Professional Negligence in Construction

Ben Patten KC and Hugh Saunders

Document

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CHAPTER 7 Insurance

Introduction 139
Section A: summary 139
Section B: the contract of insurance 141
Section C: key aspects 144
- The proposal 144
- Notification 146
- Claims and aggregation 148
- Admissions 149
- Disputes 149
Section D: third-party rights 150

Introduction

7.1 Arguably the most important contract which any construction professional will enter into is its (annual) agreement for professional indemnity insurance. This form of insurance protects the construction professional against the consequences of claims against it for negligent breaches of duty. 7.2 For practising architects registered with the RIBA and practising surveyors registered with the RICS, carrying professional indemnity insurance to a minimum level is a condition of practice.1 Many commercial clients will require proof of professional indemnity cover at a particular level as a condition of engagement, often further requiring that insurance be maintained at that level for a number of years after the project is completed. 7.3 When claims are made against construction professionals, it is the insurer of the construction professional which undertakes the defence of the claim and the level of insurance available is often a key consideration for any claimant pursuing a claim against a construction professional.

Section A: summary

7.4 All policies of professional indemnity insurance share core features. 7.5 Professional indemnity insurance covers the construction professional against claims made against it where the subject matter of the claim is some act or omission concerned with the construction professional’s carrying out of its professional obligations. 7.6 The risk which the policy guards against is a claim arising from negligence on the part of the construction professional. For this reason, most policies will exclude claims

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which arise from workmanship or the supply of goods or materials by the construction professional. 7.7 The scope of cover will attach to the construction professional’s business. Thus if the construction professional trades through an LLP, the person described in the policy as “the Insured” will be the LLP. Most policies will go further. They will provide insurance cover to the construction professional in his or her personal capacity, and to the employees of the construction professional’s business. Provided the claim made against these persons concerns negligence and arises out of the construction professional’s business it will generally be covered.2 7.8 Each contract of insurance is annual. Every year the construction professional will obtain a policy of insurance for that year. Even if the construction professional remains with the same insurer and is insured on the same terms for a number of years, its insurance falls under sequential and separate policies. 7.9 The insurance is provided against a “claim”. In contrast to household insurance or property insurance, professional indemnity insurance works on a “claims made basis”. Thus a construction professional may carry insurance for a number of years during the life of a project which, particularly during the early years, will have very little practical bearing in respect of the risks of that project. What matters is the construction professional’s insurance position when a claim arises. This can, of course, be during the life of the project, but it is much more likely in the years following completion. 7.10 This means that when a construction professional ceases to practice it will need to maintain “run off” cover for a minimum of six years.3 7.11 When an insurer agrees to provide a policy of insurance, the insurance it agrees to provide and the cost which it charges (“the premium”) are all dependent upon the insurer’s appreciation of risk. This means that in the negotiation of a policy of insurance the construction professional is required to provide the insurer with information relevant to the risk. This requirement can take the form of answers to specific questions and it can take the form of a general duty on the part of the construction professional to tell the insurer about facts or matters known to the construction professional which are likely to have a bearing on the insurer’s appreciation of risk. 7.12 Failing to answer questions correctly or failing to provide material facts to the insurer may lead to the policy being “avoided” and/or the claim being declined. 7.13 It is frequently the case that facts or matters come to the attention of a construction professional which indicate that a claim may arrive in the future. Something may have gone wrong on the project and the construction professional may perceive a risk that the employer or some other person is likely to make a claim against the construction professional (even though it perhaps has not said so). Professional indemnity policies generally require this kind of “circumstance” to be “notified” to the insurer. If notification takes place and a claim subsequently materialises the claim is treated as falling within the policy current during the notification. 7.14 This mechanism is mainly intended to provide protection to the insured: if it did not exist, then any insurer negotiating a policy for subsequent years might decline to provide

