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Professional indemnity (PI) insurance does not provide (and is not intended to provide) complete protection against professional risks. When a claim is covered by your PI policy, additional costs could be incurred as follows:
- The policy excess (likely to be several thousand dollars or more).
- If your policy limit is defined as inclusive of costs, costs form part of the policy limit and you could incur additional costs in defending a claim. (If your policy limit is defined as exclusive of costs or costs in addition, any costs incurred in defending a PI claim will be paid by the insurer in addition to the policy limit).
- Liability under some contract clauses (such as warranties and indemnities) that is typically excluded from cover. (You should discuss coverage options with your broker).
- Liability for claims that are excluded under your PI policy (noted on the policy schedule or in the policy wording).
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Exclusions
All PI policies contain 'exclusions', meaning a specific type of claim/circumstance that is not covered under your PI policy. Many exclusions are common across all PI policies, however other restrictive exclusions can be found in a minority of policies. It is wise to consult a 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 schedule and in the policy wording.
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/materials including but not limited to cladding.
- Commercial aspects of a dispute, such as non-payment of the architect’s fees or claims for a refund of the architect's fees already paid. (However, it is prudent to notify your PI insurer or broker of the above disputes as claims initially identified by you or your client in this manner, may eventually become claims for damages or compensation which may be covered under your PI policy).
- Claims involving dishonest, fraudulent, criminal or malicious acts or omissions by the insured(s). 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 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 suffered loss, 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 due to their conduct in the legal proceedings.
- Territorial exclusions applying to work in certain countries, noting that some policies limit cover to Australia only, or worldwide except for certain countries.
- Entrepreneurial involvement in projects, beyond ordinary scope of services for architectural practice, is generally not covered unless disclosed and approved for cover by your PI insurer.
- Other exclusions that are specific to certain materials or physical circumstances, the most common being for anything relating to asbestos. However toxic mould is becoming more common due to more frequent environmental causes such as floods and unpredictable weather events.
If you have any concerns in respect to the above exclusions, please discuss with your broker. Insurers can consider providing options to write-back cover in certain circumstances.
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. This exclusion ensures that the insurer does not cover a claim in circumstances where you do not have a genuine liability to others, but you are merely seeking inappropriate financial gain.
Commonly this exclusion applies to the following persons:
- 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 insureds.
- Companies or trusts operated or controlled by an insured, or by employees, nominees or trustees of an insured or in which that insured or that insured’s partner or child has a direct or indirect financial interest.
- Any person or entity advised or induced by the insured or by anyone acting on the insured’s behalf to invest in or lend money to any company or trust referred to above or to any person or entity named as an insured.
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 of your relatives or relatives of 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 in a direct financial manner.
If the insured or related entity or person has sold their interest in the property which is the subject of a claim to a third party with no proximity or relationship to the insured or related entity or person, the insured would likely be covered for claims made against the insured by a third party, if those claims would otherwise have been covered by the PI policy.
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 cover under your PI policy.
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 policy.
The risk with such clauses is that there could be a disagreement with your insurer about whether liability is the normal common law liability or not. Conversely there can be no similar argument with the client. You will be obliged to pay pursuant to the contract enforceable in a court, the full extent of the indemnity including any portion of the claim that is not covered under the PI policy.
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 a PI policy. 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 rely on proportionate liability legislation. Insurers are entitled to rely on your liability being 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 is not payable by the insurer under the PI policy.
Note that some insurers may, as optional policy extensions, provide some cover for indemnities and waiver of rights under proportionate liability legislation.
For these reasons it is 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 any contract review services that may be available to you if you place your PI insurance through Planned Cover.
Risk of limited liability for subconsultants and others
Subconsultants that you engage directly may attempt to have you engage them with limited liability to you, for the same reasons you may attempt to limit your own liability to your client. Agreeing to limit a subconsultant’s liability, without a corresponding limitation of your liability to your client exposes you to a risk of having to cover claims that result from subconsultant errors In short, your PI policy may not cover the ‘gap’ between your practice’s liability to your client and the subconsultant’s liability to you.
Refer Including limitation of liability clauses in Acumen note Limitation of liability.
Less common exclusions
In addition, PI policies with the following exclusions should be avoided:
- 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 claims that arise as a result of the negligence of engineers, interior designers, surveyors or others they engage as subconsultants.
- Cost estimates: A small number of PI 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 estimate 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.
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 PI 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 PI 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 PI 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.
Disclaimer
This content is provided by the Australian Institute of Architects for reference purposes and as general guidance. It does not take into account specific circumstances and should not be relied on in that way. It is not legal, financial, insurance, or other advice and you should seek independent verification or advice before relying on this content in circumstances where loss or damage may result. The Institute endeavours to publish content that is accurate at the time it is published but does not accept responsibility for content that may or has become inaccurate over time. Using this website and content is subject to the Acumen User Licence.