Professional indemnity cover exclusions

Exclusions

Every policy contains 'exclusions', meaning types of claims which the insurer will not cover. Some exclusions are common to most or all PI insurers' policies, but others are traps found in only a minority of policies. It is wise to consult an insurance broker specialising in the construction industry to help you understand the exclusions in your policy, but there is no substitute for reading the exclusions section of the policy.

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Common exclusions

While there is no such thing as a 'standard policy' in relation to exclusions, the following exclusions are commonly found in PI policies:

• Claims involving non-compliant building products including but not limited to cladding. Policies may also not provide any cover for defence if you are brought into an action.
• Wholly commercial aspects of a dispute, such as non-payment or claims for a refund of the architect's fees already paid. (However, where the latter type of claim or intimation of one is received, it is prudent to notify your PI insurer or broker, as claims initially identified by your client as this, can turn out to be claims for damages or compensation which would attract a response from the policy when their true nature is identified).
• Claims involving dishonest, fraudulent, criminal or malicious acts or omissions by the insured(s) are usually excluded. This can be a very wide-ranging exclusion. For example, an architect who certifies that they have conducted monthly inspections of the construction work when they have not could be held to be acting 'dishonestly' even though the conduct may fall far short of fraud.
• Breaches of copyright are usually excluded unless the breach was 'inadvertent' or 'coincidental'.
• Punitive damages, ie damages that are not awarded in compensation for a party’s loss actually suffered, but those that are specifically awarded by a Court as a sanction on the insured(s) for unacceptable conduct in their dealings with the party who suffered loss, or their conduct in the legal proceedings.
• territorial exclusions applying to work in certain countries, as some policies limit cover to Australia only, or to Australia and the world but with the exception of certain countries.
• Entrepreneurial involvement in projects, beyond ordinary architectural practice, is often not covered. 
• Other exclusions that are specific to certain materials or physical circumstances, the most common being exclusion of anything to do with asbestos.

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Proximity or related entity exclusion

Most PI policies have what is commonly described as a proximity or related-entity exclusion. When a claim is made against the insured by certain relatives and related entities, including a company or trust that is operated or controlled by one of the insured persons or entities, the exclusion generally applies. The reason for this is a general concern of insurers over being exposed to fraud, or semi fraudulent claims, where the insured, or one or more of them, may stand to gain in ways that are not transparent or reflecting real loss, from making an insurance claim. Without this exclusion the insurer may be inappropriately paying out the claim, not because you owe a genuine liability to others, but providing you with an inappropriate financial gain for a claim arising from you not properly performing duties to your close associate or related client.

Commonly this exclusion applies to the following persons who you may be considering, or have had, as clients, pro bono or not:

• The insured(s) (one cannot sue oneself)
• Parent of the insured or one of the insureds
• Spouse, partner or de facto of the insured or one of the insureds
• Child of the insured or one of the insured
• Companies or trusts in the name of the insured or one of them, or in which one or more of the insureds, including your partners, co-directors or employees is a shareholder

Contemplating work for a close relative or a related entity is relatively common in architectural practice. For that reason, it is very important to discuss the specifics of the policy wording with your broker when considering a project for any relative of yours or your fellow insureds, or any company or trust in which you or your practice, your relatives, or your employees have any interest at all, not just a direct financial one.

If the related entity or person sells the building or their part in it to a third party with no proximity or relationship to the insured persons in the practice, the architect would then usually be covered by professional indemnity insurance against claims from that new third party. However, because of the exclusion, before or unless, that sale or transfer occurs, you or your practice may be without cover for a claim made by a proximate or related entity which you cannot control or prevent from making a claim against you.

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Uninsured indemnity clauses, (and others) in conditions of engagement

Contractually assumed liabilities, such as an agreement contained in your conditions of engagement to indemnify your client or others, will usually be excluded from your professional indemnity insurance cover.

An example of such an indemnity in a client-drafted consultancy agreement is:

The Architect is liable for and indemnifies the Principal, including its directors, agents and employees, from and against any claim, action, damage, loss, liability, cost, expense or payment (including legal costs on a full indemnity basis) which arise out of or in connection with the Services.

PI insurance usually covers the extent of liability an architect would have under common law (and legislation) while engaged to provide architectural services. To the extent that the liability imposed by a clause like the one above exceeds the architect’s liability under common law or statute, the liability will not be covered by the PI insurance.

