In this article, we look at common issues businesses need to be aware of when agreeing to the terms and conditions of new work and instructions (i.e. the contract of work), and how these may impact your Professional Indemnity Insurance should a claim arise.
Before we jump into this, lets first look at basis of what Professional Indemnity Insurance is and covers.
The basis if Professional Indemnity Insurance
Professional indemnity insurance (PII) is a type of insurance policy designed to cover the professional and their firm against claims or losses arising out of negligent; acts (meaning you did something but not to the standard required), errors (you did something wrong which a reasonable member of your profession would not have got wrong) or omissions (you fail to do something a reasonable member of your profession would do) connected to the insured professional practice.
When you accept an instruction from the client you are agreeing to provide a professional service to them, and they are entitled to rely on that service.
When a professional provides services to a client, they have a legally imposed duty of care to the client to use their reasonable skill and care in the provision of those services. This means that, if for example you are an architect, you are expected to exercise the skill and care that someone could reasonably expect of architect. This is not therefore a standard of perfection, nor is there an absolute obligation that no matter what the service will be completed, or a certain thing done by a set date.
What PII doesn’t provide cover for is claims that arise on the basis of a client claiming you have done something wrong, or not done something you were due to do under a contract, unless the client making the claim would be able to do so under the law, even if that contract didn’t exist.
However, when considering whether the service has met the required standards, one of the key considerations is whether the Duty of Care owed to the client has been breached.
Duty of Care is a large and often complex area to get into, but in its simplest, most basic form, the core of the test amounts to – did you provide the agreed services with reasonable skill and care?
Duty of Care in practice
As a professional, providing professional services to your clients, the law generally says that you have a Duty of Care to provide those services with reasonable skill and care.
What this means is, if, for example, you are an architect, would another architect have done the same thing or done it the same way i.e. it is a test of what the ‘reasonable’ architect would have done. This is not therefore a standard of perfection, nor is there an absolute obligation that no matter what the service will be completed, or a certain thing done by a set date.
However, the pressures of commercial business decisions and winning contracts mean that it is common to businesses agreeing to terms and conditions in contracts that impose a higher standard, or extend the Duty of Care beyond ‘reasonable skill and care’.
“the Consultant will perform the Services, and carry out its duties and obligations under this Agreement”
“The Sub-Consultant has agreed to provide certain services (which form part of the Main Contract Services) under the terms and conditions of this Deed.”
The Consultant shall immediately advise the Company in writing of any circumstances which have arisen, or which are likely to arise which require or may require the Consultant to perform … …any additional services.
The Consultant warrants and undertakes to the Company that the Lead Partner / Director shall….
“The Consultant shall indemnify the Employer against any and all claims, actions, liabilities, losses, damages and expenses (including legal expenses) incurred by the Employer … “
These effectively are holding you to a higher standard, i.e. it does not matter if you used reasonable skill and care or not, if the thing is not done or something goes wrong or is delayed etc. you are in breach of the clause and liable to the other person as a result.
However, you should be aware that accepting a higher standard than would otherwise exist, conflicts with the terms of your professional indemnity cover and could leave you facing an uninsured loss should a claim arise, because:
- you have a legal liability under the contract, that is absolute;
- You used reasonable skill and care but something still went wrong and that has lead to a claim against you;
- you therefore have a legal liability under the contract, but it is not one that your PII will cover.
Whilst the risk of such an ‘uninsured claim’ arising might be small, the potential liability could be very large (i.e. you could have a liability for millions for loss of damages on a construction project, for example) but the extent of the risk and exposure depends on the project and the surrounding circumstances.
Whilst contracts are boring, they are fundamental to both parties
When you are considering a new instruction there are a number of points to be considered and addressed, including and very importantly, the terms of your engagement, indeed it is especially important that these terms of engagement should be established from the outset, and confirmed in writing.
Continuing the Architect analogy; In the same way an Architect wouldn’t prepare designs without adequate foundations to support the work, it is equally important to ensure that the relationship with the client is also adequately supported and evidenced in writing from the outset.
It is important to note that it’s as much in the interest of the other parties to the contract to see that any liability of yours under a contract will be covered by your PII, because if it does not, they will be relying on your firm having the funds or assets itself to pay for any claim, should they succeed with the claim in court.
Considerations for contracts
Reasonable skill and Care
We therefore recommend that all your obligations under a contract are qualified by the obligation to exercise “reasonable skill, and care”. The purpose of that is to remove the risk of an uninsured claim.
We recommend that you seek legal advice in the preparation or agreeing to contract instructions. However, we commonly seek to include the following clause in your contracts as this is quicker and simpler than qualifying each individual clause:
“Notwithstanding anything that may appear elsewhere to the contrary, any duty imposed on or requirement of, the Consultant’s and its officers, employees, agents or sub-consultants whether under this Agreement, or otherwise shall be deemed to be subject to the exercise of reasonable skill and care and nothing contained in this Agreement, or elsewhere, shall be construed as imposing on the Consultant, its officers, employees, agents or sub-consultants any greater duty than the exercise of such reasonable skill and care.”
Indemnities
Indemnities in a contract are another common issue, that can cause your Professional Indemnity Insurance not to cover a claim.
