Professional indemnity insurance – am I liable?

Phil Thorpe

Providing the right insurance protection is only part, albeit the major part, of the service we provide. Once insurance is in place, you will inevitably be confronted with a range of queries from your customers – which you won’t necessarily be able to answer and will need support from various advisors.

One of these areas is contracts which your customers ask to be signed and which, naturally, will lead to referral to others beforehand. Principally, this will involve your law firm, from a more general perspective, but there will be specific areas which the lawyer might not feel entirely comfortable commenting on.
One of these areas is insurance and the implications for your professional indemnity policy in signing contracts and, essentially, whether your cover will respond to the liabilities contained therein.
This is where we come in and can offer you something which you are unlikely to find elsewhere.

Throughout this webinar we’ll be exploring why contract reviews are vital and will be looking at:

• Common areas of liability contained within contracts you enter into
• Explaining these in detail and whether you should or can accept or push back on these
• Whether your insurance does, or can, cover these extra liabilities

Why are contract reviews vital to managing your business’s risks?
We’re always told to ‘read the contract’ before signing, but how many businesses conduct a thorough assessment of the terms? If a company is small, in its infancy, or if an order is crucial to its survival, then a contract review could be overlooked in the haste to secure a deal. But does it really matter?

Of course – as we know – it’s all in the small print
Business contracts are usually comprehensive documents, which typically attempt to pass all responsibility to the other side and, as a result, they will generally limit the liability of the party that has issued the contract. At first glance, this might seem like a sensible route to take, but in fact it doesn’t necessarily benefit either side.

“One likely consequence is that the contracted party can’t get insurance for certain aspects of the terms and, as such, they may need to pull out of the deal,”

“Alternatively, it might only be able to get partial cover, perhaps at a higher premium, but decides to proceed anyway.
If something goes wrong down the line and the contracted party doesn’t have sufficient insurance to cover its liability, then both parties could suffer serious financial and reputational damage.”
By carrying out a review of the contract terms as early as possible, these risks can usually be significantly reduced or avoided altogether, and a mutually beneficial business relationship can be forged between both parties.

The power of contract reviews
The purpose of a contract review is to highlight unfair or unreasonable liability terms, and to address the specific insurance requirements that are involved. It gives the receiving party a chance to find out which parts of the contract can be insured and which cannot, and to then negotiate with the insurer and request amendments to the terms.

Generally, large companies have an in-house legal team and established Terms and Conditions so they can respond quickly to incoming contracts. However, start-ups, SMEs and many other UK companies may not have these luxuries. For them, an expert insurance broker becomes an invaluable intermediary.

“By engaging with us, you can adopt a stronger negotiating position,”

But before all of this we can help you choose the right insurer in anticipation of such contract referrals. Some insurers are more willing or able than others to extend their policies to cover greater contract terms.

As such, there is an art in the broker recognising clients that are likely to need cover extensions and placing the risk with a more accommodating provider.”

However, time is of the essence in such matters and if we are not made aware early enough in advance it makes it harder to negotiate with the insurer and push for the best possible deal.

Of course, if appropriate insurance can’t be arranged in time, you may have to turn down the work and lose out on valuable revenue; or even decide to take the work on regardless of being uninsured – which could have big repercussions at a later date.

Once signed, contract terms are virtually impossible to change.

There will always be toing and froing with these sorts of things. That’s why receiving contracts at least a month before signature is ideal.

Early intervention is key.”

So, what are the contractual issues which commonly arise?

