Episode 108 - Professional Indemnity Insurance *Revisited*

This week we will be revisiting Professional Indemnity Insurance. This episode content meets PC1 - Professionalims & PC2 - Clients, Users and Delivery of Services of the Part 3 Criteria.

Resources from today's episode:

Websites:

• https://www.architecture.com/knowledge-and-resources/resources-landing-page/riba-guide-to-professional-indemnity-insurance-for-architects
  
  

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Transcript

Episode 108:

Hello and Welcome to the Part3 with me podcast. 

The show that helps part 3 students jump-start into their careers as qualified architects and also provides refresher episodes for practising architects. I am your host Maria Skoutari and this week we will be talking about Professional Indemnity Insurance Revisited. Today’s episode meets PC1&PC2 of the Part 3 Criteria.

I previously spoke about Professional Indemnity Insurance back in episode 19, but with the introduction of the Building Safety Act and new dutyholder roles we are expected as architects to undertake, adds a new level of complexity to the PI insurance level required to cover all these new roles. So I thought a more in-depth episode on PI would be beneficial to navigate the additional level of cover required and what that means to practices. 

As architects, we need to protect our reputation and business, and having an adequate level of professional indemnity insurance can ensure that it is retained and helps you out of a critical complaint or claim. We are also required, as architects, by the ARB & RIBA  Codes of Conduct to carry out a set level of professional indemnity insurance at all times and for all projects to ensure the reputation of the profession is upheld as well as providing the required level of protection against claims towards practices and/or individuals. It also ensures that clients and the eventual owner, occupier or user of the building can expect the protection of a remedy if they are advised to make a claim against you. It is considered a breach of the code to enter into contracts without insurance and in contracts which include indemnities or other similar clauses imposing unlimited liability which are not insurable. 

Unfortunately, with the additional duties and roles architects are expected to take on and the subsequent impositions of the Building Safety Act expanding obligations and duties of care and extending the statutory periods of liability, means the probability of an architect experiencing an allegation of professional negligence is becoming increasingly high. 

So what are the key takeaways and items to consider when it comes to selecting PI insurance:

Contracts of insurance are complex because they encompass:

• a commercial bargain between the insurer and the insured, 
• implications of finance and tax, 
• ‘legal interpretation’ by reference to common law, the laws of contract and statutes, and 
• a range of commercial practices in the sale and administration of insurance which create differences between insurance policies that are often not discernible by the Insured until they are disputed in the event of a claim. 

Insurance is typically bought based on the offered price rather than to its value. That tends to be the most common of cases, because without specialist knowledge, it is almost impossible to measure the value of one insurance policy against another mainly for two principal reasons:

• It requires an experienced insurance practitioner to recognise the valuable differences in cover and benefits offered by one policy in comparison with another;
• The inherent value in an insurance policy is proven only in the event of a claim, when the implied promises and services of the insurer are actually experienced in practice. 

And it tends to be a common mistake to buy insurance based upon price alone, where cover limitations might restrict your ability to practice within the ARB Code of Conduct. 

It is, therefore, advisable to refer to an insurance broker or consultant to advise you which insurance company best meets the demands and needs of the practice and which insurance policy fits those requirements as not all insurers are ‘the same’ and their products are not identical to each other. 

So, the practices protection from insurance should be reinforced at the outset. A limited liability company for example, is the safest protection for the owners and directors of the business, Sole trader is the least secure protection and your home and other assets could be at risk if you are uninsured for a claim against you. Partnership and Limited Liability Partnership (LLP) are commonly adopted means of forming a business entity that shares the risks and rewards with others with whom you wish to practice.

In the event of a claim, the lawyers will almost certainly seek to establish whether the professional service out of which the claim has arisen constituted part of the declared “professional business” before agreeing to the pay out. An increasing number of PI insurance claims are refused by insurers because they didn’t know that the firm was ‘providing a specific service’ and ‘had they known they would not have offered insurance’. Therefore, it is key for architectural practices to fully understand what their ‘Professional Business’ is and more importantly what they may occasionally be asked to do that falls outside of that ordinary definition.

