In the current landscape, architects and other consultants are becoming increasingly exposed to litigation and risk of claims arising from their contractual obligations. There is a general awareness in the construction industry about clients’ ability to commence litigation or make a claim from another party who might have caused them to suffer loss or damage as a result of some negligence or errors on the part of the consultant. Clients operating in this manner make it essential for consultants to have PI insurance in place when setting up a practice and necessary for it to be kept current even after retirement.
What is PI insurance and when do you need it?
By definition, PI insurance provides cover against claims for liability to a third party, as a result of loss suffered by the third party arising out of professional negligence of the consultant. It provides protection to those in the business of providing professional services from claims for damages that may arise from a negligent act or omission of the consultant or breach of a contractual term.
Generally, each PI policy lasts for a fixed period, usually one year. Near the end of the expiration of your policy, your broker will contact you to renew your policy. If you do not renew your policy and it lapses, this means that you will have no cover for any new claims that may arise from past or future work. This is the unique concept of PI policies, wherein PI insurance covers ‘claims made’ during the term of the policy, even if the negligent act or event occurred long time ago. In other words, your policy is activated when a claim is made against you (during that policy period) regardless of when the negligent act took place. Hence it is important that you notify your insurer of any claim or potential claim within that period of insurance.
For example, you design a building in 2000 while holding a valid PI policy, five years later you retire from practising and no longer hold or renew your PI insurance. In 2010, your client has noticed a defect and commences litigation for your work in 2000 and makes a claim for damages. If you contacted the company you were insured with in 2000, you will not be covered, because the claim was not made in that year. In this scenario, you will be uninsured and must bear the cost of the damages on your own.
Example: registered architects in Victoria
It is a Victorian Government requirement for practising architects to be covered by PI Insurance in the interests of consumers. Their PI policy needs to specifically cover architects and the provision of architectural services. The amount of insurance required must not be less than $1 million plus not less than $200,000 or 20% for defence costs, with one automatic re-instatement. Practising architects are also required to provide the Board with proof of PI cover as a condition of registration. This can be in the form of a Certificate of Currency which may be obtained from your insurance broker. You will also need to provide the Board a new Certificate of Currency each renewal year.
It is an offence under the Architects Act 1991 (Vic) to work as an architect without required insurance or to represent that you are an insured architect when you are uninsured. The Act sets out specific penalties for breach.
Some examples of what PI typically covers:
• Non-compliant design or building products
• Legal or court attendance costs
• Investigation costs
Some examples of what PI typically does not cover:
• Fraud / dishonesty
• Unpaid fees (not paying sub-consultants)
• Deliberate damage
Some common PI issues with client contracts
It is essential that you as consultants review your client contracts and understand your contractual obligations. If you are unsure whether some obligations that your client wishes to impose on you may not be covered, you should contact your broker to clarify. Bear in mind also each PI insurance policy wording may differ, especially if you have changed insurance providers.
Some common risks in contracts (sometimes) not covered by your PI policy are:
• Guaranteeing the work of others (e.g. builder)
• Fit for purpose
Notifying your insurer
As soon as the likelihood of a claim is known, you should notify your broker. Not all notifications eventuate into claims, nevertheless you should notify immediately. Every insurer will have a different procedure to be followed to formalise the notification. Typically, your insurer / claims manager would send you a form to complete all the details of your notification. You may also send / attach any supporting documents relating to the notification, especially if the complaint is in writing or you have been served with a court order. Paper trails are important evidence so you will need to ensure that you provide all the known details so that the record of your notification is clear and complete, at least to the best of your knowledge. If you don’t tell your insurer promptly (particularly before the end of your policy term), you may not end up being covered at all.
It may also be sensible to take steps to minimise any further loss or liability that may occur as a result of the potential claim. Remember also to keep your insurer informed of any developments that may occur once you have notified your claim.
An important point to remember is that under no circumstance and at any stage, should you admit liability. This may affect your insurer’s ability to defend the claim made against you.
Gaps in PI cover
As with other insurances you will still bear some costs, such as:
• Policy Excess – This amount can be discussed with your broker to confirm what would be suitable and appropriate for you and your practice.
• Exclusions – This refers to the types of claims your insurer will not cover. You should be familiar with these when agreeing to contract terms. Exclusions should be clearly noted on your policy and should be reviewed each renewal year. Based on what your policy wording states, some liabilities may be excluded from your cover such as warranties, indemnities, fraud or dishonesty.
Limit of indemnity
On your PI insurance policy, you will see the maximum amount your insurer has agreed to pay out on any single claim made by you. This is called ‘limit of indemnity’. It is up to you and your practice to determine an appropriate limit of indemnity. Things you may take into consideration to determine this amount are: type and value of projects you usually undertake, type of clients that generally engage you, risk level you are willing to accept, involvement with multiple parties for your projects and in general the type of professional services that you provide.
If you choose to set your limit of indemnity too low, and you are faced with a very large claim, your insurer will only pay the limit of indemnity. You or your practice will have to pay the balance of the claim out of your pocket.
Consultants should try to regularly check their cover with their broker if unsure whether they would be covered and consider the factors mentioned above to update or amend your level of cover if needed.
In conclusion, taking out PI insurance is strongly advisable for consultants providing professional services. There is no “standard” PI insurance policy, you will need to discuss with an insurance broker and secure the most appropriate policy suitable for you and your practice. Our colleagues at Planned Cover will be pleased to assist you with this if required.
When securing a project and agreeing to contract terms, ensure that the obligations you are accepting are covered under your policy, if they are not, your broker may be able to explain the potential risk or provide advice on what could happen in the event of the claim.
Remember to notify all claims as soon as possible when they occur. Bear in mind that not all notifications turn into claims. What is important is that you notify within the relevant period of insurance to ensure that you are covered.
PI insurance is designed to protect you as professionals, your interests, your assets and your business against claims of breach or negligence made by a client.