1). Contract Type

• There are 2 main areas of contractual implications. These are:ii). General Standard T&C’s and where there can be potential conflict between those of your clients and your customers
• i). Specific Sales/Supply/Services Agreement

2). Typical Concerns

What are these typical areas of concern?

a) Waiver of Subrogation Rights. This is where you are asked to waive any rights you might have against the other party to the contract; this irrespective of whether they are at fault or not! Most policies will not permit this and, indeed, cover might well be voided if these have perhaps, unwittingly, been signed away! These must be referred to the insurer for their prior agreement.

b) Hold Harmless Agreements. This is where you agree not to sue the other party and, hopefully, they agree not to sue you as well. Often covered within that part of a contract perhaps headed ‘liability or indemnity’ This can either be:

• a benefit to you
• or an additional liability

Which will depend upon who the other party is. If there is greater exposure to you, it’s a benefit to have this waived, but if not the reverse applies

Finally – It is important to ensure that such agreements are reciprocal (i.e. work both ways).

c) Jurisdiction. This refers to where a claim is brought and governed. Typically, UK issued policies are governed by UK law and might not follow the interpretation put on a claim/policy by, for example, a US or other overseas court.

d) Inclusion of Additional Insureds. This is where your client askes to be named on your policy and, therefore, has the benefit of and is able to claim under it. This is generally not included within professional indemnity policies (more likely for public and products liability).

So, if this does arise, requests should be avoided as this would mean you would then not be covered for genuine claims brought against you by your customer – this on the basis that you can’t claim against yourself and which would be the case if a client had been added to your policy title as joint insured.  In the UK, this is usually addressed through a standard ‘Additional Insureds’ clause which, very simply, allows your customer to be covered under your policy when they receive a claim for something YOU have done.

e) Contractual Liability/Penalties. This is where you are asked to be responsible for something which is beyond your legal liability and negligence and where you limit your rights of recovery against the other party to the contract. Policies, traditionally, only cover your ‘Legal Liability’ and are unlikely to cover additional liabilities imposed under contract and in the absence of negligence/legal liability applying. Consequently, it is vital that such ‘extended liabilities’ are not accepted – or you accept and understand that these will be uninsured risks.

f) Intellectual Property Rights – This is where you infringe intellectual property owned by someone else. Generally, a professional indemnity policy will cover your INNOCENT infringement of these but you might find that your liability here, under contract, goes further than this so it is important to ensure that you only accept this if arising out of such innocent infringement. Stand-alone IPR cover is available but is very expensive.

g) Breach of Confidence – This is where confidential information provided to you (by your client) manages to get out into the public domain. If this arises through your negligence, your policy will cover you for resulting claims brought against you but ONLY where brought by your client. Claims made by others, who are not party to your contract, will NOT be covered and this is where you would need more specific insurance, such as a Cyber Liability policy which will also cover liabilities imposed under GDPR.

h) Negligence. Effectively, this means your ‘legal liability’ and this is what professional indemnity policies cover. Many contracts try and impose liability for ‘Gross Negligence’ as opposed to simple ‘negligence’ which is more clearly understood and accepted by UK courts/insurers. There is a degree of ambiguity over what ‘gross’ is in this context and what it actually means. This has the potential for this aspect of a claim not to be picked up by your policy as it could extend your liability beyond pure negligenceSo it is advantageous to try and have this one, simple word removed from a contract.

So, in summary

• Stay calm and negotiate

• But start this process in good time

• Ultimately, it’s all about taking a proactive, realistic and timely approach to each and every new business contract – to the benefit of all parties involved.

• Even if you believe you are in the less-strong negotiating position, against a large corporation that has standard terms and conditions signed-off by its lawyers, it doesn’t mean there’s no scope for negotiation.

• If we get in early enough, and provide a reasoned and rational argument surrounding proposed changes, these large companies will invariably try to accommodate as they want the services you are offering! Terms can usually be changed to suit both parties, as it’s in everyone’s interest to be happy and appropriately insured.”

• This dedicated management process will allow you the confidence to sign contracts, while being as fully insured at the same time.

• Ultimately, you will avoid exposing the business to unnecessary uninsured risks and, importantly, leave you to get on with generating revenue!”

Why is it important to refer contracts to us before signing?

• The principal reason is that many businesses, which might expect this cover to be provided, will be unaware of these issues which could impact on their insurance protection.
• It avoids having a claim repudiated by the insurer solely because of contract terms entered into
• In many instances, depending upon the insurer, policy cover can be extended (sometimes without cost) to cover some of these additional liabilities
• Not addressing the potential issues surrounding contracts has the potential for serious reputational damage not to mention loss of income.

