Module 04 Notes - Professional Indemnity Insurance PDF

0.4 PROFESSIONAL INDEMNITY INSURANCE Introduction Professional indemnity insurances are some of the most important insurances that an architect needs to undertake business and can prevent it from going under in the event of a claim. This module will discuss: – One of the most important clauses o...

0.4 PROFESSIONAL INDEMNITY INSURANCE Introduction Professional indemnity insurances are some of the most important insurances that an architect needs to undertake business and can prevent it from going under in the event of a claim. This module will discuss: – One of the most important clauses of a professional indemnity insurance policy, the ‘insuring clause’ – Common ‘need to know’ insurance terms – The difference between professional indemnity and public liability insurance – Other types of insurance that are relevant for your business – Common policy exclusions – The fundamental nature of a professional indemnity policy namely that it is a ‘claims made and notified’ insurance – The important requirement of the duty to notify Presenter Simon Gray, State Manager NSW Planned Cover Natalie Sullivan, Risk Manager Informed by Planned Cover Simon holds a BSc LLB degree and is the state manager NSW at Planned Cover. Prior to joining Planned Cover, Simon was a partner for many years at Hunt & Hunt, Lawyers. During his 12 years as a lawyer, Simon specialised in insurance litigation and acted for the major insurance companies in defending public liability, compulsory third party (CTP) and professional indemnity claims. Since joining Planned Cover in 2006, Simon has been the state manager and is also responsible for handling the company’s major professional indemnity insurance accounts as a broker. Natalie holds bachelor’s degrees in law and economics and was admitted to practise as a solicitor in NSW in 1997. Natalie has worked as a solicitor / associate at Sydney law firm Colin Biggers & Paisley in the insurance litigation division, defending claims brought against professionals, and as a legal advisor in the commercial claims division of an insurer, managing claims and providing legal opinions on indemnity and policy interpretation issues. Learning outcomes On completion of this module you should be able to: – Understand the key features of a professional indemnity insurance contract—the insuring clause, common policy conditions and exclusions, notification requirements – Distinguish between professional indemnity and public liability insurance – Understand the duty of disclosure to one’s insurer 1  – Understand the concept of ‘claims made and notified’ insurance NSCA 2015 Performance Criteria This module relates to the following competencies from the National Standard of Competency for Architects 2015: Practice Management 9.7 Knowledge of legal and regulatory requirements and obligations in regard to architectural practice, practice management and registration as an architect NSCA 2021 Performance Criteria This module relates to the following competencies from the National Standard of Competency for Architects 2021: Practice Management and Professional Conduct PC 1 Comply with the regulatory requirements and obligations pertaining to practice as an architect, including legislation, professional codes of conduct, obligations for continuing professional development and professional indemnity insurance. References Professional indemnity insurance for architects https://acumen.architecture.com.au/practice/risk-management-and- insurances/insurances/professional-indemnity-insurance-for-architects/ Public liability https://acumen.architecture.com.au/practice/risk-management-and-insurances/architects- liability/public-liability/ Engagement of contract staff https://acumen.architecture.com.au/practice/human-resources/recruitment/employment- agreements/ employment-of-staff-under-contract/ Duty to disclose liability https://acumen.architecture.com.au/practice/risk-management-and-insurances/architects- liability/duty-to-disclose-liability/ Client-generated agreements https://acumen.architecture.com.au/project/agreements/client-generated-agreements/ The ‘insuring clause’ A need to have insurance It is compulsory for architects to hold professional indemnity (PI) insurance in most Australian states and territories. For example, the NSW Architects Code of Professional Conduct requires architects to maintain PI insurance. Understanding the insuring clause 2 One of the first things taught to lawyers when reviewing an insurance claim is to start with the insuring clause. Too much focus is often put on the exclusions in a policy. Exclusions are only relevant if one can first ‘get through’ the insuring clause of a PI policy. Only then does one turn the mind to conditions and exclusions in the policy. A sample insuring clause ‘The insurer will indemnify the insured in accordance with the policy, for any amount which the insured has or would have a civil liability to pay, up to the limit of indemnity arising from the conduct of the business of the insured, committed or alleged to have been committed subsequent to the retroactive date, and in respect of any claim first made against the insured during the period of insurance.’ Key words in the sample insuring clause that are defined below are in bold. – The insured: The architect’s business entity must be listed on the policy. If an architect has started a new entity and not told their broker it will simply not be covered. – Civil liability: Businesses are not covered for non-civil liability, e.g. criminal liability. – Limit of indemnity: If a business only has $1 million in cover and the claim is for $5 million, the business will be uninsured for $4 million. – Conduct of the professional business: If an architect is insured as an architect but hires a structural engineer in the business and does not tell its broker who would then approach the insurer to change the policy, the business will not be covered. – Subsequent to the retroactive date: An architect must take out insurance before it starts work otherwise it will not be covered for its first projects. – Claim first made against the insured during the period of insurance: Discussed below under the concept of ‘claims made and notified’ insurance. Who is covered? The insured in a policy is generally defined to include: – the person, persons, partnership, company, or other entity specified under the heading ‘Insured’ in the schedule—so if the entity is not listed it is not covered – their predecessors in business – any person who is or may become, during the period of insurance, a principal, partner, director, i.e. current and future employees/directors in the policy period – any former principals, partners, directors or employees—previous employees/partners are covered for their past work for the business – the estate, heirs, legal representatives or legal assigns of any natural person insured under the policy in the event of the death or legal incapacity of such person—meaning that individuals’ estates are protected by the policy provided the policy is still in force/renewed Contractors Contractors are usually covered but only if they are working solely during the contract period for the insured entity. If they are true independent contractors, they should have their own insurance policy. 3 Subconsultants Professional subconsultants are not covered by an architect’s PI policy. If the architect’s policy has a broad subconsultants extension, then it is generally covered for the errors of the professional subconsultants it engages directly. It is important to keep track of their insurances and it also creates extra risk for the architect. ‘Private jobs’ or ‘moonlighting’ What is not covered are ‘private jobs’ by ‘moonlighting’ employees. If employees are working on their own projects (even if they use their employer’s resources without consent) they are not covered as the work falls outside the insuring clause—it is not work of the ‘insured’. If an employee is doing private projects, this must be discussed with their employer who may be able to bring it under their policy with appropriate peer review. Alternatively, the employee will need to obtain their own PI policy. Terms and definitions Limit of indemnity The limit of the insurer’s liability under the policy as specified in the schedule, i.e. the most the policy will pay for any one claim. The policy may also pay legal defence costs in addition to the limit (an ‘exclusive of costs’ limit) or they may form part of the limit (an ‘inclusive of costs’ limit). Professional business The carrying out of those functions normally associated with the conduct of the members of the profession stated in the schedule. It is important that the professional business in the policy schedule is correctly defined to include all professional activities of the practice. Any new and different activities need to be added in discussions with one’s broker during the policy period and before the architect starts providing those new or different services. Retroactive date The retroactive date (if any) specified in the schedule. The retroactive date is usually ‘unlimited’ or tied to a specific date, such as the date your practice started. Operation of retroactive date Unlimited retroactive cover Cover will be provided for any claim or costs irrespective of when the acts, errors or omissions giving rise to the claim occurred. Limited retroactive cover If retroactive cover is limited to a specified date then cover will not be provided for any claim or costs where the acts, errors or omissions giving rise to the claim occurred prior to the specified date. Example In our example: 4  – The practice takes out PI insurance two years after starting work – A limited retroactive date is provided of 1 June 2019 – The claim is made after the practice takes out PI insurance, however, it relates to work done prior to the limited retroactive date Is the practice covered? No. The policy does not provide any cover for work done prior to the retroactive date, i.e. 1 June 2019. There is no cover for the claim. It is vitally important to take out the insurance before one starts work or gives any advice. Professional indemnity vs public liability insurance Professional indemnity insurance Covers a service provider’s professional liability, that is, liabilities directly associated with the provision of profession services and advice. Professional indemnity insurance is ‘claims made and notified’ insurance as discussed below. Public liability insurance Covers a service provider’s general liability, that is, liabilities associated with running a business not related to one’s profession, including its liability as: – an owner/occupier of premises, – a visitor on a work site or someone else’s property Public liability insurance is occurrence-based insurance, that is, the policy responds to the occurrence or event, for example someone slipping on a wet floor in an architect’s office or tripping over a power cord attached to a projector. The important point to note is that it is the nature of the claim and one’s duty of care as a professional or as an occupier / visitor that determines which policy responds. There is a misconception that a personal injury matter is always going to be a public liability, however, that is not the case. The difference is best illustrated by an example. If someone comes to an architect’s office and slips on wet tiles which had been designed/specified by another architect, then the following claims could be brought: – Public liability claim against the first architect as occupier of the unsafe premises – Professional indemnity claim against the other architect for specifying non-compliant tiles 5 If the same event happened at a client’s premises after completion of the works, then the following claims could be brought: – Public liability claim against the client as occupier of the unsafe premises – Professional indemnity claim against the architect for specifying non-complaint