Now lets look at the specific types of Insurance and the insurance contract:

So an insurance policy is a particular type of contract. A contract of insurance is based on the principle of Indemnity. The law applicable to contracts, generally, applies to contracts of insurance but there are features of a contract of insurance that distinguish it from all other types of contract. If the insured person or company fail to comply with their obligations and duties as outlined within the insurance policy, then the contract of insurance can fail and they can be left uninsured. Those duties and obligations will be set out in the Conditions of the policy.

Now when we say indemnity, we mean:

• A contract of insurance is a contract of ‘indemnity’. 
• There are other contracts, which are not contracts of insurance, but which also contain indemnity clauses/conditions. The meaning of indemnity in such contracts is NOT the same meaning of ‘indemnity’ as in a contract of insurance. 
• An insurance contract of indemnity is intended to ‘put you back in the same financial position after your loss as you were immediately before it’. That is the ordinary meaning in insurance law and practice. However, all contracts of insurance include terms conditions and exclusions which define the limit and restrict the extent to which the insured is put back in the same financial position after the loss, as immediately before it. Consequently, the insured is usually required to contribute to the cost of a claim made against them. This usually includes an ‘excess’ which is payable as part of the terms of the contract. Key item to highlight here is that the insured is rarely fully compensated for the full cost of experiencing a claim. 
• Under the contract, the insured party is bound under the terms of the contract, which includes:

1. to cooperate with the insurer in the management and defence of a claim;
2. to do everything reasonable to mitigate the loss;
3. do nothing unreasonable to cause the loss to be greater.

•  Another important point to mention is that Insurance is not a guarantee and its not intended that you make a profit from a contract of insurance.
• Exaggerating a claim or making a false claim can be an act of fraud, the consequences of which can include being unable to buy insurance of any kind ever again. There are also criminal penalties for proven dishonesty and fraud against insurers.
• Insurance companies are skilled in managing and paying professional liability claims. The expertise of insurers and loss adjusters can be a valuable service in itself in the restoration of the business to its pre-loss status and in the defense of the insured against allegations which may harm it.
• Therefore, continuity of a relationship with an insurer can have some value. Shopping around for the lowest price every year can prove to be to the detriment of the Insured in the event of a claim. This is because PI insurance is different in its legal structure from most ordinary commercial insurances. It is called a “claims–made” insurance which gives rise to the need for continuity with the insurer to avoid ‘gaps in cover’ over a period of time.

Now when it comes to the different types of insurance, there is:

• Professional indemnity, which is specifically designed to meet the needs of protecting businesses engaged in professional advice and services against the risk of being sued for professional negligence
• Then you have, insurances of property which are intended for repairs, replacing or reinstating the property lost or damaged by an insured peril.
• Liability, including Public liability, employers liability, professional indemnity also falls under this category, and so on
• Insurances of the person and so on 

What does a Professional Indemnity Insurance Policy typically consist of:

The policy document itself consists of:

• The Recital clause - which is the introduction to the policy
• The insuring clause - which describes what’s covered. Generally, PII insurers will not cover a liability arising in the contract which goes beyond ‘any liability that would have arisen in common law (usually negligence) in the absence of that contract’. This means that a claim for negligent breach of contract would be covered by a Civil Liability policy but it might be argued by an insurer that a negligent breach of contract is not covered by a ‘negligent act error or omissions’ policy.
• Then are the definitions of the terms used in the policy
• The conditions which are the does and don’ts. If a specific Condition is breached the insurer is entitled to reject a claim even if the breach of the condition is not closely connected to the cause of the claim. 
• The exclusions - essentially what’s not covered by the policy
• The schedule - which sets out the details of the insured business or person, the limit of the indemnity, the excess, the period of the policy and any other detail specific to the practice and the contract of insurance 
• Then it sets out the premium - which is the annual cost of the insurance including the insurance premium tax
• And lastly any endorsements/memoranda/addendums - which are any special terms or conditions that apply to the policy

To better understand insurance policies in general, its recommended to carefully read the policy exclusions in order to be aware from the outset what is excluded, then to be made aware of the conditions to know what the practice will be required to do in the event of a claim or identifying a circumstance which may give rise to a claim, then its beneficial to be made aware of the insuring clause which reaffirms the cover that can be expected under the policy and lastly the endorsements.

Then it is recommended to compare two or three, policy wordings to give you a clearer view for the potentially relevant differences in the way that they are expressed. Then its recommended to seek advice from someone who has the knowledge, experience, time and incentive to give it which will typically be a broker or consultant specialising in professional indemnity insurance.

