Architects and PI insurance
Architecture is one of the older established professions and as such, architects are regarded by the insurance market as being a 'traditional' profession. Chartered architects are associates or are fellows of the Royal Institute of Chartered Architects (RIBA), although not all architects are members.
The profession is regulated by the Architects Registration Board (ARB) who in recent years, have introduced a number of changes including the requirement for all qualified architects to carry professional indemnity insurance.
Like all those involved in the building industry, architects have been affected by new legislation. The Housing Grants, Construction and Regeneration Act 1996 for example, became law in May 1998. It was designed to tackle problems such as excessive delays in claims and protracted and costly disputes within the construction industry. The legislation did so by incorporating adjudication procedures into all but a few building contracts. It is important to understand these acts and how your insurers expect you to respond to actions if and when they arise.
What do insurers look for?
Insurers will look for qualifications or experience. If there is a lack of qualifications or obvious experience insurers will want to see CVs for the relevant principals and consultants. They will also analyse a breakdown of fee income, attention commonly being paid to the following:
- Architectural work: new build
This is viewed as higher hazard - particularly work involving structural design for industrial or commercial clients. Attention is paid to public sector clients where the work may involve repetitive design e.g. low cost housing or Housing Association work.
- Architectural work: non structural
When work is in the private residential sector it is seen as lower hazard, but this changes to an increasing hazard when work is in the commercial sector. Claims tend to be less expensive than those linked to new build as the remedial work does not involve the building's 'skeleton'.
- Town planning
This poses a lower risk as nothing is being designed for construction. However, sizeable losses can still occur.
- Feasibility studies
At the stage of feasibility no actual building work has taken place, and if the project fails to materialise then the risk to insurers is very low indeed.
- Architectural consultancy
This is a 'catch-all' section for other miscellaneous work carried out by architects. if it is a large proportion of the annual fees, an explanation is likely to be needed.
- Interior design
A low hazard area which becomes more hazardous where work involves the retail sector, in which contract sizes can be high and often carry a significant amount of supervisory responsibility. Interior design by its nature tends to be transitory, particularly in the retail sector where premises are 're-invented' regularly.
- Quantity surveying: Project managing and project co-ordinating
Quantity surveying is generally a lower hazard, but this changes when architects find themselves project managing with a responsibility to appoint all other consultants as their sub-contractors. This means that any claim, regardless of fault, would be channeled through the architect whose insurers would then subrogate against the party at fault.
It is essential that you ensure that the contractor and all other parties involved in the design team maintain adequate professional indemnity insurance. Insurers see project co-ordination contracts under which the architect carries out a project management role but does not appoint other parties, as being a far better risk from their perspective.
This area is viewed as higher hazard. In Hammond's experience, architects rarely carry out surveys for lending purposes, but are far more likely to do a condition survey as part of a job.
Other areas of interest for underwriting purposes include:
- Contract sizes
There is a direct relationship between the size and complexity of the job and the exposure to risk.
Is your firm using 'cutting edge' technology or standard, tried and tested processes?
- Overseas exposure
Does the practice carry out work for overseas clients? Careful consideration would be paid to such work, particularly if it is carried out for US or Canadian firms.
- Retroactive exposure
Does the practice have an exposure to claims arising from past work, whether in the current firm or a former practice?
Examples of claims
- Negligent design on industrial new build
This case involved a design failure in respect of an industrial distribution warehouse. The building was incapable of housing refrigeration plant due to the incorrect design of an internal load bearing roof. Settled for £75,000.
- Negligent design on commercial new build
The incorrect design of fuel tanks in respect of a new petrol station development led to a failure in respect of a standard industry health and safety check. Alterations cost £18,500.
- Negligent design on residential new build
An architect signed a practical completion certificate on a residential new build job. Dozens of snagging problems then arose which the contractors failed to resolve. Settled for £5,000.
- Failure to seek planning permission
An architect was instructed to plan and design an office development. Although planning permission was requested and received from the Local Authority, there was a failure to seek permission for the correct area. Settled for £9,000.
- Inadequate supervision
Architects were instructed to produce a specification and supervise the renovation works to a church roof. After the contractor went 'bust', the roof failed after heavy rain and it subsequently transpired that work carried out by contractor was inadequate. The claimant alleged proper supervision by the architect would have avoided the problem. Settled for £100,000.