The biggest risk with such clauses is that there could be an argument with your insurer about whether your liability is the normal common law liability or not. Conversely there can be no similar argument with the client – so you will be obliged to pay, under a contract that the client can enforce in court, the full extent of the indemnity and make up that part of the claim the insurer refuses to pay, out of your pocket.

There are other commonly encountered clauses of engagement which impose absolute obligations likely to exceed common law and statutory liability and therefore exceed the cover of professional indemnity insurance. These are warranties and guarantees, fitness for purpose clauses and clauses requiring the architect to pay liquidated damages.

Another is agreeing to waive your right to proportionate liability. Insurers are entitled to rely on your liability being set, and limited by, statute as well as the common law. If your liability would have been limited to, say, $700,000 if proportionate liability applied, but you agreed in your conditions of engagement that proportionate liability would not apply, and the Court imposes liability of $900,000, you are left with liability to pay $200,000 (plus your excess or deductible and other costs) that the insurer will not pay under the policy.

Note that some insurers can, in the policy extensions, provide some cover for indemnities and waiving your right to proportionate liability.

For these reasons it is very prudent to carefully consider what gaps in PI cover your client-drafted conditions of engagement are imposing, and to seek expert advice from your broker, including free contract review services that may be available to you and your practice if you are insured through Planned Cover Insurance Brokers.

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Risk of limited liability for subconsultants and others

Subconsultants that you engage directly will often attempt to have you engage them with limited liability to you, for the same reasons you might attempt this with your own client. Agreeing to limit a subconsultant’s liability, without corresponding limitation of your liability to your client that covers the same grounds of liability and reflecting appropriate allocation of risk, exposes architects to a very serious risk of having to pay large claims caused by subconsultant errors, as the shortfall in the subconsultant’s contribution to the loss. In short, your professional indemnity insurance does not cover the ‘gap’ between your practice’s liability exposure to your client and the limited liability of the subconsultant to you, brought about by limitation of their liability under their engagement conditions with you.

Refer Limitation of liability clauses in Acumen note Limitation of liability.

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Less common exclusions

In addition, the following exclusions are less commonly found in PI policies and can often be avoided by choosing the right policy:

• Subconsultants: Some policies only provide cover for liability for subconsultants in the same professional business as the insured architect – that is, other architects. These policies would leave the architect uninsured for the risk of engaging engineers, interior designers, surveyors or others as subconsultants.
• Cost estimates: A small number of policies simply exclude all claims arising out of cost estimates, and this exclusion can be broad enough to jeopardise cover for cost-overrun claims frequently made against architects, especially on domestic projects. Other policies cover cost estimates only if given by a person with a specified qualification. Architects should seek out policies that contain no exclusions for cost claims.
• Superintendent services: While PI policies commonly exclude cover for performance of building work by the architect, sometimes the exclusions are broad enough that they cast doubt over whether the architect would be covered for the observation and assessment of the builder's construction work which is an ordinary part of contract administration.

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Uninsured risks in AS 4122

AS 4122-2010 (General conditions for engagement of consultants), and its predecessor AS 4122-2000, contain terminology which might compromise the professional indemnity insurance cover of architects in certain circumstances. Both contracts provide the architect with considerably better protection than many consultancy agreements drafted by commercial or government clients and their solicitors, but AS4122-2010 is preferred. However, it is important to be familiar with the areas in which uninsured risks may arise, as outlined below.

Both forms of this contract impose a higher standard of competence than the common law, raising the possibility that conduct is found to impose liability on your practice that the insurer is not obliged to cover under the policy. See The Standard of Competence above.

Both forms of this contract also contain contractually assumed liabilities including indemnities (an indemnity is an agreement to pay compensation in the event of loss – sometimes even if the loss was not the architect's fault), as well as warranties and guarantees (which in this context generally involve a promise to undertake work to a standard that may be higher than that of an 'ordinary competent architect'). See Uninsured indemnity clauses, (and others) in conditions of engagement above.

While taking on this additional risk and the provision of warranties under AS 4122-2000 will not actually void most professional indemnity insurance policies, claims arising directly from such contractually assumed liabilities may not be covered, where your practice would not have been liable if the liability had not been contractually assumed.

Refer Insurance risks in Acumen note AS 4122.

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