Chapter 9
Professional indemnity insurance (PII)

This chapter:

  • explains why an architect needs professional indemnity insurance
  • describes the extent of the cover such insurance provides
  • gives an overview of the provisions of a typical professional indemnity insurance policy
  • discusses the risk management strategies an architect can adopt to reduce the possibility of claims.

9.1 The need for PII

9.1.1 What does PII do?

Professional indemnity insurance (PII) is an essential safety net. There are many ways in which an architect can manage the risks inherent in practising architecture (discussed more fully in section 9.3): carrying out proper due diligence in respect of new clients, keeping up to date with current practice by attending training courses, negotiating appointment terms to include limitations on liability, and so on. PII is best seen as part of a spectrum of measures that an architect can take to reduce the risk of claims occurring in relation to their work and to cope with claims if and when they do arise. PII is the vital final element that will provide protection for the architect when all the other risk management procedures have failed to prevent a claim arising.

As a general point, PII provides cover only in respect of the architect’s liability to other parties, such as the client; it is not equivalent to a fully comprehensive motor insurance policy, for example, which may directly benefit the insured party by providing a fund with which to purchase a replacement car in the event of theft. PII indemnifies the architect, protecting them in relation to the financial consequences of claims by others. PII policies are typically renewable annually, and operate on a ‘claims made’ basis; this means that the policy responds to claims made, or notified to the insurer as possible claims, during the currency of the policy only. The negligent act which is the root cause of the claim may have occurred in a previous period of insurance or even when the architect had a different insurer or different cover.

This should not be a problem for an architect who maintains cover with the same scope and at the same limit of indemnity year on year, or who has a growing practice and is increasing the scope and level of their cover. But if for whatever reason an architect has reduced the scope or level of their cover, this could leave them exposed.

The activities and liabilities covered, the people covered and the level of cover will all depend on the wording of the specific PII policy. The amount you will have to pay (the ‘premium’) to secure cover will also depend on your specific circumstances; the insurer will take into account a number of factors, including:

  • the level of cover you are seeking
  • the size of your practice
  • the nature of your clients and the work you carry out for them, and
  • your previous claims record.

As well as circumstances specific to the insured party, the level of premium charged will also be dependent on the state of the insurance market as a whole. If the market is ‘hard’, an architect may find it difficult to obtain cover at a reasonable premium. Conversely, in a ‘soft’ insurance market, premiums will be reduced, and the scope of cover potentially extended, as insurers try to keep hold of their existing portfolio of business. The insurance market is inherently cyclical, but the cycle is unpredictable.

The RIBA endorses the RIBA Insurance Agency (a division of a well-known UK insurance broker) as its official insurance broking partner; their website is a useful starting point for an architect looking to obtain PII for the first time:

  • www.architectspi.ajginternational.com

9.1.2 Professional standards and client expectations

Both the ARB and the RIBA have strict rules relating to the maintenance of PII cover. Put simply, PII is a compulsory requirement for practising architects.

The RIBA Code of Professional Conduct, Guidance Note 4, states:

The RIBA guidance also refers to the ARB requirements.

Standard 8 of the ARB Architects Code provides that:

Current ARB guidance is that:

for each and every claim, however small the turnover of a practice may be. The question of what is ‘adequate and appropriate’ cover will in each case depend on the size of the practice and the nature of its work.

Even if the ARB and the RIBA Codes were not so prescriptive, it would still be vital for an architect to maintain PII cover. Almost every client will expect an architect to have appropriate insurance, as part of the enhanced service that a client should receive from a regulated professional.

Sophisticated clients will also be aware of the potential insolvency protection benefits conferred by virtue of an architect maintaining PII cover. If an insured party becomes insolvent, a claimant may try to recover their losses from the insurer under the Third Parties (Rights against Insurers) Act 2010, which came into force on 1 August 2016. Prior to the 1930 version of the Rights Against Insurers Act, if an insured party became insolvent before a claim was paid out, the insurance money would become an asset of the insured’s insolvent estate and the third party claimant would only receive a fraction of the money. Under the 2010 Act, the insured’s rights against the insurer can be assumed by the third party claimant, allowing the claimant to obtain the benefit of the indemnity in full.