tiles Other insurances to consider In addition to PI and public liability there are various other insurances to consider including: Office or business insurance—recommended Public liability insurance is often part of an office-pack or business-pack insurance which includes cover for: – Office contents, furniture, computers – General property—portable items – Glass – Electronic machinery – Tax audit – Business interruption Workers compensation—compulsory Covers injury sustained by an architect’s employees while they are at work. Each state/territory has varying requirements. Management liability, including employment practices, statutory, and directors and officer’s liability— recommended Covers the personal liability of the directors and officers of the business for their responsibilities relating to company management, corporate governance and statutory compliance. It covers the business for employment-related actions, such as wrongful dismissal or workplace harassment. It covers (most) civil (not criminal) statutory fines and penalties the business may incur as a result of breaching legislation or regulation. Income protection key person—consider Covers the business against the loss of a key person from illness or injury. It can cover both the loss of potential earnings the key person would have otherwise made or in the event of total disablement or death pays a lump sum to the business to buy out the shareholding of the key person. Other type of ‘life’ insurances include life, total and permanent disability (TPD) and trauma insurances. Cyber risks—highly recommended This is a rapidly increasing area of risk. It covers the costs associated with various types of cyber-crimes including hacking, cyber theft, denial of service, ransom attacks, data breach etc. It covers the costs to the business as well as the liability to third parties and potentially any fines associated with the release of clients’ data and personal information. 6 Motor vehicle—recommended Covers the damage caused to business vehicles and the damage those vehicles cause to other vehicles or property. Group policies can be economical. Business travel—recommended Covers the business for costs associated with travel risks, such as medical/evacuation costs of the employee whilst overseas, loss of luggage, cancellation expenses, kidnap and ransom, personal liability etc. While the exposure is moderate, potential claim costs can be high. Group policies can be economical. Common policy exclusions All professional indemnity insurance policies are subject to limitations on cover, generally known as exclusions. Without wanting to dwell on the ‘bad’, it is vitally important that architects understand what is not covered by their policy. Professional indemnity insurance is often one of the most significant assets of a professional practice. It is imperative that architects operate within the confines of their policy so that it will be available should it need to be called on. As with all insurance policies and contracts generally the ‘devil is in the detail’, so while this section discusses in broad terms some common policy, architects must refer to their own policy wording to understand what is in or out and remember that professional indemnity insurance is annually renewable, meaning that the insurer and the policy wording issued by the insurer may change over time. Contractually assumed liability exclusion This is an exclusion to be mindful of when negotiating the terms of professional services agreements with clients. Many (probably most) professional indemnity policies include an exclusion on cover for liability which is assumed by the insured under the terms of a contract in circumstances where such liability would not have otherwise attached to the insured. Essentially this means that the difference between an architect’s common law liability and their contractual liability is uninsured. Commonly client drafted consultancy agreements are drafted in terms which increase an architect’s exposure to liability above that which the law would usually impose on an architect. Contractual clauses which oblige an architect to provide warranties as to fitness for purpose or guarantee project outcomes or indemnify clients for all losses which they may incur regardless of fault are examples of clauses which may, if they are the subject of a claim against an architect, lead to uninsured liability due to the operation of an ‘assumed liability’ exclusion. 7 It is important that architects carefully review and negotiate amendments to professional services agreements to avoid agreeing to clauses which may fall foul of this type of exclusion in the event of a claim. Waiver of rights exclusion Waiver of rights exclusion is another common exclusion found in professional indemnity insurance policies. Insurers have a number of rights under the policies they provide. One of the most commonly used is the right of subrogation. This mean essentially that the insurer can stand in the shoes of an architectural practice and in the name of that practice bring a claim against a party that it believes has caused or contributed to losses which it has paid out on that practice’s behalf. If an architect does something that prevents the insurer from successfully pursuing this right of recovery in circumstances where but for the architect’s actions it would have been entitled to, this exclusion may allow the insurer to reduce cover available to the architect to the extent of the prejudice they have suffered due to those actions. Asbestos exclusion Claims involving asbestos have generally been excluded from cover under professional indemnity policies available to construction professionals since the early 2000s. These are often very broadly worded exclusions, which exclude cover for claims in any way related to asbestos. If a policy includes such an inclusion, the architect should carefully review its scopes of services to ensure that it is not taking on obligations related to asbestos