A risk with all insurance policies is that you inadvertently do something which invalidates the policy, with the result that you will have to meet the costs of any claim made yourself. We set out below the common pitfalls that you need to be aware of, after first providing a brief explanation of public liability and professional indemnity insurance.
Public Liability Insurance – What is it?
This protects you for accidents – to any person for death, injury or disease and for accidental loss of, or damage to, property.
Cover is on a ‘loss occurring basis’ so there is no need for it to be maintained after the project has been completed. Usually cover is for any one loss and includes your defence costs, any awards, damages and rectification costs.
Professional Indemnity Insurance – What is it?
This protects you from claims of professional negligence, e.g. negligent design and negligent performance of professional services, such as surveying, project management or contract administration.
Cover is on a "claims made" basis, so a claim made against you in 2013 will be dealt with under your 2013 insurance policy, even if the work was carried out several years earlier.
Cover usually includes defence costs, any awards, damages and rectification costs.
Common pitfalls to both professional indemnity and public liability policies
Never admit liability
Never admit liability for, or settle a claim, without the written consent of your insurer. This extends to expressions of dissatisfaction (as they may later become claims).
A particular grey area is where meetings take place to discuss problems. Ensure that you make it clear that any settlement would be ‘without prejudice’ and on a commercial basis. Also, any remedial works should be carried out, without admission of liability on your part.
Failing to notify
It is critical that you notify your insurer of any claims or potential claims as soon as you are aware of them. Failure to do so could invalidate your policy and the insurer will not indemnify, leaving you to pick up any claims.
Often an insured party worries that several notifications during the course of a policy year may cause problems at renewal, however, usually the insurer simply regards this as good risk management by the insured.
What work is covered?
Check your policy schedule to ensure you are covered for all the works or services that you are intending to provide. Often insurance policies that are cheaper may look like they will cover you for any losses but in the fine print they contain specific exclusions. Examples of exclusions are working abroad and excluding certain types of (risky) work.
Ensure insurance requirements are "back to back" with the actual cover maintained
Any contract you are considering should be sent to your broker who will be willing to review, to ensure that you have a programme of insurance to cover your contract. Problems often occur when contracts are signed which contain insurance requirements more onerous than the policy held. For example, insurance is often requested for ‘any one claim’ but professional indemnity insurance can be ‘in the aggregate’. Your broker can assist with this in the tendering phase. The insurance that you maintain should be brought to the client’s attention and they may be happy to accept the (lesser) insurance that you hold rather than what is stipulated in the tender document (but remember that your contract should be amended to reflect this).
Beware of fitness for purpose and indemnities
Your lawyer can also advise on any onerous conditions which could invalidate your cover. Often clauses are inserted in an attempt to place additional risks and liabilities onto you. For example, a fitness for purpose obligation, which is a much tougher standard than the usual, reasonable skill and care. Effectively, with a fitness for purpose clause you are guaranteeing the result of your work. Such clauses are almost always excluded from your insurance cover.
Indemnities are also problematic as usually they are excluded from your insurance cover. An indemnity clause will extend your liability; there is no duty on the claimant to mitigate losses and proceedings can be started outside the normal limitation period.
Limit your liability
It is good practice to limit your liability as much as possible. There are a number of ways of doing this, for example excluding indirect and consequential losses and loss of profit, limiting claims to a certain amount or limiting the time in which claims can be made against you. Alternatively, agree a net contribution clause, so your liability is limited to the extent for which you are liable, so you are not taking on liability for other parties that also contributed to the losses.
Be aware of your duty to mitigate
Often insurance policies will contain a condition that a payment will not be made unless you make a reasonable effort to minimise any loss, damage or liability. So if a circumstance arises which is likely to cause a loss to your client, you should be taking measures to reduce those losses.
For example, this may mean that you carry out work to remedy the initial defect complained of (but beware of making admissions – see the first point above).
Make sure any advice that your give/receive is in writing
Documenting what you do is key to standard risk management. If you give any advice in the course of a project, even if your client ignores it, you should record it in writing, as you may need to rely on that evidence if a claim is brought against you.
Preserve any evidence
Maintain all files, emails, documents etc. relating to every project. Again whilst expensive and sometimes time consuming, this is standard risk management. If any key witnesses are leaving the practice, make sure you have discussions with them about providing witness evidence should a claim be brought against you.
Generally, you are liable for your work under contract for six years from completion, under deed for twelve years from completion and in negligence potentially for fifteen years. There are then further time periods that can apply. Obviously you need to assess the risk, but we recommend retaining documents for at least 20 years from completion of a project.
To sum up
Whatever insurance you are required to maintain under your contract, the key things to remember are to ensure your contract terms are in accordance with the requirements of your insurance, be aware of onerous clauses and read your policy and share its terms. Involve your broker and legal advisors early whether that is at the time of contract negotiations or if you face a claim and if in doubt be cautious because small matters can turn big!
For further information, please contact Partner Sarah Wilson by calling 0345 901 0930 or email firstname.lastname@example.org