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Professional Indemnity Insurance set to soar

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Architects should brace themselves for a ‘significant’ leap in the costs of Professional Indemnity (PI) insurance from the end of next year, a leading insurance broker has warned.

Paul Berg of Griffiths & Armour said that architects ‘were burying their heads in the sand’ if they did not start to prepare for a hardening insurance market and an uncertain future – caused in part by the credit crunch.

Other sources indicated that PI cover could double or even treble, meaning that a practice with a fee turnover of £1-2 million might see its annual PII premiums rise from £20,000 to nearly £40,000.

But one small London-based firm, which currently pays £7,000 a year said a tripling of PI, ‘would possibly put us out of business’.

And Moritz May of London-, Berlin- and Kiev-based M2R told the AJ: ‘Our business will definitely be affected. Doubling of PI would be hard, but trebling would be very bad news.’

Berg said that as capital becomes less widely available, the big insurers are likely to suffer significant financial exposure ‘through a combination of increased claims, an erosion of balance-sheet strength and reduced investment income’.

To guard against a similar scenario to 2001, when around 60 insurance companies and syndicates withdrew from the PI market, those insurers could either raise premiums or lower the extent of the coverage. In 2001 insurers were faced with a combination of ‘inadequate levels of premium, deteriorating claims experience and diminishing investment returns’, said Berg. This led to a hike in costs that took four years and a strengthening economy to recover from.

Berg warned that practices shouldn’t look to decreasing premiums to control costs. While premiums may seem expendable in a tight market, historically more claims are filed when construction activity is reduced.

‘Any significant saving in cost at this point is likely to come at a price,’ he said. ‘There is potential for difficulties after claims are notified leaving a practice potentially exposed to uninsured liabilities.’

Adrian Dobson, the RIBA’s director of practice, agreed the premiums were likely to go up. He said: ‘Premiums have been going down over the last three or four years – so the only place for them to go is back up.’

Read Griffiths & Armour’s appraisal of the potential impact of the credit crunch here.

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