The pitfalls of not purchasing professional indemnity insurance: The struggles of the construction industry in the current economic climate

The economic crisis in South Africa has seen the construction industry struggling, with several large construction companies filing for business rescue during the course of the year.

 

The economic crisis in South Africa has seen the construction industry struggling, with several large construction companies filing for business rescue during the course of the year.

The construction industry functions in ebbs and flows, but with the current mix of high levels of government debt, a dejected economy, uncertainty, and low infrastructure-spending, new contracts are drying up. This has resulted in jobs lost, diminishing talent and highly skilled professionals leaving the country.

The repercussion being an adverse effect on quality as professionals struggle, under increased pressure, to reduce costs and work within the constraints of ever tightening budgets.  This has resulted in poor workmanship, unsafe structures, increased risk, disputes and claims for damages.

Lisa Swaine, a partner at Webber Wentzel, revealed that there has been a significant increase in Professional Indemnity claims in the last couple of years, particularly in the built environment.

Barriers to quality are noticed in procurement, design and construction. In the current and competitive tendering environment, professionals and contractors are signing onerous contracts with high emphasis on price and shortened project periods. Design is fraught with inadequate detail and specification, the deployment of often unsupervised, cheaper junior professionals on projects, and poor design co-ordination. The construction industry is plagued by skill shortages and a lack of skilled supervision and quality control. Together with the degradation in quality is reputational damage as companies are slated in the media. And of course, the knock-on effect of a damaged reputation is financial.

Swaine spoke of numerous professional indemnity claims involving professional consultants providing services on poorly co-ordinated and managed projects, with inadequate documentation, information, detail and specification, restricting work, altering design, limiting supervision and working with other professionals and contractors equally constrained by clients' shortened project times and restrictive budgets. As quality is fundamental to the design process and ultimate construction, it goes without saying that it is destined to deteriorate if professional services are unduly hindered, restricted or curtailed. Disaster strikes, projects fail, and professional consultants are amongst those in the firing line. Claims usually run into many millions and very often into the billions.

As projects are few and far between and professional fees earned are being reduced, professionals find themselves taking on as much work as possible to stay afloat and this is when errors or omissions are most prevalent.

With the looming economic crisis we often see professionals cancelling their insurance or reducing their cover (in order to save money), however, this is the time when professionals should be more cognizant of the risks that they face, the potential damage to reputation in the instance of a professional indemnity claim, as well as the time spent trying to resolve the matter.  Purchasing and maintaining your professional indemnity policy will provide professionals with the necessary peace of mind required – particularly when the crisis occurs!

The question is, can a professional afford to NOT purchase sufficient professional indemnity, particularly in what is currently a dire economic climate?

Camargue Underwriting Managers offer professional indemnity insurance for various professionals in the construction industry. The insurance cover includes various risk management services as a value-added risk benefit to policyholders such as contract vetting and assessment, crisis communication, private arbitration services as well as a cyber vulnerability scans.

For more information on Camargue’s professional indemnity cover, email us at Pindemnity@camargueum.co.za or call us on 011 778 9140.

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