Definition: An indemnity clause is a contractual agreement that holds one party responsible for any losses or damages that occur from a specific event or set of circumstances.
Purpose: Indemnity clauses provide financial protection for businesses by shielding them from unexpected events, such as legal disputes or breaches of contract.
An indemnity clause is a bit like writing a blank cheque. The party who gets the benefit of the indemnity can basically tell you how much you need to pay as there is no limit set in place. The reason why you shouldn’t include or agree to an indemnity is because without it, the party would have to prove:
a) That you owed them a duty (I.e. you owed them a duty to complete a design by a specific date).
b) That you breached the duty you owed (i.e. you failed to complete the design by the date agreed).
c) That your breach caused them a loss or damage (i.e. because you failed to compete the design on time their, or the application for planning consent was delayed and they had to keep covering extra interest on a loan they used to buy the land).
d) They also need to prove the loss or damages, and that they have taken reasonable steps to limit them (i.e. they would need to show how much longer it took to get planning, and how much interest they were paying on the loan for that period of delay and they would also need to show what steps they took to try and reduce the interest, such as trying to renegotiate the loan etc.).
As you can see, the inclusion of an indemnity is therefore much simpler for the party bringing the claim because you can’t challenge them on any of those points. That is what insurers don’t like them, because if they did cover claims for indemnities, they would probably have to pay out a lot more.
Without an indemnity, the onus on proving a claim therefore lays with the claimant. We recommend that you insert the following clause in your contract to protect against Insurers not covering you for indemnities:
“Notwithstanding anything that may appear elsewhere to the contrary, whether under this Agreement or otherwise, to the extent that there is an indemnity regarding losses arising out of the performance or non-performance of the professional services then the recoverable losses shall be limited to those losses arising out of any negligent performance or negligent non-performance of the professional services and which are reasonably foreseeable, fully mitigated, demonstrable and legally recoverable.”
Collateral Warranties and Letters of Reliance
Collateral warranties and letters of reliance are both effectively, mini contracts between one party (the “giver”) and another Party (the “beneficiary”), but unlike a normal contract the responsibilities and liabilities flow one way from the giver to the beneficiary
These are used because the “beneficiary” is not a party to the main contract. For example, you sign a contract to design something for a contractor, on a larger development, the contractor might ask you to provide Collateral Warranties for their employer.
In doing so, there is a possibility you are giving the legal right of action (i.e. the ability to sue you) to a person who would not have such a right, if you had not given them the Collateral Warranty.
Some Insurers do not cover collateral warranties and letters of reliance if you give them to someone who would not have to right to sue you without it, others specify who you can give collateral warranties and letters of reliance to whilst others require collateral warranties and letters of reliance to be approved by them to be covered.
You should always check your policy and or check with your broker what the situation is with collateral warranties and letters of reliance under your current policy and each time you renew you PII cover.
Net contribution and limits of liability clauses
Net contribution
A net contribution clause is industry standard clause to put in contracts and are approved for use by BPF, ACE, RIAS, RICS and RIBA.
What these do is limit the amount that you (and or your PII) will have to pay for any claim. We therefore suggest you add the following clause to your contracts:
“The [insert the name you are referred to in the contract]’s liability shall be limited to the net contribution. The net contribution shall be such sum as it is just and equitable for the Consultant to pay having regard to the extent of its responsibility for the loss and/or damage in question when compared with the responsibilities of all other consultants, contractors, sub-contractors, and other persons providing services for the Works for that loss and/or damage.”
Limit your liability
It is also industry standard that your liability should be limited to a reasonable sum depending on all the circumstances. We suggest that you add the following:
“The [insert the name you are referred to in the contract]’s total liability for loss or damage arising out of or in any way involving the Development shall be limited to [£ Insert Figure], regardless of the number of collateral warranties, duty of care agreements or other similar agreements entered into by the Consultant. This limit of liability shall not limit the Consultant’s liability for bodily injury, sickness, disease or death.”
PLEASE NOTE: You should select a figure as low as possible but that you believe is still reasonable, taking into account your level of involvement in the project, the fee you will receive for your services, size of the Development, etc. the figure you choose should be no greater than your limit of indemnity under your PII.
Top four other things to consider when agreeing to new instructions.
- If a contract obligates you to hold and or maintain insurance, ensure the limit of indemnity required is less than or equal to the limit of indemnity you have.
- Ensure you are not obligated to provide your PII policy documents, only a certificate of insurance or brokers’ letter. If you were to provide policy documents to a potential future claimant, Insurer may withdraw or reduce cover.
- Always review your obligations, duties and services under any contract, they should fall within your firm’s profession (i.e. if you are a Surveyor, they should not be asking you to provide any design work).
They should also be within you competence (i.e. if you design air conditions systems, they should not require you to design drainage systems) and your capacity (i.e. does your firm have the people and resources to complete the work in the timeframe set out?) , any that do not are likely to be classed by a PI Insurer as outside of the policy and will not be covered. - If a contract refers to any other contract or documentation, ensure you have been provided with a copy, before you sign the contract.
Jensten Insurance Brokers in house Claims team offer a bespoke contract review service for all clients. If you receive a contact for consideration from a new or existing clients do feel free to refer the same to us so we can assess its compatibility with your professional indemnity insurance (PII).