Generally, the insurance market comprises of insurers/underwriters; underwriting agencies; insurance brokers; insurance agents and insurance consultants. The Insurer can easily be confused with an Underwriting Agent or a broker but its important to know the differences. Every insurance company has a name and it must be shown in the insurance policy, however, sometimes it is the name of the Underwriting Agent or even the broker that appears on the Policy or Certificate of insurance. Neither the underwriting agency nor the broker are ‘risk-carrying’. Rather, they are acting as agents of the insurer for the purpose of issuing the policy. This can be confusing and misleading - but it is legal.

The reason why underwriting agents shouldn’t be the ones named on the policy is because they carry no risk, they are merely agents ‘underwriting’ on behalf of an insurer and are remunerated by commissions for successful and profitable underwriting. In terms of brokers, they shouldn’t be named on the policy either because they are the agents of the insured and their duty is to obtain the best terms, conditions and price for the insured, they are an entity regulated by the Financial Conduct Authority (FCA) and authorised to act as an intermediary between the underwriting agents and insurance companies. 

Practices don’t necessarily need to use either consultant to obtain insurance, they do have the option to approach the insurers directly themselves. This tends to be done online but the key thing to be wary of with purchasing insurance online is that any advice as to the suitability of the insurance is limited and won’t be to the same level and depth that an underwriting agent or broker would provide.

So lets look at how the claims process unfolds:

The word ‘claim’ has more than one meaning in a typical insurance policy and its important to recognise the differences. 

• Firstly, a ‘claim’ against a policy is for the Insured to make when the occasion necessitates the protection afforded by the policy.
• And second, a ‘claim’ against the Insured is made by a third party wishing to take legal action to recover an(alleged) loss.

A typical policy will define the meaning of the Claim against the Insured, therefore, its important when reading the word claim in the policy to understand the context of its usage. Typically, a claim is made by a solicitor on behalf of a third-party claimant but it doesn’t always have to be that formal. A third party writing a letter or email can also make a ‘Claim’ as defined in the policy and so it should be treated as such, whatever the firm may think about the matter. It will then require immediate attention by the recipient and that means telling the insurer and assisting them or their appointed loss adjuster or solicitor, in preparing to defend the allegation. Its important to inform the insurer ‘as soon as is practicable’ of the receipt of a Claim because they want to avoid any legal prejudice to the position of the Insured, in law, which may easily arise by undue delay in attending to the notice of Claim.  

As architects the ‘public/client’ perception and expectation of an architect is that they are the master of expertise in how the building should be designed, specified, built and commissioned. Whether or not this is contractually the case, the architect is usually a leading contributor to the finished project/building and therefore presents as a prime target for parties suffering from the loss or displacement after an event to make a claim against architects. Unfortunately, architects’ commitment to their clients and their role on projects, and their eagerness to please or appease a client will often cause them to ‘go the extra mile’ in doing things that are beyond the agreed remit or scope of their services. Consequently, complainants and claimants and their professional advisers will explore the work carried out to find opportunities to create a ‘legal’ responsibility of the architect, whom they know will be insured and therefore worth pursuing. One of the principal features of liability insurance is to provide and to pay for legal representation, at no cost to the Insured. That’s an invaluable benefit of an insurance policy as legal costs of defence will typically start at roughly £25,000 and can quickly escalate as some disputes can last for several years.

When a claim is submitted under the policy one of the first things that the insurer will do, or instruct the lawyer or loss adjuster to do on their behalf, is check the accuracy of the answers given in the proposal application process. If any inaccuracies are found it immediately prejudices the future handling of the claim and also, possibly, the coverage eventually offered. Therefore, it is key to describe the business and the nature of the business including the trials and tribulations of the business as accurately as possible to ensure the likelihood of acceptance of a future claim. The underwriter will then assess the risk presented by the business and decide whether to accept the risk and on what terms. Some insurers, will agree to include a clause in the policy which provides protection against innocently failing to disclose ‘material information’ or making an innocent misrepresentation to insurers. This is a valuable protection and should be requested of the insurer if it is not already in their standard policy.