9.1.3 Obtaining cover

The role of the insurance broker is central. The broker is the link between the architect and the insurer who agrees to carry the risk in return for the premium. The broker seeks to find the best fit between insurer and insured. A broker is an expert who can assist you with finding the right policy and level of cover for your business, at the right premium. They should help you to assess the nature and value of the work you undertake, as well as where you want your practice to be in the future; enhanced PII cover can help you find a place in the next league up. A good broker sees their relationship with the insured as a long-term prospect. Good brokers tend to be very loyal; they will fight your corner with the insurer at renewal time to secure the best premium for you.

Insurance brokers typically get paid on a commission basis, the commission being calculated as a percentage of the premium. Sometimes, a broker will instead be paid a flat fee; or a combination of commission plus fee Perhaps controversially, the broker may also receive a fee or commission from the insurer; a broker should generally be under an obligation to disclose on request the source of their earnings.

The proposal form

The key document underlying any policy of insurance is the proposal form. This is an application for insurance cover to be completed by the architect, which in its most basic form will usually require at least the following information:

  • full name and address of the party or parties to be covered by the policy
  • annual turnover and profits of the insured
  • confirmation in respect of any claims or potential claims made against the insured for a specified period, often the 5 years preceding the date of the proposal form.

Insurers need to be able to accurately assess a risk in order to decide whether to take it on at all and, if so, what premium to charge. The proposal form has to be completed fully and accurately – there is nothing to be gained by withholding relevant information or presenting information in a potentially misleading way in order to convey a more favourable picture of your business.

Both the insurer and, most importantly, the insured are under a duty to disclose in a clear and accurate way all material circumstances relating to the proposed insurance. Under the terms of the Insurance Act 2015, the party seeking insurance cover must make a ‘fair presentation’ of the risk to the insurer. If the insured architect breaches this duty, they may have given the insurer cause to deny cover in the event of a claim.

What is a fair presentation of risk?

Sections 3(3) and 3(4) of the Insurance Act 2015 define what is meant by fair presentation as follows:

  • disclosure of every material circumstance which the insured knows or ought to know, or
  • failing that, disclosure which gives the insurer sufficient information to put a prudent insurer (an objective test, independent of the views of the particular insurer and insured) on notice that it needs to make further enquiries for the purpose of revealing those material circumstances
  • the presentation of the risk must make the disclosure in a manner which would be reasonably clear and accessible to a prudent insurer, and
  • every material representation as to a matter of fact must be substantially correct, and every material representation as to a matter of expectation or belief must be made in good faith.

What is ‘material’?

Section 7(3) of the 2015 Insurance Act states that a circumstance or representation is ‘material’ if ‘it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms’. There are no hard and fast guidelines as to what precisely may be considered material, although numerous decided cases provide examples of material facts which have been required to be disclosed in particular situations and section 7(4) of the Insurance Act gives some non-exhaustive examples. An insured architect is partly reliant on their broker, and partly on common sense. Existing or likely claims made against an architect will be material. Patterns of behaviour which have not yet led to a claim but which may make the architect a more risky insurance prospect may also be relevant; for example, a practice of failing to adequately review professional appointment terms.

A proposal form will typically remind the party seeking cover that:

and will go on to set out the insurer’s available remedies in the event of a breach of the duty of fair presentation that is not deliberate or reckless. The applicable remedy will depend on what the insurer would have done if the insured architect had complied with their duty – would the insurer have refused to enter into the insurance contract at all, or might they have agreed to insure but charged a higher premium for doing so?

The proposal form will end with a declaration section:

The party seeking cover will have to sign this declaration.

The onus of proving non-disclosure is with the insurer, but the effect of the insured party signing the declaration on the proposal form is that the insured is taken to have warranted the accuracy of the information supplied and the truth of the answers given.

Who should be covered by the policy?