Martin Taylor

Standard Extensions
A professional indemnity policy will provide cover for your liability for negligence, professional errors & omissions and frequently your civil liability.

In addition you will frequently find extensions within the wording to cover your liability for –

• Your Unintentional Libel, Slander or deformation
• Your unintentional infringement of intellectual property rights but generally not breach of patent
• Court Attendance Costs – costs for you and your staff to attend court as a witness.
• Criminal Prosecution Defence Costs but only where defending the criminal proceedings could protect you against a claim under the policy
• Criminal prosecution defence costs for breach of the Data Protection Legislation
• Disputed Fees where payment of the fee (or sometime 80% of the fee to you will avoid a claim under the policy). Normally as a result of a counter claim to a fee recovery action.

Special Extensions
In addition to the ‘standard’ extension you may expect, dependent on your profession, the following ‘additional’ extensions –

• Pollution and Contamination – this is usually either excluded or restricted to sudden and accidental – the wider cover is needed in the event that the pollution or contamination was gradual.
• Asbestos – frequently excluded under a standard wording but essential for many professions even if you are not specifically contracted to advise on asbestos – for example a geotechnical engineer or laboratory that miss the presence of asbestos in a sample.
• Waiver of subrogation rights against sub consultants or sub-contractors. This may be essential where you have self-employed or one person sub consultancy businesses that either do not have any insurance or very limited cover.
• Ombudsman Adjudication Awards such as the property ombudsman as these may go beyond pure legal liability and therefore must be included if you are signed up to any ombudsman scheme.
• Vicarious liability – If you are providing consultants as an agency you may have to accept the liability for the work they do as well as your liability for the sourcing and placement of them.

Main Exclusions

• Products and Goods Supplied are frequently excluded – this needs to be checked if you supply a ‘product’. An example of this may be a prepacked self-construct house where there are design and supply elements only.
• Extended Liability – your policy will cover your legal liability but if you extend that liability under contract your policy may not respond a good example of this is –
• Fines and Penalties which go beyond your legal liability
• Bodily Injury or property damage which may either be excluded totally or restricted to breach of duty. This may be particularly relevant where advice provided or not provided could lead to injury or property damage. An example of this is a training provider that runs a course on machinery handling.
• Damage by transmission of viruses this would be insured under a cyber liability policy.
• Jurisdiction and Geographical Limits – these always need to be checked to ensure they are in line with your business geographical spread and the jurisdiction you contract in.

Collateral Warranties
This term differs dependent on the context in which it is used:-

In General Law Contracts – it is a Term or Contract which runs outside of the main written contractual agreement between the parties

In Construction Law – collateral warranty refers specifically to a contract between a professional consultant, building contractor or sub-contractor and a third party (for example a funder, tenant or buyer)

It is an agreement under which a professional consultant, building contractor or sub-contractor generally warrants to a third party that it has complied with its appointment, building contract or sub contract.

Under construction related contracts there are frequently collateral warranties applied, these –

• • Allow assignment of the rights under the Contract to Funders, Purchasers, Tenants etc.
  • Confirms work has been carried out professionally and in compliance with the Contract.
  • Is normally issued as a Deed (though the original Contract must also be issued as a Deed) – under the Limitation Act 1980 claims can be brought within 12 years of the Breach of Contract/Deed (more of this later).

Pitfalls
There are certain pitfalls you should be aware of before signing a collateral warranty –

• 12 years from practical completion of the Contract i.e. the completed building. This should be avoided if possible and changed to 12 years from completion of the Consultants Contract. Always avoid terms such as ‘the right to rely on the limitation defences under the Limitation Act 1980 is expressly excluded’. Clearly a consultant who accept a contract with completion of the building could extend their liability by a number of years.
• Avoid going beyond reasonable skill and care – avoid proper or professional skill and care.

