Tensions in the Middle East: Implications for Professional Indemnity in the construction sector

On 12 March, the International Energy Agency reported that current conflict driven disruptions represent one of the most significant supply shocks in the history of the global oil market.

While such pressures are often analysed through a project finance or contract works lens, they also have significant implications for Professional Indemnity (PI) programmes. PI exposure arises not just from physical loss but also from allegations of negligence, inadequate design, inaccurate advice, or flawed project management.

In the current economic environment with unpredictable availability of materials and labour, and tight construction schedules, PI insurers are seeing both increased frequency and severity of claims relating to professional services.

This article examines how these systemic pressures continue to shape PI risks for construction-related professionals and highlights actions firms should consider during this period of uncertainty.

Cost volatility amplifies the consequences of professional error

Rising fuel prices affect the cost of materials, logistics services, labour and site operation. For professionals responsible for forecasting, advising, or designing, this volatility creates a significantly more challenging landscape.

Key impacts on professionals

Errors in cost estimates

In a sector which already operates on tight margins, even minor miscalculations now carry far greater consequences. Underestimating project costs can result in substantial disputes when inflation outpaces expectations, particularly where rising fuel costs directly affect operations and material pricing.

Inadequate advice relating to inflationary risk

Clients may argue that consultants failed to anticipate, communicate, or advise on inflationary risks associated with fuel dependent materials, transportation, or logistics. As construction costs surge, advisory errors become more visible and more expensive to resolve.

Design changes

Design adjustments can become significantly more expensive, increasing the likelihood of allegations relating to negligent design, specification errors, or coordination failures.

In an inflationary environment, the cost of remediating a professional error is rising exponentially which can directly increase claim severity. Professionals should therefore incorporate clear caveats relating to volatility and consider limiting liability within contractual terms. In addition, construction professionals should be looking at their own insurance arrangements and whether the limits they have historically purchased remain adequate, as both the cost of defending claims and severity of potential losses have increased.

Supply chain disruption and scheduling exposure

Geopolitical conflict increases the likelihood of sanctions, restricted trade routes and disrupted shipping lanes. These factors make lead times and availability increasingly unpredictable.

Common allegations which can lead to a PI claim include

• Failing to account for extended lead times when preparing programmes
• Specifying vulnerable or single source materials without advising clients of associated risks
• Inadequate contract administration regarding variations or extensions of time
• Incorrect sequencing assumptions or unavailability of critical machinery due to transport disruption

Delays of this nature often lead to substantial cost overruns. When contractual relief is limited, clients frequently pursue PI policies as an avenue of recovery.

Key considerations

Proactive negotiation of contractual terms, with transparent acknowledgement of potential risks, can meaningfully reduce exposure.

Heightened exposure for Design and Build Contractors (“D&B Contractors”)

Design and build models combine design responsibility with construction execution, creating vulnerability during market volatility.

Fuel price increases disproportionately affect D&B contractors due to heavy reliance on diesel powered plant equipment, transport and site operations.

Key exposures include

• Value engineering decisions prioritising short term cost savings over long term performance
• Design shortcuts or under resourcing driven by margin pressure
• Inadequate documentation around design modifications or rationale linked to price movement

Inflation often renders original specifications impractical, prompting mid project changes that generate disputes about responsibility and design intent. Clear documentation of all design changes, together with clarity around ownership and accountability, remains central  to avoiding and mitigating claims.

Increased disputes in a financially stressed environment

Economic instability typically increases the number of disputes in the construction industry. When developers or contractors face financial pressure, matters that may previously have been resolved commercially are more likely to escalate into formal claims.

Why PI claims rise during economic stress

• PI insurance becomes one of the few remaining avenues for recovery
• Decisions are reassessed through the lens of present financial strain
• Contract ambiguities become disputed when budgets are exceeded
• Cost saving behaviours, including deviation from the original brief, become contested

Communication and expectation management as critical risk areas

In volatile markets, the importance of clear and continuous communication increases substantially.

Typical allegations relating to poor communication

• Failure to warn of escalating costs, delays, or shortages
• Failure or contractual inability to update forecasts when new risks arise
• Inadequate advice relating to escalation clauses and contractual protections
• Unclear or undocumented recommendations

Weak governance around communication and document control significantly heightens PI exposure.

Key considerations to mitigate and defend claims

• Robust change-order sign off
• Clear reporting procedures
• Disciplined document retention practices

Increasing insolvency risk among contractors and consultants

The combination of energy-driven cost increases and geopolitical uncertainty has intensified financial distress across the construction supply chain. In 2023, construction insolvencies reached a 30-year high, with 4,371 firms failing driven by thin margins, labour shortages, and inflationary pressures.

How insolvency drives PI claims

• Insolvent firms cannot complete works, prompting scrutiny of prior design or advisory decisions. The cost of projects with replacement contractors is often significantly higher, leading to negligence allegations
• Projects may already be delayed due to underlying financial issues, creating further disputes particularly where QS assessments or valuations become central to determining loss
• Once a party becomes insolvent, commercial negotiation becomes impossible, leaving PI insurers as the primary target
• Third party rights against insurers can allow claimants to pursue insurers directly when the insured entity is insolvent

Financial resilience within supply chains is therefore a material underwriting consideration. Demonstrating how supply chain risk is assessed - including liquidity, stability and debt exposure can provide additional confidence to insurers.

How insureds can protect themselves

Many firms started to make changes following Brexit and Covid which highlighted the importance of a strong risk culture. This is critical to a firm’s ability to survive and thrive in an uncertain world. By fostering a robust risk culture, firms can adapt to changing market conditions, respond effectively to crises, and maintain operational continuity.

Key risk management practices include

• Strong internal controls and risk management frameworks
• Clear documentation of advice, assumptions, and recommendations
• Formalised change management procedures
• Detailed supply chain risk assessments
• Competence in forecasting and cost planning within contractual boundaries
• Robust contractual risk management (including escalation clauses and cost reimbursable mechanisms)
• Awareness of tender expiration risk in volatile markets
• Inclusion of contingencies for material cost fluctuations
• Continuous professional development and training
• Open communication and whistleblowing mechanisms

Conclusion

Energy market volatility and wider geopolitical uncertainty continue to influence the Professional Indemnity exposure profile of the construction sector.

While these forces originate outside the control of professional service providers, they create an operating environment in which professional decisions carry greater consequences, disputes are more frequent, and financial loss is significantly magnified.

For firms operating in this sector, resilience shaped by strong risk management, high quality documentation including a robust document retention policy, proactive communication, and robust contractual practices will be crucial to navigating the challenges ahead.