and not engaging as sub-consultants those who do provide such services. In the last 12 – 18 months, many insurers are placing additional exclusions on cover for claims arising from the use of aluminium composite panels (ACP) and some more broadly in relation to the use of non- conforming/non-complying building products. It is important that architects fully understand the extent of these exclusions, which all are drafted differently, and speak to their insurance broker if further explanation is needed to assist in understanding them. Refund of professional fees exclusion It is not uncommon for disputes between an architect and their client to involve the client demanding a refund of the fees paid by the client to the architect on their project up until that date. Refund of fee claims are regarding as a commercial matter between the architect and their client and are generally excluded from cover under a professional indemnity policy. Jurisdictional and territorial exclusions Professional indemnity insurance policies sometimes include jurisdictional or territorial exclusions on cover, even on policies which otherwise provide ‘worldwide’ cover. Most commonly the exclusion applies for claims arising from professional services performed in the USA / Canada and their territories or claims brought in the courts of these countries. If an architect is working in a country the subject of a territorial exclusion or are subject to that country’s laws, they should speak to their insurance broker to see if their cover can be extended. 8 Prior known claims and circumstances Understanding this type of exclusion requires understanding how professional indemnity insurance operates as a ‘claims made and notified’ insurance as discussed below. Claims made and notified Professional indemnity insurance is what is known as a ‘claims made and notified’ insurance. With ‘claims made and notified’ insurance, is it important to understand that the policy which responds to a claim is the policy in place at the time the claim is made, or the circumstances which may ultimately lead to a claim arise, not the policy in place at the time of completion of the work which is the subject of the claim. This is to be contrasted with ‘occurrence’ based policies, such as public liability insurance, where the policy which responds is the one in place at the time the event which lead to the claim occurred. It is vitally important to understand how ‘claims made and notified’ insurance works. One of the consequences of PI insurance being ‘claims made’ insurance is that architects need to continue to maintain PI insurance after retirement or ceasing to practice as they need to have a current policy in place for an insurer to respond to claims made against the architect. How long an architect keeps its insurance in place is a commercial matter. An architect’s contracts may specify a period of time during which it is contractually obliged to maintain its insurances. An architect may wish to seek legal advice regarding the applicable statutory limitations periods for the bringing of claim to assist in making a decision, and may also seek advice from its insurance broker. Notification So, what if a problem does arise on a project? When does an architect need to notify its insurer? The policy wording will set out exactly when and how an architect should notify its insurer and an architect should comply with all obligations as set out in the policy. Generally, the policy will require an architect to notify your professional indemnity insurer when it receives a claim alleging a breach of its professional duty or becomes aware of circumstances which a reasonable person with the architect’s knowledge would consider may result in a claim even where no claim has yet been made. The first limb of the test for notification is probably well understood. It is an objective test, in the sense that it relies on a third party to initiate a claim against the architect. 9 The second limb is possibly less well understood. The architect is also generally required to notify under its professional indemnity policy when a fictional ‘reasonable person’ who is given the same knowledge about a particular matter would think that those circumstances may at some point in the future result in a claim being brought against the architect. Insureds are encouraged to err on the side of caution when it comes to notification. If it is an issue on a project that is keeping an architect awake at night so much so that they feel the need to call their broker about it, it is probably a matter that should be notified. The consequences of failing to notify in accordance with the terms of a policy can be significant. Professional indemnity policies generally contain a ‘prior known circumstances’ exclusion, which allows an insurer to deny or reduce cover for claims or circumstances which were known by the insured and not disclosed to the insurer prior to coming on risk. It is vitally important that all claims and circumstances which may result in a claim are notified to the professional indemnity insurer prior to the expiry of the policy period. It is good risk management to have a policy in the office where staff are routinely asked if there are any matters which they are aware of which may result in a claim against the practice in the future, so that all matters are notified to the insurer in a timely manner and prior to the expiry of the policy term. Architects cannot allow a culture of fear to develop in their practices, where staff feel they cannot report problems on their projects. It is imperative that the culture within a practice encourages staff to seek the assistance of nominated senior staff within the practice should their projects be going astray. Concluding summary – Architects must have PI insurance to practice. – Do not treat it as just another administrative task to undertake. – Take the time to understand it. – It is a vital component of architects’ risk management as a professional. 10