Under the professional indemnity insurance Section –

Always check the Limit of Indemnity required and ensure that the Clause ‘provided always that such insurance is available in the market at commercially reasonable rates’ is included. Check whether it is any one claim or aggregate basis. The contract must always reflect your insurance cover.

Any Clause that enables the Principle to organise insurance cover and then recharge should be deleted.

Assignments
Some Policies restrict the number of Assignments this should be checked to ensure the insurance and warranty are on the same basis.

Adjudication and Arbitration
It is imperative to ensure that any Adjudicator is an independent and therefore should not be named in the Appointment.

Fitness for Purpose
Fitness for Purpose obligations impose a greater standard of care than ‘reasonable skill and care’ as they impose a duty to achieve a result. Claims that arise out of such Clauses are often excluded under professional indemnity Policies and should therefore be deleted.

Instead of Fitness for Purpose the words

‘Warrants and undertakes that the Works will be properly designed or meet the requirements of an Employer in all respects and will comply with all relevant statutes’ maybe used though this should also be deleted if possible

Blanket Indemnities
A Clause is often added along the lines of ‘A Consultant shall Indemnify and Hold Harmless a Tenant/Beneficiary from and against all claims, actions, costs, losses and expenses made or suffered by a Tenant as a result of any breach by the Consultant of its Warranties and Undertakings under this Deed’. The key word being ALL.

This should not be accepted. The best position would be to delete this Clause in its entirety or alternatively you may consider the following Clause:-

‘The Consultant will indemnify the Client against all loss, damage, costs and expenses caused as a direct result of the Consultants negligence or negligent breach of contract provided such losses were reasonably foreseeable as likely to be incurred by the client and provide always the liability for Personal Injury or Death shall not be excluded or limited in any way’.

If a Client refuses to amend the Agreement as a last resort the words ‘provided such losses do not exceed those losses that will be awarded by a Court of Law in the absence of this Clause’ should be added.

To avoid the risk of picking up the liabilities of other design teams within a contract the following clause should be added:-

‘The consultants liability for loss under this agreement shall be limited to that proportion of such a loss which it would be just and equitable to require the consultant to pay having regard to the consultants responsibility for the same on the basis that all the members of the design team shall be deemed to have provided contractual undertakings on terms no less onerous than this agreement to the (beneficiary) in respect of the performance of their services in connection with the (development) and shall be deemed to have paid the (beneficiary) such proportion which it would be just and equitable for them to pay having regard to the extent of their responsibility’.

General
It is advisable to add the following Wording in any Collateral Warranty Agreement:-

‘A Consultant shall have no greater responsibility in scope or liability to the (Beneficiary) by virtue of the Deed than it would have had if the Beneficiary had been named as joint Client under the Agreement’.

Finally under limitation periods these are 2 types of contract –

Under a standard Contract –

Within six years of the date of breach of contract

The cause of action occurs as soon as the contract is breached.

However if a

Contract is signed under Seal (Deeds)

Within 12 years of the breach of Contract or Deed

IN ALL CIRCUMSTANCES SPEAK TO YOUR BROKER OR INSURER BEFORE YOU SIGN A CONTRACT.

Lucy Frost

Notifications and claims
As the claims manager I’m on the front line when things go wrong, so let talk about the claims process.

We all hope that we won’t ever need to make a claim but unfortunately with human (and let’s not forget IT) error always possible, combined with a litigious society no-one is bulletproof.

So you’ve got an Insurance policy that covers your professional indemnity, the policy requires you to notify any matter that could give rise to a claim, but what does that mean and when does a ‘problem’ become a ‘claim’?

You could be going through a complaint with a customer, you’ve discovered an error or maybe you’ve received a solicitor’s letter. Whatever the situation, if there is the slightest possibility that a claim could arise you need to let your insurers know.

Some people often hold off notifying problems in the hope that they can resolve the situation early or simply go away but sadly that isn’t always the case. The benefit of notifying insurers early is that you will have access to free advice. Along with insurers, we will guide you through how to manage the problem in the background without revealing our involvement to any other parties until absolutely necessary. The important thing is that at the early stages of any notification the tactics followed are always led by you, so you’re still in the driving seat. After all you know your business and probably the claimant better than anyone.

