Professional indemnity insurance for architects

Note that the two most recent versions of the Australian Standard Consultancy Agreement AS 4122-2010 and AS 4122-2000 both contain clauses that may take the architect’s professional obligations outside the cover of professional indemnity insurance. Refer AS 4122.

However, of potentially greater concern is the degree to which participants in the construction industry actively transfer risk to consultants such as architects in an effort to gain the benefit of their professional indemnity insurance. Thus, risk management for architects not only must focus on avoiding errors and omissions but also must defend the architect from the direct transfer of risk by others in the construction industry.

Recent trends

There is no doubt that our community has become increasingly litigious. This is commonly thought to be due to a number of contributing factors:

• Public awareness of a civil right to sue.
• Law firms marketing their expertise in specific branches of law.
• Consumer-oriented legislation.
• Greater expectations of the performance levels of professionals.

A by-product of the interplay of these factors, increased community expectations and a demand for accountability is that professionals may face the possibility of not only civil action but criminal prosecution by the Crown or government instrumentalities such as the Australian Competition and Consumer Commission.

In addition, the commercial construction industry has become more willing to use litigation for the purposes of managing costs and recovering budget overruns, and regularly undertake 'scattergun' litigation in order to leverage insurers into contributing to commercial settlements. Often the merits of such litigation are secondary to the commercial ends served by the process itself and as a result the risk of such litigation is difficult, if not impossible to manage.

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Risk transfer through insurance

Although it is certainly a good security net, risk transfer through maintaining policies of insurance is not always the best form of risk management, as there is a cost to the professional in the form of the policy excess and the time and effort it takes to defend claims. In addition, the peace of mind that often follows from the knowledge that a policy of insurance will protect the architect may well be unjustified (due to the limitations to cover provided by such policies) and may promote poor risk management practices. The exclusions now commonly found in professional indemnity policies include:

• contractual assumptions of liability (contractual clauses that expand the architect's liability beyond their liability at common law)
• waivers of rights (contractual clauses that waive insurers rights)
• pre-purchase inspections
• asbestos and toxic mould
• cladding
• pollution
• terrorism
• in some policies cover is even being eroded for claims arising from bodily injuries, or the provision of costs estimates.

With civil law actions, professionals generally have recourse to their professional indemnity insurance but with criminal prosecutions professionals are almost exclusively 'on their own'. Generally, fines or associated legal defence costs are not indemnifiable by way of insurance because such insurance would be 'contrary to public interest' or excluded by the terms of the professional indemnity policy.

Professional indemnity policies generally provide indemnity for legal liability for claims related to a civil liability. They also cover any inadvertent breach of the Competition and Consumer Act 2010 where it does not constitute a breach of the penal or criminal provisions. There is also cover for the criminal acts of an employee of the professional, however, where the insured is an incorporated body this does not extend to a director or managing director.

Thus, rather than viewing insurance as a safety net, architects must prepare for the fact that their insurance policy may not completely protect them from the effect of a claim against them and rather should focus on developing internal risk-management procedures in order to avoid relying upon insurance as far as possible.

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Criminal prosecutions

Criminal prosecution generally requires the proof of guilt or reckless intent (mens rea) to commit the prohibited act.

There is the incident of an engineer with NSW State Rail who faced manslaughter charges as the result of a collapsed embankment; ultimately the charges were withdrawn when the Coroner's Court found that the embankment collapsed as a result of water pressure.

A Dandenong council engineer faced criminal charges for third-party injuries, again due to a collapsed wall. (Subsequently, the engineer was found not guilty after the matter proceeded to trial.)

Fortunately criminal prosecution is still the exception rather than the rule.

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Competition and Consumer Act

As of 1 January 2011, the Trade Practices Act 1974 (TPA) was renamed the Competition and Consumer Act 2010 (CCA). The Australian Competition Law which forms a part of the CCA, is a Commonwealth law which regulates the conduct of business by, among other things, prohibiting certain trade practices regarded as restricting competition or being unfair, unconscionable or misleading and deceptive. The states have equivalent legislation (the Fair Trading Acts) which affect individuals and business partnerships. The Australian Competition Law under the CCA is generally of the same effect the same as the law was under the TPA.

The act provides for criminal proceedings for breach of the act as well as civil remedies. An action for damages may be pursued in certain cases for the amount of loss or damage a person suffers as a result of the conduct of a person contravening the act.

The Competition and Consumer Act also includes penalties for breaches of the consumer-protection provisions of the act (fines of up to $220,000 for individuals and $1.1 million for each offence.)

The Australian Competition and Consumer Commission (ACCC) is the government body that administers and enforces the Competition and Consumer Act, jointly with the state and territory consumer-protection agencies.

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Negligence actions

It is clear that an architect owes a duty to a client to provide advice and services in a reasonable manner. The standard against which an architect will be assessed in determining whether he or she has been negligent is the standard of 'a reasonably competent architect experienced in providing similar services'.

Professional indemnity claims against architects can be made for, or arise out of:

• personal injuries
• property damage (including building defects)
• financial losses.

But it does not stop at the client. The law of negligence means an architect owes a duty to anyone who they would reasonably expect to be affected by their decisions and may be injured as a result of their negligence. This duty is extended where there is a proximity (closeness) of relationship between the architect and the party suffering loss or damage. The test of proximity involves such issues as reliance on the architect's advice, the degree of control exercised by the architect over the situation, and the vulnerability of the injured person to potential harm as a result of the architect's lack of care.

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Window for litigation

In relation to time, the Limitation of Actions Act in each state or territory provides that actions are statute barred after a period of time from which the cause of action arose. (In the case of negligence actions, generally six years.) In negligence actions, a necessary element of the cause of action is that damage has occurred, i.e. for an action to be successful it must be proven that actual damage has taken place. The time at which the damage occurred is therefore relevant. Damage is not, however, necessarily physical damage – it may be economic. In Pullen v Gutteridge Haskins & Davey Pty Ltd (1993 1 VLR 32.) the Full Court of the Supreme Court of Victoria found that settlement of a swimming pool occurred because of inadequate footings. It further found that the limitation period ran from when the economic loss occurred, not from when the footings were laid or even from when the plaintiff could reasonably have been aware that defective footings were causing cracking.

Apart from consideration of the limitation period of actions, the case is also interesting in that a contractual clause purporting to limit the liability of the engineer to the client was held to be ambiguous and construed against the engineer.

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Extent of duty of care

In relation to the extent of the duty, a failure of a professional to act may also create a liability irrespective of whether the client (or patient) has made enquiries from the professional. (In Rogers v Whitaker, 109 CLR 625.)

The High Court in that case found that the decision as to whether the standard of reasonable care demanded by the law was met may in fact be higher than the body of opinion of a profession. It was argued that it is up to the courts to adjudicate an appropriate standard of care giving weight to the consideration that it is up to a client (or person) to make decisions about their own project (or life). Therefore the duty of care of a professional to warn a client (or patient) of risks of a proposed decision if the client would assign significance to it.

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References:

Standards Australia (2010) Australian Standard AS 4122-2010 General Conditions Of Contract For Consultants, Standards Australia.