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insurance at all or might provide it on prohibitive terms. It is also so that the insurer can take steps – should it so wish – to prepare for an anticipated claim, and insureds who fail to notify an insurer of a circumstance when they should do may find that a subsequent claim is declined because notification is a “condition precedent” to cover. 7.15 The financial value of cover is entirely a matter of what the insured wishes to pay. A construction professional in a modest way of business, working on smaller projects, may well opt for the minimum level of cover consistent with its regulatory requirements. The very largest practices will have insurance in the high tens of millions of pounds. Because professional indemnity insurance works on a “claims made” basis this level of cover will apply to each claim. 7.16 Thus a construction professional may have £5 million of cover, but if it is unlucky enough to face two claims of £4 million each falling into the same policy year they will both be met. The exception to this general statement is where the two claims share some unifying or common factor and the policy contains an “aggregation” clause which, because of that factor, treats the two claims as being one claim. 7.17 Insurance cover under professional indemnity policies will generally go beyond the financial consequences of a claim. Most importantly, such policies will generally indemnify the construction professional against the legal costs of investigating and defending a claim and against the legal costs of the person bringing the claim. 7.18 This fact, and the fact that the insurer indemnifies the construction professional against any damages awarded against it, have the effect that the insurer is accorded a substantial measure of control over the claim and over subsequent rights which arise. Thus the insurer will have control over whether and on what terms a claim is compromised and over whether and in what ways other persons are claimed against. If an insurer indemnifies a construction professional by making a payment to the claimant, the insurer will be entitled to recover the sum paid from a third party. 7.19 Sole practitioners and construction professionals in a modest way of business will often arrange their professional insurance directly with the insurer. However, larger concerns with more substantial insurance needs will generally work through an insurance broker. This form of agent is responsible for placing the construction professional’s risk with an insurer in a way which is appropriate to the construction professional’s needs. Where a broker in involved, all the construction professional’s dealings with the insurer will be conducted though the broker. 7.20 The law of insurance is complex and a detailed examination of the way in which it applies to professional indemnity policies is beyond the scope of this book.4 The discussion below is concerned with the areas of law and practice which are likely to be of particular significance to construction professionals.

Section B: the contract of insurance

7.21 The contract of insurance is sometimes referred to as the policy of insurance, although this shorthand is not strictly accurate.5 Like any contract it is made by offer and

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acceptance6 and its terms are to be construed in the same way that any contract is construed. On renewal a new contract comes into being even if the terms are the same (including as to the premium). However, in terms of its shape and contents the written documents which constitute the contract of insurance are likely to unfamiliar to construction professionals. 7.22 The Schedule. A policy of professional indemnity insurance typically takes the form of standard policy terms to which are attached a schedule and various addenda. The Schedule sets out the bare essentials of the contract which are specific to this policy of insurance. The policy number will be given (each policy having its own unique number). The insured is identified (usually by reference to its trading name) and any subsidiaries if also covered. The period of insurance is identified. This will be an annual period, for example “from 1 October 2017 to 30 September 2018 both days inclusive”. The Schedule will state the limit of indemnity, for example “GBP 5,000,000 any one claim including Defence Costs and Expenses”. The excess will be stipulated. This is the contribution made by the construction professional to the cost of indemnifying any claim, for example “GBP 50,000”. There may be further information. Usually the insurer is identified and there is a statement as to who any notification of a claim or circumstance is to be sent to (it is common for insurance to be provided by a number of insurers, one of which takes the lead). The “Proposal” (see below) and the premium may be identified. 7.23 The Endorsements. For larger contracts of insurance the insurer may have negotiated bespoke terms with the construction professional. This is particularly prevalent if the construction professional is represented by a broker. Some of these will serve to restrict the ambit of cover. For example, “The Policy excludes all claims which arise from the Insured’s contracts with WindGen Ltd and/or any claim which arises from the provision of any service by the insured in relation to wind turbines”. The may extend the ambit of cover, for example, “It is hereby noted and agreed that SYG designers are included within ‘the Insured’ for the purposes of this policy of insurance”. They may clarify some uncertainty as to the scope of cover. For example:

it is hereby noted and agreed that indemnity afforded by the Policy applies to liability attaching to the Insured arising out of a failure by the Insured to warn any client or clients of the inadequacy or deficiency (alleged or otherwise) in any design, specification or formula.

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