Professional Indemnity Insurance
Why is Professional Indemnity Insurance (PII) necessary?
We live in a society which is increasingly compensation–minded. Anyone who has had to defend a negligence claim will know that it can be an extremely worrying experience with potentially crippling costs.
Insurance against such eventualities is a necessary requirement of professional practice, and you can and should use it as an important marketing tool that sets you apart from many of your non-professional competitors.
Who needs PII?
Anyone who is carrying out professional work may face potential liability. Most professions have found that the risk of being sued for professional negligence is increasing.
Whether you run your own practice, are an employee, a part timer, mainly retired or just giving free or low cost advice, you may still be blamed when something goes wrong and may end up with a claim for compensation against you.
Any member of the public using the professional services of an architect has the right to expect their work to be covered by PII.
Why has ARB issued Guidelines that set indemnity levels?
The Architects Act 1997 gives the Board power to issue a Code laying down standards of professional conduct and practice. The current Code specifies that architects should maintain “adequate and appropriate” PII, and the Guidelines are designed to assist practitioners by encouraging adequate and appropriate cover.
The Board recognises that the circumstances in which individuals practice, and in which claims can arise, vary substantially. It also recognises that it may be wrong to assume that there is necessarily a link between the level of gross fee income and the potential size of a claim.
It is important to understand, however, that it is the responsibility of a professional person to ensure that they have adequate and appropriate cover. This should be done by seeking expert advice from your broker, but in any event an architect is expected to hold a limit of indemnity of no less than £250,000.
Why are the indemnity limits so high for architects?
Quite simply, they are not. They are in line with other professionals and merely meet the minimum expectations of those who deal with other construction professionals.
How can I decide what level of cover is ‘adequate and appropriate?’
The Board recognises that the circumstances in which individuals practice, and in which claims can arise, vary substantially. Decisions on what level of indemnity to hold should be made after giving consideration to the scale and nature of work you intend to undertake, and after discussions with both relevant clients and your insurance broker. The question that must be considered is “what is the extent of loss that might result from a mistake on any particular project?” Ultimately, it is your responsibility to ensure that you have a level of insurance to cover yourself against such a loss.
It is important to understand that the Board would not normally consider any cover under £250,000 to be adequate and appropriate. This level was set after consultations with insurers and others to establish realistic minimum levels of indemnity.
My turnover is below £10,000 per year so why do I need £250,000 cover?
Even a modest project can give rise to a significant claim. As an example, a project worth £30,000 gave rise to a potential claim of £159,000. The architect, who had a fee income below £10,000 and a limit of indemnity of £100,000, might have appeared reasonably covered, but in practice this was shown to be woefully inadequate.
There is an added danger that even if clients agreed to a ceiling on the amount recoverable in the event of a problem, third parties are not bound by that limit. There are also technical legal reasons why a contractual limit on liability may not be effective.
What if I am only carrying out work on my own property?
Although architects who carry out architectural work on their own properties cannot claim for loss or damage that they may suffer arising out of shortcomings or mistakes – that is they cannot make claims against themselves – then they would remain liable for claims by others.
The ARB understands that architects may not be able to purchase PII to cover them against such third party claims on their own properties, so cannot require such insurance to be in place. It is strongly advised, however, for architects in such situations to maintain appropriate cover for such third party risks through building/public liability insurance.
What if I am retired from practice?
If you are completely retired from business and practice there is no need to maintain PII (except for run off cover – see later). However if you are still carrying out small or occasional projects then this is still professional work which needs to be covered by insurance.
I don’t charge for the small amount of advice I give in my local community. Do I still need PII?
It makes no difference whether a professional person provides advice for a fee, for benefits in kind, or free of charge – they still have a duty of care to their client. They are exposed to potential liabilities and may be sued for negligence.
If you are providing professional advice as an architect that can be relied on, then those instructing you should understand the responsibilities you have and should be asked to provide cover/protection on your behalf.
I am employed by a practice so surely I do not have to worry about Professional Indemnity Insurance?
Wrong. Employees need to be aware that if appropriate insurance is not in place then they could be personally responsible for losses at some time in the future. It is therefore important for employees to satisfy themselves that appropriate cover has been put in place.
Similarly, if you are working as a consultant, or through an agency, it is your responsibility to ensure that appropriate cover is in place before you undertake any work.
Do I need cover for private work I do outside my employment?
Yes. Unless you are covered by your employer’s PII for your own private work (which is highly unlikely) you will need to buy your own insurance.
What is Run Off cover?
If you are retiring from practice that does not mean that you may still not get a claim in respect of projects you have completed in past years. Whilst the majority of claims are made within a few years of practical completion, it is still possible for a claim to go back many years, and for this reason the Board recommends a minimum of six years’ run off cover (five years’ if you practice in Scotland). If no policy is in place at the time a claim is made, then you may face personal liability which can not only be traumatic, but financially devastating.
You should also consider making the necessary provisions for run-off cover in the event of your death. Claims can be made against a deceased person’s estate.
What if I want to work abroad? Will I be covered?
If you want to undertake work overseas you should check the terms of your policy to see whether you will be covered, and if not, arrange with your broker for the necessary amendments to be made. You should also consult with your broker to determine in which country proceedings would be dealt with should a claim arise.
What if I have been, or will be, working on projects involving asbestos?
Concerns have been raised with the Board regarding the position of Architects, who have in the past, or may in the future, work on projects involving asbestos. These concerns arose due to the withdrawal of insurance for asbestos claims and the introduction of the Control of Asbestos at Work Regulations 2002.
The Board understands that at present cover for asbestos continues to be either limited or excluded entirely. The Board recognises and understands the difficulty this continues to cause Architects, and the Board accepts that it cannot expect Architects to have and maintain Professional Indemnity Insurance for a risk if cover is no longer available in the market.
Where cover is available the Board is aware that such cover is likely to be offered on a limited basis. Generally speaking cover would usually be subject to limited indemnity. It would generally be further restricted to UK work only, and would usually exclude liability for bodily injury and property damage. Architects should seek advice from their broker regarding the availability of asbestos cover. Before accepting an assignment involving asbestos legal advice should be obtained on possible contractual limits of liability.
Finally, Architects should be aware that Professional Indemnity Insurance is a claims made insurance which means that it is the policy in force at the time a claim is first notified to insurers that responds, not the policy that was held at the time the work was originally carried out and therefore any exclusion or restriction under your policy could apply to work undertaken in previous years.
What are the implications regarding mould?
Towards the latter part of 2002, professional indemnity insurers in the United Kingdom started to exclude cover for ‘toxic mould’. A number of large legal actions had been brought in the USA alleging mould-related illness and UK insurers were concerned at the time that mould could become the next ‘Asbestos’. Their reaction was to add exclusions to UK PI Policies relating to ‘Mould’ – as defined in the policy wording.
Today, PI Insurers are slightly less concerned about mould claims (at least for work outside USA / Canada) and a limited number of PI insurers for Architects will consider providing some cover, sometimes subject to completion of a satisfactory questionnaire. No cover is usually provided for claims arising from work in the USA or Canada. Some PI policies still have a full exclusion for mould claims.
This general guidance does not replace the need for specific expert advice to be taken where appropriate nor does it lessen an architect’s responsibility for decisions in relation to specific projects.