- Negligent site layout
Architects were instructed to design a residential development comprising ten properties. Dimensions for the site were provided by surveyors but were incorrectly translated by the architects and the development encroached onto land owned by Local Authority. Additional costs were incurred in purchasing additional land. Settled for £10,000.
- Negligent survey report
An architect instructed by a residential property developer to carry out a pre-purchase/exchange survey on a residential property. On the basis of the architect's report, the property was purchased in part-exchange for one of their properties.
A subsequent survey by prospective purchasers revealed serious cracks to structural wall. It was alleged the architect should have warned of the problem in order to trigger further expert investigations. Settled for £20,000.
Failure to adequately specify
Architects were instructed to design a number of hotels. After completion of the project, one of the hotels suffered a fire which resulted in major damage. During repairs it was noticed that the fire resistant material used in the property was inadequate. It was later alleged that the architect failed to specify material correctly. The error meant material in all hotels had to be replaced. Settlement £500,000.
Main bodies with PI rules
- The Royal Institute of British Architects (RIBA)
The RIBA is a professional body that represents the interests of the profession. They provide professional training and qualifications and access to information. The RIBA is not a governing body but they do require their members to maintain PI.
- Architects Registration Board (ARB)*
This is the governing body for architects. They 'police' the profession and they set the guidelines including the minimum standards for PI. The main features of their rules are as follows (at August 2004):
Cover must be written on a civil liability basis; 'neglect, error or omission' is not wide enough.
Limit of indemnity
Limits must be on an "any one claim/each and every claim" basis, unlimited in any one period.
These are not defined by the ARB other than to say they must be affordable.
Legal defence costs
Legal defence costs must apply in addition to the limit of indemnity.
if the practice ceases, partners must ensure that they purchase run-off cover for at least six years. The limit of indemnity must be maintained at the highest level in the preceding three years to the cessation of the practice.
Minimum ARB prescribed levels of cover
- Fee income less than £100,000
- £250,000 limit of indemnity
Wordings are normally required to be written on a 'civil liability' basis (covering all civil liability, not just negligence). If a business consists of unqualified principals and/or staff, or if they are qualified only to a limited extent, more basic miscellaneous wordings can be offered by some insurers.
The usual cover
Usually the limit of indemnity will be 'any one claim' with legal costs in addition. The excess will not normally apply to insurers' costs and expenses. Being on a civil liability basis, unless specifically excluded, which is unusual, cover would include negligence, liability for dishonesty, liability for lost documents, libel and slander and breach of warranty of authority.
The usual exclusions
Typically, policies will exclude:
- Death or bodily injury Loss or damage to physical property (but fidelity and loss of documents are covered)
- Punitive or exemplary damages
- North American offices
- Liability to other insured’s
- Nuclear risks
- Claims and circumstances known at inception of the cover
- Acting as contractor
- Onerous collateral warranties
The usual extensions
- Loss of documents
- Collateral warranties
- Occasionally, some insurers will offer cover for the litigation costs of recovering unpaid fee accounts.
Disclosing and being aware
It is important to disclose all types of work in which you are involved and to recognise that not all professional indemnity insurance is equal. When entering into working relationships with others it is worth remembering that whilst ARB-regulated practices require the minimum ARB cover, other building design consultants are not subject to the same mandatory PI rules, and insurers often offer limited cover, particularly regarding pollution or collateral warranties.
Design and build jobs
In essence, these jobs occur when a client looks for a combined design/build contract. Frequently, the builder takes contractual responsibility for the design and if there is no in-house design department, sub-contracts the design work to the consultant architect or engineers etc. When entering into such arrangements, it is important to ensure that there is no formal consortium partnership created. The architect might inadvertently incur a joint and several liability for other members of the design team. It's also important to ensure that the design consultants don't take on the contractor's role. If the architect is simply acting as design sub-contractor under a contractor's design and build job, then the normal policy coverage should suffice.
It is common for clients to insist on collateral warranties or duty of care agreements on design and build jobs because there is no direct contract between the client and the design team.
It is important you notify your insurers or brokers if your architectural firm is also a contractor Contractors perform a different role to pure consultancy and insurers may refuse to honour a policy if a problem arises.