So once a claim has been made, insurers will typically outsource claims to solicitors, loss adjusters and/or claims management companies. Those are given the authority to interface with the policyholder which in this case would be the architect, and they will report back to the insurer. This distances the Insured from the insurer and can lead to poor communication in certain instances. Therefore, it is recommended to use an insurance broker whereby they can have an input into the communication direct with the insurer. 

It is, therefore, critical that practices take specific legal advice in relation to the formal contracts enter into, as sometimes, a poorly drafted contract could prejudice the practices legal rights and remedies, without anyone appreciating the fact; until a dispute about the contract arises and the fault is discovered by a lawyer. Investment in an ongoing relationship between the practice and competent and experienced legal services, therefore, is both an investment in the practice’s security and also of great value to insurers when they are fighting on your behalf.

Here is where internal complaints handling processes are valuable for practices to have to ensure a claim is handled as quickly and efficiently as possible to avoid it escalating further to the insurers. 

So how can practice identify the best value for money to spend on PI insurance:

The insurance market for architects’ professional indemnity fluctuates between 20 and 30 competing insurers at any one time. Some of these insurers deal only with insurance brokers who specialise in PI insurance but not with the architectural practices direct. Some insurers sell only online and not through brokers. The price of insurance for an architecture practice can vary by anything from 5% to 50% or more.  

How a policy may respond in the event of a claim is determined by: the culture and attitude of the insurer towards paying claims, the meaning and effect of the words, phrases and expressions used in the policy according to the law, and the efficiency of the legal and/or expert representation engaged in defending the claim. It is generally advisable to start the annual renewal process at least four months in advance of the renewal date. This is because it takes time to do the research, get comparable quotations and have time to consider the pros and cons of what is being offered at any one time.

An additional matter practices should consider to ensure it is included within their PI:

Is for matters relating to subcontractors and consultants. Its important for every architect to understand and to record the ultimate responsibility of the architect for design, and associated services, for each element of the building at each stage of design. It must be clearly understood not only at the outset of the work but as the work progresses and when amendments, additions and necessary changes are introduced by the architect or by any party with influence in the project. Despite the best endeavours of the architectural practice, its almost impossible to control or regulate the performance of subcontractors by any means other than by contract and so its equally important to ensure that everything is crosschecked with regards to subcontractors/consultants engaged by the practice or by the client and with whom the practice will have to interface. It must also be considered that subcontractors/consultants not appointed by the practice in contract, but by a third party, may necessarily interface with the practice’s individuals responsible for the project and in doing so they are likely to create a legal relationship whereby the practice owes a duty of care to the subcontractor/consultant and or their client. 

Any interface, therefore, between the practice and subcontractors/consultants should be carefully recorded and scoped as to what exactly is required and delivered - and what is excluded from the practice’s services and the level of insurance subcontractors have with regards to their professional services. The insurances, therefore, held by subcontractors/consultants and other parties not connected with the architectural practice but involved in the practice’s project are important considerations to the architect’s pracrice. This is because, in the event of an incident that may cause the architect’s liability to be brought into consideration, the practice’s PI insurers will immediately start to look for other parties that may have a contributing liability. If they are not properly insured the architect may have to bear that uninsured liability as well as their own liability. That can ruin both a practice’s reputation and its financial stability. 

To sum up what I discussed today:

• Under the ARB and RIBA Code of Conducts, architects are expected to have adequate and appropriate insurance cover - therefore selecting the correct insurance for the practice is key 
• Architects are particularly vulnerable to legal attacks because their scope of services are broad and complex, therefore, insurance is an ‘economic necessity’ for an architectural practice
• PI insurance includes the costs of expert legal advice in defending the allegations against the practice and doing so in a way that preserves the integrity of legal rights and remedies
• In the course of choosing and buying professional indemnity insurance, practices can acquire knowledge that will help them to understand the best forms of risk management for the practice and so reduce the likelihood of a claim being made against them and increase the prospects of a successful defence if it happens. 
• It is advisable to refer to an insurance broker or consultant to advise the practice which insurance company best meets the demands and needs of the practice and which insurance policy fits those requirements as not all insurers are ‘the same’ and their products are not identical to each other. 
• When a claim has been made, insurers will typically outsource claims to solicitors, loss adjusters and/or claims management companies. Those are given the authority to interface with the policyholder which in this case would be the architect, and they will report back to the insurer on the best route forward.