Insurance + Risk Services

How much Professional Indemnity cover does an engineer need?

“What limit of Professional Indemnity (PI) Insurance cover do I need?” You’re not alone, this is a question asked by a vast number of engineers when researching and requesting PI insurance cover. Unfortunately until delving deeper into the details of your business, the answer initially equates to “how long is a piece of string?”

This article explains key factors involved in assessing the level of PI Insurance you require, and how a specialist PI Insurance advisor at EngInsure can assist.


What does Professional Indemnity Insurance cover?

Any company or individual that provides professional advice or services can be held liable for financial loss that occurs as a result of an act, error or omission in carrying out their work.

PI Insurance is designed to provide you and your engineering firm with financial protection against claims alleging loss as a result of your professional advice or service.

PI Insurance acts to insulate you against this financial exposure and extends to cover legal defence and investigation costs incurred arising out of a potential claim or allegation.

Levels of cover can be purchased commencing at $1m and can range increasing upwards depending upon the requirements of your business, and any limit requirements which may be incorporated into your client contracts.

To read more on PI cover: Click here.


What determines the level of cover required?

Coverage requirements are different for everyone. Ascertaining the right level of PI Insurance for your business can be daunting and complex, particularly with the highly unique nature of projects that engineers undertake.

EngInsure’s specialist senior PI insurance advisor, has outlined key factors that play a role when determining a suitable level of PI cover:

1. Your occupation and engineering discipline 

Each engineering discipline and micro-discipline carries a different level of risk. The level of risk associated with certain business activities is important when considering how much cover is required. High risk engineering disciplines generally require a greater limit of PI cover, including legal defence costs, to ensure sufficient protection of your assets.

Business activities that are considered higher risk, are generally deemed so, because:

  • they experience PI claims at a higher frequency or severity
  • they tend to include high value projects / contracts that can lead to large losses and significant levels of compensation sought when errors are made, or
  • they encompass projects that have a high number of interested parties, and are therefore extremely costly with extensive legal proceedings when something goes wrong.

2. CONTRACTUAL and statutory requirements

Many engineering contractual agreements stipulate a minimum level of PI insurance cover as a condition of the contract.

Statutory requirements
Certain engineering disciplines are required by law to have a minimum level of PI Insurance in order to provide a professional service, for example to maintain Statutory Authority registration requirements.

It is important to note that while statutory requirements, or conditions imposed in a contract can help determine the level of PI cover needed, this is not necessarily an accurate guide. It is merely the minimum level of cover you must hold to perform work.

There are a number of factors to consider when making a decision on an adequate PI cover limit. It is worth speaking to a PI Insurance specialist who can help determine a suitable level of cover relative to your business risks outside of regulations and contracts.

3. The value of the contract / project

The value of your projects and contracts are a key determinant in how much PI cover you need. If your work forms part of a multi-million dollar project, and an error you make causes a major problem, legal action could be taken against you for the cost of the whole contract – not just your part in it. In simple terms: high-value projects and contracts need high-value PI insurance to protect you!

This concept also applies to smaller contract values. Your level of PI insurance may be less, but bear in mind, coverage levels are still affected by all the other variables discussed in this article.

4. The effect of inflation

PI Insurance coverage is provided on a ‘claims made’ basis of policy wording. A “claims-made” PI policy covers you retrospectively for all past engineering work performed after the retroactive date set out in the policy.

Essentially, this means that the current PI policy in place responds to any claim made during the current policy period, regardless of when your error or omission took place. It could be 15 years ago, but it is the current policy at the time you become aware of the claim that responds.

How does this impact the level of your PI insurance?

In many cases PI claims don’t emerge until a number of years after works have been completed. Even then, it is not uncommon to see liability claims take up to 8 or 10 years of legal proceedings before settlement is reached. This can have implications on your level of PI insurance. For example, if you are notified of a potential claim now and it takes 8 years to settle, your coverage now will need to account for what the final costs are in the future.

When setting your level of PI Insurance it is essential to consider all potential claims that might arise today; estimate the worst case scenario; and consider the effect of inflation on future costs e.g. interest rate increases, increased legal representation costs, changes in legislation and legal appeals, all of which can impact on the total cost of a claim brought against you, and your capacity to withstand the damages.

5. Your turnover or annual fee for service

Generally the higher this is, the more cover you will require. If you have a high annual turnover, you likely have a sizeable business with lots of clients, or a few very large high-value clients. In both scenarios there is a greater likelihood of claims occurring and/or for more money than a smaller business with fewer clients. Therefore, your turnover and/or annual fee income is a key factor in setting the right level of PI Insurance cover.

6. The types of clients you work with

Consider the size and sophistication of the clients you work with, and businesses you contract for. Are they large organisations with significant financial resources? Bigger companies are more likely to involve a legal team and pursue damages if there is a problem, whereas smaller businesses may be a little more ‘low key’. The type of clients you work with can have implications for the level of PI insurance you require.

7. contract indemnity clauses

Strong contract management & tightly written contracts can help to reduce the likelihood and size of claims for professional negligence. Having contract indemnity clauses, including those that limit or exclude your liability under contracts is a useful strategy for businesses engaged in high risk engineering disciplines, and in some cases can help to reduce the PI risk exposure and cover required.

How to obtain the right level of cover?

Asking a specialist PI insurance advisor can ensure you have the right level of PI insurance, and quality coverage behind you when things don’t go to plan.

An EngInsure advisor can assist in a number of ways.

  • We understand the scope of engineering risk across a number of specialist disciplines.
  • We provide specialist insurance advice & recommendations, assessing risk complexities on your behalf to ensure you receive quality insurance coverage at a level suitable for your exposures.
  • As professionals we take on your risk of making a poor insurance decision.
  • Our dedicated claims team will manage claims & advocate for the best possible outcome on your behalf.
  • We hold close relationships with specialist PI underwriters allowing us to negotiate the best PI policy terms and conditions on your behalf.
  • We only partner with specialist insurers who are in it for ‘the long haul. This provides you with security, stability, and consistency of coverage – a major factor in pricing and a long term ability to pay claims.

EngInsure are here to support you with important PI Insurance advice and solutions. For assistance on ensuring your PI Insurance cover aligns with your level of risk, please get in touch with one of our specialists:

T: 1300 854 251

This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 License Number: 229092 trading as EngInsure Insurance & Risk Services for further information or refer to our website.