may include structural movement, cracking to key elements and the need for remedial works, together with associated costs.
In this scenario, the employer advances a claim with a potential exposure of around £5 million.
While it is initially assumed that PI insurance will respond as expected, this is often where complications arise. Issues relating to policy coverage, notification, exclusions and the allocation of liability between parties can significantly affect the extent to which the claim is ultimately covered.
Key Areas of Scrutiny
As the claim develops, focus typically turns to:
- Allocation of design responsibility
- Extent of subcontracted obligations
- Wording of underlying contracts and warranties
- Whether any party has assumed obligations beyond reasonable skill and care
- Alignment of PI policies with these obligations
It is often at this stage that gaps between contractual risk and insurance cover become apparent.
Where Issues Commonly Arise – Contractual Liability
A frequent source of difficulty is the inclusion of contractual obligations that go beyond the duty of reasonable skill and care. This can arise through:
- Amended contract conditions
- Employer-driven requirements Warranty provisions
In cases like this, liability may fall outside the scope of standard PI policies.
Some claims are framed not on the basis of negligence, but on whether the works achieve a specified outcome. As most PI policies respond only to negligence-based claims, this can create a mismatch between the liability alleged and the cover available.
Back-to-Back Cover
Where design responsibility is subcontracted, it is often assumed that risk is effectively transferred down the supply chain. However, this assumption does not always hold.
Differences in subcontractors’ PI insurance particularly in relation to limits of indemnity, policy wordings, and the scope of insured services this can create gaps in cover. As a result the main contractor may remain exposed to losses that cannot be fully recovered from subcontractors.
Limits of Indemnity
Alignment between project exposure and policy limits is critical. For example:
- A £5m claim may be supported by lower limits within parts of the contracting chain
- Even where policies respond, insufficient limits can leave residual uninsured exposure
Observations
There is rarely a single factor that determines the outcome of a claim. More often, it is the interaction between:
- Contractual terms
- Allocation of responsibility
- Insurance arrangements
These combined factors can materially influence how a claim is assessed and ultimately resolved.
Practical Considerations
When placing construction PI risks, it is important to consider not only whether cover exists, but whether it aligns with contractual obligations. Key areas to review include:
- The nature of design obligations assumed
- The extent of any fitness for purpose wording
- Consistency of cover across the contracting chain
- Adequacy of limits relative to project exposure
Addressing these issues at placement stage can help reduce uncertainty at the point of claim.
Conclusion
Claims of this nature are not uncommon. They frequently arise on standard projects where contractual and insurance positions have diverged over time.
Understanding how liability is assumed and how it interacts with PI cover is essential to managing these exposures effectively.