The risks of sourcing insurance online

Every RICS-regulated firm is required to have professional indemnity insurance (PII), which is designed to cover any compensation claims and legal costs as a result of a professional making a mistake and a client subsequently losing money.

According to UK law, the only compulsory insurance for firms are employers' liability insurance for those that employ staff – even on a casual basis – and business vehicle insurance for those who use a car or van for work-related purposes.

There are, however, several other insurance types to consider when starting your own construction business, including business interruption insurance, business legal protection, insurance directors' and officers' liability insurance, material damage insurance and public liability insurance.

There is a tendency for small- to medium-sized enterprises (SMEs) in the construction and professional services sectors, particularly sole traders or companies comprising two or three employees, to source their insurance – compulsory or not – online, to seek the cheapest premiums, whether purchasing a package cover or an individual policy.

This means it is often purchased without full understanding of what cover has been provided, resulting in scenarios such as underinsurance or restrictive policy cover.

Misunderstanding the level of cover provided could mean the policy protection fails to indemnify the policyholder and could be the difference between posting a loss or profit at the end of the firm's financial year, or at worst, ceasing to trade.

Another common issue with sourcing insurance online is miscommunicating the business description and activities. Insurers must be informed of the precise work undertaken as they need to understand the risks they are covering. For example, is there any specialist activity in the build contract they should be aware of, such as basement works? If these types of activity are not disclosed to insurers then there is a major risk they will not be included in the insurance policy. In the case of basement works, the policyholder may be in breach of a working at depth condition.

Focusing on achieving the lowest price possible belies the significant risks in the construction sector. Ultimately, SMEs operating in the construction sector must ensure they obtain insurance protection that fulfils their needs, provides comprehensive risk protection and pays a premium commensurate to the risks. Any policy should be competitively priced and provided by a recognised insurer.

Ideally, engage with a specialist construction insurance broker that has a thorough understanding of the industry, including the activities undertaken, the possible risks and the parties involved and, on a more technical level, the standard forms of building contracts. Specialist construction brokers also provide an opportunity to discuss your business activities and clarify any uncertainties and queries before purchase. Both your broker and insurer will then have all the facts and a full understanding of your business, so you purchase the insurance protection that correctly covers your business.

Regular dialogue with your broker is necessary so they are kept informed of any changes to your firm's activities, such as business expansion, during the period of insurance. Many SME policies will have certain limitations not solely restricted to the cover offered. There may be limitations on contract value, turnover, number of employees, or the use of subcontractors. Making your broker aware of changes enables them to review cover options to meet the ongoing needs of your business.

You should look upon a specialist broker as your own in-house insurance adviser: someone who knows the insurance market and understands the intricacies of the construction industry.

Colin Donnellon is associate director of MPW Brokers a construction specialist broker owned by the Clear Group colin.donnellon@mpwbrokers.com

Related competencies include: Client care

RICS has a list of insurers that are listed to underwrite professional indemnity insurance policies of RICS member firms in the UK and Republic of Ireland jursidictions.

rics.org/insurerslist