Risk by design
Insurers may view electrical design in a way that threatens contractors. Wes McKnight offers some protection.
Imagine a scenario in which a fire started in a client’s bedroom.
No one was hurt, but half the house was lost. Investigations begin.
There’s a suggestion that your cabling was the cause. You call your public liability (PL) insurer to say there may be a claim. Reams of paperwork are filled out. Meetings are held.
You continue running your business on the understanding that the insurance company will cover any liability.
Then there’s a call from the insurer. It is considering that a cable sizing issue caused the fire.
You argue that you’ve been doing this work for years and never had a problem. They say the room was at the back of the house and there was voltage drop you didn’t consider in calculating the cable size.
It is then pointed out that your public liability policy has an exclusion for errors and omissions in any calculations or formulas.
And it hits you. You aren’t covered. You’ve paid years of premiums believing you were protected for all aspects of your normal contracting business.
This exclusion does appear in many popular policies. A few years ago I was made aware of it in my own policy.
So much of our daily work is based on formulas and calculations. So how could insurers exclude this aspect and still market the product to our industry?
I began to ask how the typical electrical contractor could be protected from this kind of exclusion.
The reasoning among insurers is that calculations and formulas constitute ‘design’ and should be covered by a professional indemnity (PI) policy. However, PI is hard for electrical contractors to get if they haven’t studied or graduated from a university.
I eventually found a sympathetic insurance broker who understood the issue. The solution was to track down a PI underwriter that would create a policy for electrical contractors.
Now, take the example above and imagine that the contractor had PI insurance with one underwriter and PL insurance with another. Which policy covers the contractor?
The PI insurer says calculations and formulas are a normal part of business and not design. The contractor is trained and licensed to deal with such matters.
The fire claim is not, for example, the same as failure to do a lighting level calculation, thereby causing an accident due to insufficient light.
The PL insurer says any errors in calculations or formulas are excluded.
After many conversations with insurers, brokers and legal people no one could tell me how the contractor would be covered. All they could say is that there would probably be legal action to determine which policy was relevant.
The challenge was to find an underwriter that would cover PL and PI risks for an electrical contractor.
The insurance industry was and is struggling to understand our industry – how we are trained and what we are trained in. It comes from the historical belief that PI strictly covers advice and design, yet there is an element of design in everything we do.
We design cabling systems; we calculate cable sizes, loads and voltage drop, fault loop impedance, fault current, etc.
Included in our apprenticeship and our contractor training are modules that cover the essential knowledge and tools for running our businesses. The insurance industry needs to understand this.
From my research on these issues it seems that any advice a contractor gives is probably not covered under a normal PL policy. If a contractor advises a client to request a certain supply from a supply authority, and that supply load turns out not to be enough, the client would probably have to pay for an upgrade. The PL policy would not cover such a claim, and the contractor could well be liable.
However, it’s a grey area. There is some thought that the contractor could not be held responsible if there is no charge for advice or calculations.
To be safe, don’t use the words ‘advice’, ‘advise’, ‘calculating’, ‘measuring’, etc. But if you have PI, it’s clear that you are covered for an interpretation of ‘design’.
It becomes even more frustrating for the commercial electrical contractor when the electrical specification is prepared by a consulting engineering firm.
Invariably at the beginning of this document there’s a catch-all clause to the effect: “Notwithstanding details in this document the contractor shall ensure that the installation is fit for purpose and complies with all necessary requirements.”
The fact that electrical contractors line up to sign such a document – essentially owning risk that the electrical consultant has been paid to manage – bemuses people in other industries.
There is a look of incredulity on their faces when I explain that we estimate the work from these documents. Yet if something is missing or some material specified does not suit the project or meet the client’s requirements, the contractor can be asked to remedy the situation – and cover the cost.
Knowing this risk why do we sign up? Worse still, why would an insurer cover a contractor exposed to such uncontrollable risk?
Electrical contractors sign a contract tied to a set of documents that someone has compiled based on requirements from the client. This is information that the tendering electrical contractors do not have. All they get is an interpretation of the client’s needs from which to fix a cost.
If that interpretation is wrong, the electrical contractor can be asked (under the specification and the contract) to rectify.
If the design contravenes AS3000, AS3008.1, AS2293 – or any Australian Standard – the contractor is lumbered with the responsibility for ensuring the installation complies.
The insurance industry tells contractors they don’t need PI because they are installing to a set of design documents. Consultants are paid by the client because they are selling design and they have PI cover.
However, it can be argued that the real risk sits with electrical contractors, and they are almost always not covered for it.
On big projects, risk assessments are completed by everyone in the chain to avoid any weak links in the project delivery team.
The main concern relates to projects in the open tender market, and projects designed by electrical consultants. This is where contractors are at substantial risk every day.
The answer? Ensure that your tender document excludes the catch-all clause mentioned above. It is numbered something like 1.1.2 or 1.2.1. It is placed right at the front of the consultant’s documents and is easy to find.
The risk outlined is real, but it’s controllable by having appropriate PI cover or by excluding the offending clause.
We need to understand who the designer is and where the responsibility sits.
Our licence says we hold the risk because we install and connect. That being the case, we need the ability to push back under any contract and get paid for any upgrades, changes or variations required to comply with Standards.
A good relationship with an insurance broker is essential. Use the services properly and ensure they understand your business, your clients and the type of work you do.
Their role will allow you to sleep at night.