Owner’s Protective Professional Indemnity

Expansion project shrinks hospital’s bottom line

An NHS trust awarded a contract for the design and construction of a two-year, £150 million expansion to its children’s a hospital wing to a Design & Build (D&B) contractor. The D&B contractor was responsible for procuring the entire design team and was required by the owner to evidence £5m in Professional Indemnity limits from its annual practice program. The project took three months longer than anticipated and went over budget by £10m. Along with the delay and cost overruns, numerous other problems were discovered in the HVAC and electrical systems all attributable to the design team. The total damages alleged by the owner were £17.5m.

During discovery it was found that the D&B contractor only had £4m remaining in its practice professional indemnity policy because cover was aggregated in the policy period and erosion had been incurred from claims on other projects. The other two liable members of the design team (the mechanical and electrical engineers) each had their full limits of £1m remaining. However, after defense costs eroded the remaining limits during litigation, only $5 million in combined policy limits were left from the D&B contractor and the design firms. Furthermore, it was found that the firms had little or no assets to collect beyond their professional liability policies. The medical center settled immediately for the £5m in policy limits and incurred a £12.5m loss to its bottom line.

The purchase of an OPPI policy by the medical center with limits of £15m would have allowed them to collect the remaining damages under that policy.

University slowed for autumn semester

A growing university commissioned the construction of a new Hall of Residence and cafeteria building. The university was only able to secure £5m of professional indemnity limits from its lead design professional for this £75m expansion. The project began in May and was supposed to be completed by August of the following year in time for the new semester. Once construction was completed, it was found that the foundation had begun to crack, there was excessive settlement of walls and other structural damage because of expansive soils moving beneath the slab-on-grade-foundation design. The owner sued the geotechnical professionals for damages of £10m for the re-work associated with the improper foundation design and economic damages as the university had to suspend the autumn semester by two months. During litigation the geotechnical consultants were found liable and still had the full £5m in limits available; however, erosion of limits due to defense costs left the University with only £850,000 available for the damages component of their claim.

The university purchased a £10m limit OPPI policy at the start of the project and was able to retrieve most of their remaining loss under an OPPI policy.

High life apartments turn into dead space

The owner of an older manufacturing facility decided to retrofit the building into high-end apartments and construct 10 more stories above the current three-story building. The 200-unit project was estimated to cost £150m and the prime design firm was required to bring £5m in Professional Indemnity limits. The project had many issues, but the most significant were the design defects in the units which led to water intrusion and mould. These defects related to window flashings, the HVAC ductwork, the roof and exterior façade. The claims against the design firms included property damage, cost overruns, bodily injury due to the mould and economic damages as the owner was not able to sell all of the units, and the units depreciated substantially. All of the design firm’s £5m in limits were available, but this did not even come close to covering the £30m in damages alleged by the owner.

In this case, design defects led to damages exceeding the design firm’s £5m Professional Indemnity limit. An OPPI policy would have provided additional coverage for the £30m damages, including property damage, cost overruns, bodily injury from mould, and economic losses from unsold and depreciated units. Thus, an OPPI policy would have offered crucial financial protection in this situation.