The professional codes of practice make clear that any architect who undertakes professional work should ensure that their work is covered by insurance, whether the work is carried out (according to the ARB’s ‘PII Guidance’ leaflet, available online):

An architect, even an employed architect, has a duty to ensure that insurance is in place to cover their work. The policy will make clear who is covered; coverage needs to be drawn sufficiently widely and should include the legal entity of the practice (LLP or company, for example) partners, directors, members, consultants and employees, as well as former partners and former practice entities that have become part of the current practice. Sub-consultants, and joint ventures entered into by the insured architect, are not usually covered.

Professional work includes all work an architect may carry out, in whatever context: paid or unpaid, formally appointed or giving free advice as a favour. If someone is relying on your professional expertise, you may be liable to claims in the event that anything goes wrong.

The need for PII cover does not end when you retire, because claims may be made in relation to work you have carried out for many years after the date you completed that work. If you were an employed architect most recently prior to your retirement, or a partner in a larger firm, and your firm continues in business after your departure, you should continue to be covered by the firm’s PII policy – but you should take care to check that this is the case. If you were in business on your own account, or your old firm ceases to trade after your retirement, you will need to make your own PII arrangements. One other point – the Partnership Act 1890, which governs practices set up in the traditional way as partnerships, provides that a retired partner could remain liable, to any person who has not had notice of their retirement, for acts or omissions of the partnership occurring even after their retirement. An advertisement in the London Gazette is adequate notice to people who have not had previous dealings with the partnership, but those who have had prior dealings with the firm must be directly notified that a partner has retired. (This is the official newspaper of record for the UK; first published in 1665 and now available online, it is the place to find official information as diverse as legal notices relating to current company appointments and military despatches from the Battle of Waterloo.)

  • www.london-gazette.co.uk

The ARB recommends a minimum of 6 years’ ‘run-off’ cover to provide insurance protection for an architect immediately following retirement. This is a minimum recommendation; a 6-year extension may be inadequate, given that the long-stop date for claims for latent defects is 15 years. In addition, actions in respect of negligence or breach of duty causing personal injury or death are not, in certain circumstances, subject to any specific long-stop limitation period.

The decision you make about the extent of run-off cover required will be informed by the nature of the work you were carrying out prior to retirement. Risks associated with large-scale, complex, high-value projects require more than the minimum recommended cover.

Can a claimant bring an action for damages resulting from negligence or breach of contract against the architect’s estate after their death? Unfortunately, yes; the Law Reform (Miscellaneous Provisions) Act 1934, section 1(1), states:

Damages can even be recovered if the estate has been distributed to the beneficiaries named in the architect’s will, and in an extreme case the ultimate sanction of the claimant would be to compel the executors to seek refunds from the beneficiaries. You should consider maintaining PII cover to protect your estate in the event of your death at least for the 6/12-year contractual liability period; this may provide a degree of financial comfort in otherwise profoundly upsetting circumstances The risk of such an action against the estate of an architect who was formerly employed by a practice constituted as a company or an LLP is much reduced, as individual directors, employees or members (of an LLP) generally enjoy immunity from personal liability for the organisation’s debts and obligations to third parties.

9.2 Specific provisions of a typical PII policy

There is no such thing as a standard insurance policy wording – the precise words and emphasis used differ from insurer to insurer and policy to policy – but certain phrases and usages do tend to crop up repeatedly. PII policies also all tend to cover the same issues.

9.2.1 The schedule

This element of the policy, also known as the slip, contains the core details of the policy:

  • policy number
  • name and address of the insured
  • policy period (almost always a calendar year)
  • limit of indemnity
  • excess
  • territorial limits
  • premium
  • name of the insurer, or names if there is more than one
  • percentage of the risk the insurer covers (their ‘participation’).

9.2.2 The insured

The definition of the insured party should generally cover the firm itself, if it is a separate legal entity such as a company or LLP, as well as any:

  • predecessor business entities
  • subsidiary or related group companies, and
  • partner, director, member, consultant or employee who has been engaged in the professional business of the firm.

