Engineering New Zealand is frequently asked why we recommend retaining a statement of $200,000 PI insurance minimum on our producer statements. This article explains why PI insurance is required, why we recommend not changing the standard amount on the producer statement, and possible alternatives to increasing the minimum.

Why do engineers have PI insurance?

Professional Indemnity Insurance protects firms, and individuals within the firm, against the financial effects of civil claims and legal defence costs. An engineer's most significant potential liability is to their client or a future third party. The client is usually someone other than the local council or building consent authority (BCA).

When issuing a Producer Statement, the engineering firm states that it has Professional Indemnity Insurance to a minimum of $200,000. This value is standard and unrelated to construction costs. It is also unrelated to the level of potential liability to the engineer’s client. The statement’s primary purpose is to confirm to the BCA that the engineering firm is reputable and does have PI cover. In relying on the Producer Statement, the BCA accepts that the total maximum amount of liability arising from the statement in relation to the building work is limited to $200,000.

What are the causes of claims?

Claims do not necessarily only arise when an engineering firm is incompetent or because it has made an error of technical judgement. A common origin of claims is a breakdown in communication between the engineering firm and the client, a contractor, or an architect.

Why limit the liability cover to $200,000?

The consultant's liability to its client is not limited by the amount stated on the producer statement. That liability is governed separately by the terms and conditions of the contractual relationship between the consultant and the client.

There have been many large insurance payouts recently, mainly due to natural disasters. Because of those increased claims, the cost of insurance is rising. As with most other businesses in New Zealand, engineering consultancies are typically small to medium-sized firms. Engineering New Zealand is already seeing significant difficulty in obtaining higher levels of insurance for those companies. If the amount of insurance required by the producer statement continually increased, the insurance cost would become untenable for many engineering firms.

Simply put, the amount of insurance available from insurance companies is limited.

Providing a level of fair insurance and liability to all parties is necessary. Engineering New Zealand works with the Insurance Council, regulatory authorities, and engineers to strike an effective, sustainable balance.

What are the alternatives to increasing insurance requirements?

Insurance is only called upon if there is a problem with a project. In effect, it’s the ambulance at the bottom of the cliff. A good question is, why is the BCA asking for higher insurance? Is it because of an increase in perceived risk? Is the design more complex than normal, or does it have a high consequence of failure?

Once you understand the perceived need, you can work to provide alternative solutions. For example:

  • Can you demonstrate robust quality assurance and quality control processes?
  • Can you work with the client and regulatory authority to select an independent peer reviewer for higher-risk or more complex projects? We recommend a peer reviewer be engaged at the project’s concept stage.
  • Can you increase the level of construction monitoring? Identifying critical work and monitoring its construction can provide additional assurance of compliance and build quality.

In Conclusion

Professional Indemnity insurance protects the engineering firm against financial and legal defence costs. The $200,000 minimum insurance shown on the producer statement series is only to provide the BCA with an assurance of the firm’s reputation and substance. The value is standard and unrelated to construction costs.

Because the consultant’s liability to their client is separate, increasing the amount shown on the producer statement form increases the insurance required by the consultant. Insurance costs continue rising, and the easy availability of insurance is decreasing.

The liability must be spread in a way that is fair to all parties. Increasing costs to untenable levels for engineering firms doesn’t provide a fair solution to an industry-wide problem.

Insurance is used when things go wrong – engaging in robust quality assurance and quality control processes, independent peer review of complex or high-risk projects, and additional construction monitoring are good alternatives to increasing insurance.