Professional indemnity premiums are soaring for consultants, hitting the biggest on their bottom line and threatening the viability of smaller firms. But as Victoria Madine discovers, it's still possible to find a better deal.
Life is hard for sapling companies 鈥� and it just got harder. As if fighting for their place in a business climate fraught with uncertainties wasn't enough, small consultants are facing increases of 60% and more in their professional indemnity insurance 鈥� enough to cripple a small firm or lone practitioner.

Companies need PI cover in case a client chooses to sue over a problem with their products or services. But a huge hike in premiums could knock a small company flat, as one solo architectural practitioner discovered when he went to renew his insurance this year (see "John's story" below). John's insurance company asked for a rate that amounted to 25% of his turnover. This was only partly because of a claim against his practice the year before. Consultants across the board are seeing their rates shoot up, even if they haven't had any claims against them.

The RIBA Insurance Agency says rates have risen about 25% for architects and the Association of Consulting Engineers' PI scheme reports premiums up 50% 鈥� although the largest rise reported to the RICS was 350%.

Most consultants are affected. All practising architects are required to take out PI. Surveyors must carry it and, whereas consulting engineers are not required to, few would risk facing legal action without it.

So why the massive increase? And should you resign yourself to paying it? Insurance brokers agree that premiums were too low for too long in the construction industry, and 11 September has acted as a catalyst to speed up increases. Ashley Brewer, director at the RIBA Insurance Agency, explains: "Premiums had been going down since the mid-1980s because of competition in the marketplace. Then 18 months ago premiums increased because Independent Insurance, which offered cheap construction insurance, collapsed."

Brewer says 11 September not only shook people's confidence in the safety of buildings, it caused a crisis in the reinsurance market 鈥� the insurers' insurers 鈥� as insurers faced a bill of anything between 拢30bn and 拢100bn.

The RIBA has expressed concern about the effects of the rises on successful small businesses that cannot afford to pay more for PI.

Some professionals in these firms are convinced they are paying for the huge, high-profile mistakes of larger firms. Fiona Griffiths, secretary general of the Association of Consultant Architects, says designers do not have to accept these extortionate increases. She advises consultants to shop around before making any settlement. The ACA's PI broker, Alex Finch and Company, was able to offer John's one-man architectural practice a "dramatically" lower premium than his own broker, despite the fact that both were underwritten by the same insurance company.

Professionals in small firms believe they are paying for the huge, high-profile mistakes of larger firms

Crispin Matson, managing director of M&E consultant Rybka, is also determined to get a better deal: the firm's PI costs have risen 60% on 2001. Rybka is a member of the Association of Consulting Engineers' PI scheme, run by insurance broker Griffiths and Armour. Matson is using his overseas links to find a more manageable rate. "We're looking to see if we can get a better group rate with our Toronto office. We've made some initial enquiries with two firms, and they're interested. One firm is in Canada, one in the UK," he says.

What about the future of PI? The ACE believes a project-based approach could be a viable alternative to the current system, whereby each consultant on a project has its own cover 鈥� the ACE argues this encourages litigation.

"To help break down adversarial relationships the whole project team should take out insurance. The concept is still in its infancy, but we are finding support for a new approach to insurance 鈥� high premiums is the most serious issue facing consulting engineers today," says an ACE spokesperson.

It is possible to take out project-based insurance, but as Peter Morris, partner at solicitor Lewis Silkin, explains, this is not a straightforward solution. "There is an option to take out 'decennial' insurance, which offers project cover for 10 years. This means the client can claim directly for any problems with the structure such as weatherproofing. But whenever I've seen this type of insurance used, there has always been a 'subrogation' clause, which means the client can make a claim against the professionals involved with the problem."

Morris can see little future for project-based insurance, though he believes it would be a fairer system. "The approach would better reflect the amount of risk taken on by a consultant," he says, "rather than the present system in which there is a set premium for the year no matter how many projects you tackle. But it would take a huge turnaround in insurers' thinking. It would have to be compulsory, which means the government would have to intervene,"

Mark Whitby, president of Institution of Civil Engineers, also wants to see change. He believes that firms should be risk-rated.

"Then the Office of Government Commerce should demand that only consultants with a good risk rating are used 鈥� though I'm not suggesting this rating system should be anything other than voluntary," he says.

John鈥檚 story: an insurance nightmare

John, a chartered architect and sole partner of a rural practice in the north of England, recounts his experience: 鈥淚 had a claim raised against me in 1998 by an American for whom we did some renovation work. The contract went badly, largely because a 拢60k contract became confused with 拢50k of direct instructions to the builder from the client. 鈥淲e were not at fault, except that perhaps we should have walked away when the client started running things his way. 鈥淲e believed our contract was a good one. Unfortunately, it became clear that litigation was the client鈥檚 favourite pastime in the US. The builder, who was culpable in many respects, was attacked first. He closed down his company and went out of business. 鈥淭hen the client moved on to me and raised a vexatious claim for the full amount of my PI insurance cover (which amounted to 拢250k). This was thrown out of the Sheriffs Court but was raised again in the Court of Session, naming me as principal. 鈥淭he subsequent year was not one I would like to repeat. It became the equivalent of a full-time project with no income and I was very ill for a large period of the time. 鈥淢y insurers appointed a legal team who rocked with laughter at the client鈥檚 absurd claims and gave me great confidence that we would ultimately be successful. However, in the course of many months of work, the legal team ran up a huge bill and I assume it was a matter of cutting their losses when the insurers considered the likelihood of being able to recover these costs from the client, a US resident. 鈥淭he agreement to settle was a bitter pill. I saw none of the fees I was still owed and obtained no reimbursement of expenses for my work in defence of our position for the insurers. Most importantly, my name was not cleared. 鈥淪hortly afterwards, I had to renew my insurance policy. My new quotation doubled the excess and halved the cover. I became very angry. However, this was as nothing to my reaction when this year the renewal further quadrupled my excess and my premium, based on a review of the settlement in regard to this case. This made my insurance untenable. 鈥淚 did eventually find another insurer who offered me reasonable terms but I was still penalised substantially for the claim. I also had to work very hard to persuade the brokers to give me cover at all 鈥� initially they declined.鈥