Professional indemnity insurance is now compulsory for workers in many disciplines. But, as the construction industry has found, costs are rising and it is often a minefield of exclusions and endorsements. Is there a better way?
16 April 2004
The cost of professional indemnity insurance (PII) has risen considerably in recent years. The levels of self-insured excesses have increased and cover restrictions have been imposed. Unfortunately, there is likely to be little improvement to this situation.
PII is third-party liability cover, meaning that the insured consultant is covered only in respect of his liability to others. Clients are not covered and - as the construction industry has discovered to its cost - this can lead to misunderstandings.
For example, a client may ask to be covered by the policy. But it is well established in law that co-insureds cannot make claims against each other for damage covered by the policy. A client may also seek to take some control over the relationship between the contractor and the insurers, for example over your right to accept a payment from insurers in full and final settlement of their liability under the policy. This is equally unacceptable to insurers, as their contract is with you not your client.
What does PII cover?
A typical policy will cover you against any sum which you are legally liable to pay, arising from any claim made during the period of insurance, by reason of negligence or breach of duty arising from the conduct of your professional business. But whether the policy only covers claims for negligence, or is wider, depends on the wording.
Unlike most types of insurance, PII policies (renewable annually) are written on a claims-made basis. This means that the insurers who pay the claim are those providing cover when the claim, or circumstances that might give rise to a claim, are first notified to insurers, rather than when the work was undertaken or the mistake made. The significance of this is that the cover might be wider when a contract is entered into than when a claim is made.
Indeed, you may have entered into contracts in the past that are not fully covered by your current insurance, or which you can only cover on payment of an additional premium. When negotiating with clients therefore, you should avoid agreeing to potential liabilities for which you might not be able to get insurance in the future. This might mean restricting the services you provide, or excluding or limiting liability. If you take on liabilities which in the event are not covered by insurance, both you and your client could suffer. You should also check the insurance clause in any contract, and include caveats such as 'provided that such insurance is available at reasonable commercial rates'.
Another example of the effect of a claims-made policy is that if a claim is made against a retired professional who is no longer covered by a current insurance policy, there will be no insurance for that claim. On retirement therefore, you need to ensure that insurance is maintained - either under your former firm's policy or your own run-off policy.
Who is covered by the policy depends on who is named as the insured, and the wording of the policy and any endorsements. You should ensure that the insured is correctly described and all those who need cover are included (eg past practices and partners). Employees, secondees and consultants are usually covered, but not sub-consultants.
PII policies are always subject to a limit of indemnity, that is a maximum amount that insurers will pay in respect of damages, interest and legal costs payable to the claimant. The limit can be each and every claim, or an aggregate. The former means that the limit is payable in respect of each claim. Aggregate cover means that the limit is only available once, however many claims are made, in the policy period.
Generally, cover is for each and every claim, but certain types of claim (such as pollution, contamination or asbestos) may be limited to aggregate cover.
Contracts of appointment and warranties often include an insuring clause, whereby you undertake that you will maintain PII for a certain amount for a certain period of time. In an appointment, for example, you may agree to carry £1 million PII for 10 years. Importantly, such a clause does not limit your liability under the appointment to £1 million.
You will also be required to pay an excess, likely to be 1-2 per cent of your gross income. Insurers have become less flexible about excesses, so it would be unwise to agree with your clients a limit to the amount of the excess.
Furthermore, claims resulting from war and terrorism are now routinely excluded, as may be claims in connection with asbestos and toxic mould. Other common exclusions relate to liabilities arising from the transmission of computer viruses and the increased risk consultants face from e-commerce transactions.
A better way?
If your firm is unlikely to have the resources to finance uninsured or underinsured risks, you may wish to consider including a provision in your contracts excluding liability for claims for which you have no insurance at the time the claim arises (although under the Unfair Contract Terms Act 1977 there are limits to the extent to which you can do this). You could also include in your contract what is known as an 'evaporation clause' limiting your liability to the amount available under your insurance policy.
PII gives a measure of protection to you the professional, but it is not an efficient or effective way of protecting client's risks. Payment under the policy is dependent upon you being at fault, and costs will be incurred by both you and your client in establishing whether you are liable or not. There must be a better way of insuring the risks associated with designing and building construction projects. One answer is first-party material damage policies, such as latent defects insurance (which covers the client or building owner against loss arising from defects).
There are other similar policies. It is recommended that you suggest to your clients that they investigate what is available to them to insure their risks more directly.
This is an edited version of a liability briefing published by the Construction Industry Council (www.cic.org.uk/liability)