This article is for the benefit of all concerned, particularly customers and brokers, who deal with professional indemnity policies for construction projects.
Usually, the project professional indemnity policies have a bad workmanship exclusion. This is because the objective of a professional indemnity policy is to cover wrongful acts in the discharge of professional services by an insured. Workmanship such as physical construction and manual labour is not something related to the rendering of a professional service. These are in the form of business or trade risks and covering them under a professional indemnity insurance, would tantamount to a work execution guarantee, which is not the objective of the insurance coverage granted.
Types of bad workmanship exclusions:
There can be two types of such exclusions
(1) total bad workmanship exclusion
and
(2) limited workmanship exclusions.
The language can typically be as under:
Total bad workmanship exclusion: “This policy will not indemnify the Insured in respect of any cost to repair or replace faulty workmanship in any construction, erection, fabrication, installation, assembly or manufacturing process performed or provided by an Insured, including materials, parts or equipment furnished in connection therewith.’
Limited bad workmanship exclusion: “The Company will not cover the Insured for any Loss, Defence Costs or any other amounts insured under this Policy which arise out of or are in any way connected with any construction, assembly, installation or maintenance unless it results directly from an act, error or omission of the Insured in the provision of Professional Services.”
Limited bad workmanship exclusion is decidedly better than the full bad workmanship exclusion.
To give an example, pouring concrete comes under workmanship and providing advice or specification as to how such pouring needs to be done becomes professional service. The former cannot be covered, but the latter can be.
With a full bad workmanship exclusion, the damage due to bad pouring of concrete would be excluded, regardless of whether it was done as per design specification or not.
However, with a limited bad workmanship exclusion, the damage would be covered if the design which provided for the pouring was defective, but execution was done as per specifications.
What is the problem with the bad workmanship exclusions?
The bad workmanship exclusion pre-supposes that there is a fine distinction between “hard” and “soft” parts of a construction project, so that the professional indemnity insurance cover can be limited to the latter alone.
Unfortunately, this is wishful thinking. The demarcation lines are often blurred.
Besides actual construction or execution, any construction project consists of the following:
1. Feasibility studies
2. Analysis
3. Project Design
4. Quantity surveys
5. Drafting
6. Technical calculations
7. Specifications
8. Supervisory activities such as project management, construction management and time flow management.
Now, it is easy to say that all of the above soft parts of the project would be professional services and all the hard stuff of actual construction is workmanship. So anything the folks at the site do is all workmanship. But in the real world of construction, they can be intermingled.
Assuming there is a tunnel boring project and there is some unexpected geology experienced. The site engineers choose to make some modification to the design specification and address the situation on hand, rather than having the matter run upstairs for a revision in the design approved.
In such a situation, if there is a trigger for a claim, then would it come under the professional service or bad workmanship?
One view is that design choices left to the good sense of the site personnel shall also be professional service in which case the claim becomes payable. But in case the insurer doesn’t agree with this and holds that design constitutes the document approved by the central design office for the project, the claim becomes untenable.
Conclusion:
Professional indemnity policies, particularly those covering construction projects, need a careful analysis of the activities involved and the respective ownership of such activities. There has to be a clear matching of various construction related activities with what constitutes professional service and what does not. If this is not done, there can be disputes and disappointments at the time of claim. Further, the customers must understand and brokers must explain to them, the extent of professional indemnity insurance coverage available under the policy, so that uninsured risks are not assumed to be insured while executing projects.