Of course by notifying insurers you are also ensuring you have complied with policy conditions which protects your policy cover later if the matter does escalate into a formal claim. professional indemnity insurers can be quite strict with these conditions, failing to give them a heads up on a problem (particularly if you’ve gone through a renewal) can lead to claims being declined. So it’s always best to tell us about a problem, if it goes away great, if it doesn’t then that’s what your insurance is there for.

So what happens when you notify?

Insurers will want to understand the problem you are facing and we will work with you on what to provide. Normally it means looking at any relevant records including contracts. It’s only when you have a claim that all those contract terms you didn’t really look at before come into play, hence the importance of utilising our contract checking expertise.

Most importantly we look at any correspondence you may have received and discuss with you and insurers how best to respond. If legal action is taken we would look for your insurers to appoint a solicitor to represent you, either to defend your position or negotiate a settlement favourable to all parties. There are often deadlines to work towards, either set by your customer or the legal process and we will support you to ensure those are met.

It’s worth noting that some policies will have useful extras which may cover early goodwill gestures or the waiving of your fee to a customer if it means preventing a claim later down the line. Tactics like this may help keep your customer happy and save a much larger claim later at a later stage.

Claims examples
So that’s a bit about the process, now let’s look at some examples of claims that might be covered.

Surveyor
A surveyor doing a house survey fails to include within his report that the property’s damp proof course is failing prior to purchase.

Later the buyer (their client) alleges the property is suffering from damp and complains that information about the damp proof course should have been in the survey.

They allege that had they known about the issues they would have pulled out or negotiated a reduction in the sale price. They expect the surveyor to contribute towards the property repairs.

The surveyor says there was no sign of damp when he inspected and looks to defend the claim but his customer provides an alternative surveyors report which criticises the original report and issues court papers for £22,000. Even if you can defend the allegations the legal costs can soon add up.

Estate agent/managing agent
A visitor to a block of flats injures his hand in a closing door – he alleges the door was faulty. The owner of the building has appointed a managing agent to inspect and rectify any faults and therefore the claim is directed to them for personal injury. It is alleged the agent failed to meet their client’s contract to inspect and maintain the property.

You might think it would always be the property owner who bears the responsibility for this, perhaps under the occupiers act, but if they sub-contract that duty to an advisor the claim becomes the agent’s problem instead. Luckily on this occasion the agent had carried out regular maintenance checks and the claim was defended but personal injury claims follow a strict protocol therefore prompt legal advice is required to ensure you comply with the timescales and that’s where the insurance came in. Insurers were able to defend this on the agent’s behalf without incurring any costs.

Environmental consultant
A house building firm instructs a consultant to carry out a soil analysis on a plot of land. The consultant gives the land a clean bill of health and work begins with foundations being laid.

The builder later discovers oil is present in the ground and work has to stop. It appears that a property to the north of the site had an unknown leak in their oil tank and the oil had been seeping into the ground. The consultant’s recommended boreholes had not gone close enough to the north boundary to pick up the contamination which was growing worse over time.

In an ideal world the builder would hold the property owner responsible but in reality they may not be responsible for all the costs in the eyes of the law. Also had the soil analysis picked up the contamination the leak may have been discovered sooner and works halted. The inadequate report mean the consultant was responsible for re-moving and replacing the contract works and a portion of the de-contamination plus contractors financial losses caused by the delay in completing the building project.

In situations such as these there is often a difference in expert opinion or maybe you have in fact fulfilled your obligations and the claim is spurious. Either way if you dispute the allegations against you having insurers there to back you means you can defend the claim without worrying about mounting legal costs. If an error has been made you have the comfort of the insurance to put the matter right and compensate the other party.

It is also important to remember that some of these trades would need bespoke cover to pick up these claims which are a risk to their business. Hence the need to have a broker instead of choosing an off the shelf product.