Tips from your broker - THINK YOU HAVE ERRORS & OMISSIONS COVER UNDER YOUR GENERAL OR PUBLIC LIABILITY POLICY? THINK AGAIN.
Unfortunately, not all Errors & Omissions cover is created equal. If your public liability insurance includes a clause called Errors & Omissions Liability you need to read what it actually covers. More than likely this simply refers to a standard clause for free advice you give, or medical treatment you might give in an emergency. All policies have it, just under various names.
It is NOT the Errors & Omissions Indemnity (E&O) cover you may have heard about and that builders should have. E&O covers your liability for mistakes, or breaches of your duty of care, that you’re held responsible for and that cause clients (or other third parties) a financial loss. If in doubt, call us.
E&O is equivalent to Professional Indemnity insurance that other professionals have, including your architect, engineer, accountant & lawyer. And in our view it’s now needed by builders too.
For more information on E&O cover visit: www.cbainsurances.co.nz/eando.
Here's the crux of it: IF YOUR COMPANY DOESN’T HAVE A CONSTITUTION ITS INSURANCE COVER MAY NOT PROTECT YOU AS A DIRECTOR OR EMPLOYEE.
More than likely your company has a number of insurance policies, including public and statutory liability, that state they also cover directors, officers and employees of the company for their liability. Great, you may think, if I’m pulled into a legal case in my position as director, the company’s insurance will also cover my liability.
Unfortunately, if your company does not have its own constitution the policy could be invalid when it comes to covering directors & officers. This is because the default provisions of the Companies Act 1993 will apply if you do not have your own constitution, and these default provisions prohibit the company from arranging insurance for a director or employee of the company. The Act doesn’t state what happens if you have arranged such insurance without a constitution that allows you to do so, but it could potentially give an insurer grounds to decline a claim on this basis.
Check your company’s records via the Companies Office website to see if you have a constitution filed. If not, you can buy a standard form one online, or speak to your lawyer about writing your own.
The long and the short: IF IT IS, YOUR PUBLIC LIABILITY INSURANCE MAY NOT COVER IT
Here's an example of a real claim that was declined by an insurer.
"My client is a builder, contracted to provide $400,000 of building services to a principal to complete his house. The plumber contracted by my client supplied a faulty product which leaked and caused some damage. Leaving aside the subbie's liability, the insurer has declined by client's public liability claim on the basis that the whole house is his product, and according to the policy wording there is no liability cover for damage to his product. If this is the case, every builder in the country has no cover for damage to any house he is building, even if he is building from the ground up."
And here is the response from an insurance law specialist.
"The technical position under the policy depends almost entirely on what the definition of "product" is under the policy. That definition often refers to something constructed by the insured. The key issue is that broadform/public liability insurance only covers liability for damage resulting from what the insured sold, supplied or worked on. The worth of the cover varies depending on the nature of the insured's business. On the one hand, if the insured is an electrician, the cover is meaningful when he negligently installs a switchboard in a large warehouse that subsequently burns to the ground. The switchboard is his product and liability for the damage to it is not covered. But the rest of the warehouse is resultant damage to that product and so there is potentially cover for it. On the other hand, if the insured is the head contractor that constructed the whole warehouse and negligently burns it down (ignoring contract works insurance for the moment), the whole warehouse is the insured's product and there will be little meaningful cover unless the fire spreads beyond the warehouse to neighbouring property."
What does this mean for builders?
Fortunately, CBA Insurances has been placing its clients' public liability insurance with a specialist construction industry insurer for many years, and their policy wording specifically addresses this issue. Under this policy, a house being built would not be considered the "Insured's Product" and would be covered in the event of a claim like the one above.
Some insurers have now copied this approach, so cover for builders is improving, however many builders are still unaware of how their own insurance responds in this situation, and that cover which better suits their business is available. Our advice is to read your policy wording, paying particular attention to the definition of "Insured's Product" and contact your broker or insurance adviser to seek assurance on this point.
Source: IBANZ iNavigator (www.inavigator.co.nz), published in CoverNote magazine, September 2015, abridged.