This case study is an anonymised composite based on publicly reported commercial insurance claim patterns. It is not actual Apex client data and does not constitute legal or insurance advice. Names, locations and identifying details have been changed. Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority, FRN 724952.
A specialist mechanical and electrical (M&E) building services contractor based in the West Midlands, around 45 staff, turnover £8.6m. The firm carries out heating, ventilation, plumbing and electrical installation across commercial fit-out, healthcare estate and small-scale industrial projects. The business holds combined liability cover (PL/EL/Products) and a separately placed professional indemnity policy with £2m limit covering its design-and-build services.
Seven years after completing a £1.8m heating and hot water installation in a 90-room budget hotel in the Midlands, the hotel operator’s facilities team identified a pattern of failures across the property. Hot water cylinders in three of the seven plant rooms had developed catastrophic internal corrosion; two had failed completely with major water damage to adjacent guest rooms, and the others were judged to be at imminent risk of failure. The hotel commissioned a forensic mechanical engineer who concluded that the cylinders had been installed with incorrect anode protection — sacrificial magnesium anodes had been fitted where the water chemistry (the property was on a private borehole supply with elevated chloride content) required titanium impressed-current anode protection. The original design specification had identified the borehole supply and the elevated chloride; the design intent had been for impressed-current protection; the installed cylinders had magnesium anodes.
The firm’s records of the project, seven years on, were partial. The original project manager had retired and the relevant detailed records had been archived. The installation supervisor was traceable but had no clear recollection of the specific cylinder specification decision. Site photographs from the installation phase confirmed the cylinder model installed but did not record the anode specification at that point. The “as-built” documentation provided to the hotel at handover described the cylinders by model number but did not record the anode specification.
The hotel served a claim letter on the firm pleading defective workmanship, breach of contract under the Sale of Goods and Services Act 1982 (as it then was; now the Consumer Rights Act 2015 for B2C work and Sale of Goods and Services Act elements for B2B) and breach of duty under the Defective Premises Act 1972 section 1.
The hotel’s pleaded loss was £840,000: cylinder replacement programme across all seven plant rooms £320,000, water damage reinstatement and guest compensation £180,000, business interruption from 26 room-nights lost during the failure period £60,000, professional fees £40,000, and an estimated future provision for the remaining cylinders £240,000.
The limitation analysis was a central issue. The installation had been completed seven years and four months before the claim letter. Under the Limitation Act 1980 section 5 (simple contract), the primary six-year period had expired. Under section 14A, the claimant could seek to rely on the “date of knowledge” extension, which would put the limitation period at three years from the date the defects were reasonably discoverable — arguably the date of the first cylinder failure approximately five months before the claim letter. Under section 1 of the Defective Premises Act 1972, a separate cause of action ran to twelve years from completion (recently extended to thirty years for relevant building work under the Building Safety Act 2022, although that extension applies to specific categories of building and dwelling that did not include this hotel).
The substantive defect allegation was essentially uncontested — the wrong anode specification had been fitted. The defence question was whether the firm was liable for the design decision or merely the installation. The original project documentation showed that the firm had been engaged on a design-and-build basis with the cylinder selection within its scope of design responsibility.
The PI policy at the time of the alleged defect, and the PI policy in place when the claim was made, were both written by the same insurer on a claims-made basis. This was fortunate — a change of PI insurer over the seven-year period would have created a contested question of which policy responded. The PI policy in place at notification had a £2m limit and a £25,000 each-and-every-claim excess and was the correct policy to engage.
The combined liability policy was put on notice separately for the consequential damage element (water damage to guest rooms, guest compensation), but the products / completed operations exclusion under the standard combined liability wording engaged on the cylinder defect itself, leaving that part of the claim within the PI policy’s scope.
Notification was made within seven days of the claim letter. The PI insurer instructed a specialist construction PI defence solicitor and a mechanical engineering expert. The expert’s report broadly accepted the claimant’s expert’s findings on the anode specification but identified arguments on the contributory contribution of the borehole supply maintenance (the hotel’s own water treatment chemistry had been varied over the seven-year period, which arguably accelerated the corrosion process).
The matter settled at mediation approximately fourteen months after notification at £520,000 plus claimants’ costs of £120,000, with the firm’s PI policy responding to indemnity and the combined liability policy contributing approximately £80,000 to the consequential damage element. The limitation point was argued but not decisively determined; the parties’ settlement reflected commercial appetite to avoid a full hearing.
The firm’s PI policy renewed at the following renewal with a 56% premium increase, a £50,000 each-and-every-claim excess, and a requirement to disclose all design-and-build M&E installations completed in the previous ten years. The firm reviewed its as-built documentation practices and instituted a new requirement that all material design decisions be recorded in a “design record file” retained for fifteen years from project completion. The combined liability policy renewed with a modest 8% increase.
A subsequent independent review of the firm’s design-and-build M&E work identified two other projects with potentially similar anode specification issues; the firm proactively offered to remediate these at its cost in exchange for a contractual release. Both were accepted at relatively modest cost.
The intersection between design-and-build work and long-tail defect claims is one of the most challenging areas in construction sector insurance. First, professional indemnity cover should be maintained on a continuous claims-made basis even after a firm has ceased trading or wound down a particular service line — “run-off” cover is essential and is the only way to respond to claims that surface years after completion. Second, the limitation analysis under the Limitation Act 1980 and the Defective Premises Act 1972 is materially different for different categories of work — the Building Safety Act 2022 has introduced thirty-year retrospective limitation for certain residential building work, and the implications need to be understood for any work that might fall within scope. Third, design-and-build records have to be kept in a form that survives staff turnover and archiving conventions — a “design record file” with material decisions documented is essential. Fourth, the products / completed operations exclusion under combined liability cover means that defect claims sit primarily with PI cover, not PL cover, and the PI limit needs to reflect the realistic quantum of defect claims in the firm’s service lines. Fifth, voluntary remediation of latent defects identified internally is increasingly preferable to waiting for claimant solicitors to find them; the commercial economics typically favour the proactive approach.
We would have benchmarked the firm’s PI limit against the realistic quantum of defect claims in its M&E service lines at the previous renewal, and would have reviewed the limitation implications of the Building Safety Act 2022 for the firm’s residential work. The “design record file” recommendation is one we make at most M&E PI renewal reviews. At notification, we would have ensured that both the PI and combined liability insurers were engaged correctly with the correct allocation of indemnity and defence costs across the two policies, and would have coordinated the expert engagement so that the firm’s own mechanical engineering expert was instructed in parallel with the insurer’s.
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