Meridian Structural Engineering: Aggregate Limit and Collateral Warranty
Meridian Structural Engineering is a 30-person firm with $8m revenue. It holds professional indemnity insurance of $5m each claim and $10m aggregate, with a $250,000 deductible and a retroactive date of 1 January 2016. It has one outstanding claim on a $12m apartment project, reserved at $1.8m. It has now been appointed to certify the structural design of a 40-storey mixed-use tower with a construction value of $220m. The appointment includes a collateral warranty to the project funder and a 12-year design liability period. The firm's previous largest project was $40m. The insurer's PI treaty provides $5m per risk; facultative reinsurance is available but expensive. The broker asks whether the existing policy can simply be extended to cover the tower.
1. Assess the adequacy of the $5m each claim and $10m aggregate limits for the tower project. Show your reasoning.
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The aggregate of $10m is already reduced by the $1.8m reserved claim, leaving $8.2m. A defect in a 40-storey tower can generate remediation costs, temporary works, delay and professional fees far above $5m; a claim of $10m-$20m is plausible on a $220m construction value. The each-claim limit of $5m is therefore unlikely to be adequate, and the aggregate could be exhausted by one tower claim plus the existing apartment claim. The firm's previous largest project was $40m, so this is a step-change in concentration. I would require at least $10m each claim and $20m aggregate, or a project-specific excess facility, before agreeing to cover the tower.
2. Recommend terms for the tower: limit, deductible, retroactive date, and whether to exclude the project. Justify.
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Recommend $20m each claim and $20m aggregate for the tower, with a $500,000 deductible because the project is larger and more complex than the firm's normal work. Maintain the 1 January 2016 retroactive date, but confirm continuous cover and that the tower is written prospectively. Do not simply extend the existing $5m/$10m policy. If the firm will not pay for the required limit, exclude the tower by endorsement and return the appropriate premium, rather than allow a large limit mismatch. Check the collateral-warranty wording for limitation of liability and net-contribution provisions before binding; the insurer should see the contract, not just the project value.
3. Explain how the collateral warranty and 12-year liability period change the underwriting risk.
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A collateral warranty gives the funder a direct contractual right against the engineer, potentially broadening the parties who can claim and increasing the defence costs. The 12-year period extends exposure well beyond a typical six-year limitation period, so the claims tail is longer and the policy must remain in force or have an extended reporting period. The underwriter should check whether the warranty includes a limitation of liability, a net-contribution clause, and a prohibition on assignment. The risk is not just the tower's value: it is the combination of a deep-pocket claimant, a long tail, and a firm with limited aggregate left after the existing apartment claim.