School of Specification Legal responsibilities and liabilities – ADC

Why is professional indemnity insurance for architects so expensive?

It’s no secret that the professional indemnity (PI) insurance market has hardened over the last few years due to a number of factors coinciding. Insurance providers have become more risk averse, due in part to the breadth of risk covered under a PI policy, the increasing value of projects and the innovation involved in delivering them, and the history of large claims weathered by the market in recent years. In particular, recent shortcomings in PI cover have been exposed as a result of the cladding crisis and a combination of the above has led to policies becoming more expensive and sometimes harder to procure.

Do architects put their head in the sand when it comes to liability and insurance?

There may be an understandable tendency to avoid considering the consequences of a job going wrong and how to protect oneself, in favour of focussing on doing a good job. The ideal scenario is to combine that focus with an understanding of the areas of risk and what (if anything) can be done to protect the practice from those matters which are sometimes outside its control.

What are the most effective means of limiting liability?

Without sounding too much like a lawyer, the most effective way is to ensure the terms of appointment are properly drafted, signed and include robust terms that reflect what has been agreed and (to the extent possible) limit the practice’s liability. These safety measures could include an overall cap on liability, which is often (but not always) linked to the level of PI cover being provided, and/or a net contribution clause, which essentially limits the professional’s liability to a ‘fair and reasonable’ proportion of the claimant’s total losses. It may also be appropriate to exclude any liability for certain types of loss.

Consideration should also be given to the extent and terms of collateral warranties or third party rights that might be given to third parties, as each of these creates its own contractual relationship and provides a direct right for the beneficiary to make a claim against the practice should it suffer a loss. Similar, or indeed more restrictive, limits of liability may be appropriate for these ancillary contracts too.

Is it advisable for architects to negotiate and draft the relevant documentation themselves?

In an ideal world we would advise taking legal advice to make sure the written contract reflects what all parties understand has been agreed. This is particularly so where the form of contract is bespoke and provided by the client for agreement, or perhaps where there is pressure to sign up to a contract on the same terms as previously used on a different project, but where the risk profile was possibly different. Lawyers can be engaged for the whole drafting and negotiation process or can be consulted in a more limited capacity, such as to give a contract an early once-over for any red flags. It would also be advisable to run the terms by the practice’s existing insurer or broker to make sure there is nothing of concern that could potentially lead to insurers refusing to provide cover – something that would not be in either the client’s or the practice’s interest.

Where can small practices and sole practitioners get sound, affordable advice?

Their existing insurer or broker will be able to advise on the scope and level of cover which is necessary and available, and potentially any insurer’s requirements that need to be included/avoided in the appointment. If it is necessary to obtain legal advice it would be wise to contact a specialist construction lawyer who will have the experience to consider the nuances of professional design services appointments.