Contractors can obtain cover but the scope and cost of cover are very different to pure design consultants.
Most proposal forms have a specific question regarding consortia and care should be taken in advising accordingly. As more and more projects involve 'project partnering', it is important to asses your exposure - and whilst care should be taken when involving your business in such arrangements, the fact that you are involved should be disclosed to insurers.
Collateral warranties/duty of care agreements
Hammond PI receives more questions in respect of collateral warranties than almost anything else.
Care should be taken when entering into such agreements and a legal opinion is always recommended. PI insurers generally take the view that they will accept claims arising from sensibly worded agreements. The British Property Federation (developers' trade association) has agreed standard templates with some construction related professional bodies, which many insurers will accept. Insurers regard the acceptance of contractual liability beyond that normally owed by a professional to be beyond the intention of a PI policy. Therefore more unreasonable agreements could have very damaging effects on professionals, leaving them without cover.
Most PI policies address the issue of collateral warranties by setting out clearly the limits beyond which cover will not apply. This should avoid the need to submit each and every agreement for sanction by the insurer. Some of the more restricted policies offer very little cover in connection with this type of agreement, not even covering the British Property Federation agreements described previously.
Of course, the 'claims made' nature of PI policies causes some difficulty. If an architect signs up to a collateral warranty having reassured himself that it is within the scope of his PI cover, what if he later chooses to (or is obliged to) change insurer? What happens if the insurer changes the wording? For this reason, Hammond regularly advises architect clients to sign up to sensible agreements only and to take proper advise when necessary.
The Housing Grants, Construction and Regeneration Act 1996
The act was introduced to speed up disputes and claims within the construction industry through a standardised adjudication process.
Due to the speeding up process, insurers impose clear procedures by which an insured practice must abide in the event of an action under the process.
Insurers generally require notification of adjudication claims within a day or two. Notification of claims has always been an issue under PI policies but insurers have not normally taken issue with matters of a day or two unless there has been clear prejudice. With adjudication claims, there is no room for latitude at all. Insurers will not allow their insured’s to compromise any right of appeal. So, they must not enter into any contracts that allow the adjudicator to finally determine a dispute.
Most policies incorporate a number of crucial clauses relating to the handling of adjudication claims. As ever, architects must read their policy very carefully to ensure that they do not fall foul of any of the requirements, in particular with regards this Act.
Presenting your proposal for insurance
The presentation of your business to insurers is very important both in respect of the facts i.e. the things for which cover is required, and the way in which you do your business, both of which influence an insurer's perception of your business and the risk it poses to them.
We would always recommend that in addition to the proposal form you are asked to complete, you provide supporting documents with your proposal such as:
- A CV showing the principals qualifications and experience in the areas of business to be covered
- Any Terms of Business or terms of engagement you use
- A copy of your corporate brochure
- Details of your website
- An insurance history listing all material changes to your business since you first had professional indemnity insurance. For example, mention any previous businesses for which you require cover. It is possible you may be asked for a claims history from the previous business or a copy of its last completed proposal form.
Don't forget to include the names of any businesses with which you have merged, or any that you have acquired, as these will need historic cover. Likewise you may have ceased to offer certain services for which cover is still required.
Keep a written record of all requests for cover to be extended and any historic or material changes to your business. This information can be updated each year and provided as an addendum to the proposal. Any certification the business may have i.e. accreditation by a governing or standards council, is also well worth disclosing.
Keep your presentation neat and tidy. Bear in mind that an untidy presentation may be construed as an untidy business. Allow yourself time to complete the presentation and remember that a hard copy always look better that a faxed one sent in at the last minute.
The Professional Indemnity Insurance market is relatively small so at the point of renewal, concentrate on asking only one or two specialist brokers to quote. Bombarding the market with requests can result in your proposal being locked out of some markets.
Renewal is an ideal time to review your insurance requirements. As your business grows and your contract values increase, it is wise to consider what could go wrong and how much it may cost to settle a claim - and also cover the attendant legal costs. Some policy wordings provide a limit of indemnity with legal costs in addition to the limit. Others provide limits of indemnity which include the legal cost. However, the cost of litigation is high and can eat into the limit of indemnity provided if costs are inclusive.
Download and return a signed copy of this PI Proposal Form