9.2.3 Limit of indemnity

The limit of indemnity is the stated maximum amount that the insurer will pay in respect of damages payable by the architect to a claimant. A good PII policy will state that legal defence costs and expenses will be in addition to the limit of indemnity, otherwise legal costs will eat into the headline indemnity figure.

The limit of indemnity may be expressed in two main ways:

  • Each and every claim cover: The headline indemnity limit, say £5 million, may apply to ‘each and every claim’; this generally has a clear meaning in practice (unless the policy contains a more restrictive definition of ‘claim’, a point which should be clarified with your broker). The full limit of indemnity applies to each claim received during the period of insurance. In our example, the architect may potentially recover £5 million in respect of every single claim.
  • This cover may be expressed in a subtly different way as applying to ‘any one claim or series of claims arising out of any one event’; this overtly applies an aggregate limit if the ‘claims’ arise out of the same ‘event’. The practical effects of the latter can lead to serious arguments in the event of multiple claims being made.
  • Aggregate cover: PII cover may also be purchased with an explicit aggregate indemnity limit. The practical effect of this is that, taking our £5 million indemnity limit as an example again, a single pot of £5 million will be available to service all claims received during the period of insurance. If the first claim in the year results in the insurer paying out £4 million, the available indemnity limit for subsequent claims in that period of insurance will be £1 million only.

Most architects maintain, and most clients expect, PII cover on an each and every claim basis.

However, within the headline limit it is common for there to be other discrete limits applying to specific types of loss. Usually, claims relating to pollution, contamination and date recognition will be subject to an aggregate limit equivalent to the overall limit of indemnity, even if the limit of indemnity under the policy generally applies on an each and every claim basis. Cover for asbestos claims, if it is provided at all, will very often be at a reduced aggregate limit; for example £1 million in the aggregate, when the headline limit of indemnity is £5 million each and every claim.

9.2.4 Excess

This figure, otherwise known as the ‘deductible’, may be familiar from typical motor insurance policies. It is the sum that the insured must pay in relation to each claim, and below which the policy does not respond. Because most claims will be small, covered in whole or in large part by the excess on each policy, the insurer is able to keep the premiums they charge to manageable levels. Generally, if an architect arranges with the insurer a low excess, they can expect to pay for that through a higher premium than would otherwise apply. An excess is also an incentive for the insured to avoid as far as possible poor practice that leads to claims.

Some clients will, in the insurance clause of a professional appointment, attempt to restrict the possible level of excess under the architect’s PII policy by requiring that the excess shall not be unreasonable or onerous (although it is unclear what these would mean in practice) or by specifying an upper limit. The architect should not accept such restrictions; generally any attempt on the client’s part to be prescriptive about the detailed content of the architect’s PII policy should be resisted.

9.2.5 The insuring clause

The insuring clause in the PII policy is the basis of your PII cover. Such clauses tend to be rich with meaning, and if you have any doubt about what is and is not covered by the policy, ask your broker to explain. Over time many of the stock phrases that appear in insuring clauses have taken on defined meanings and a broker should be able to explain the practical effect of any of the words used.

The insurer provides an indemnity to the insured architect. The money paid out by the insurer will compensate the insured for their actual economic losses. Even if the headline amount of cover under the policy is higher, the insured will only be able to recover the level of loss that can be proved to have been suffered. PII is intended to place the insured architect in the position they would have been in had the claim not been made.

The indemnity is given in relation to the insured architect’s legal liabilities. In theory, to become a legal liability for the purposes of a PII policy the architect must first have been found liable to pay damages by a court or other competent forum; in practice, an insurer will typically take over conduct of the insured architect’s defence against the claim.

  • Some policies go on to list specifically what is meant by a legal liability, while others rely on the understood meaning of the phrase. Essentially, what is covered is every liability that can create an obligation on the part of the insured to pay damages – not, for example, any fines that might result from a criminal process. Legal liabilities resulting from negligence or breach of contract would include liability for:
    • – property damage
    • – personal injury
    • – consequential and economic losses
    • – costs of redesign and repair.

Because ‘legal liability’ is very widely drawn, PII policies will invariably include qualifications setting out what is not covered, in the form of ‘exclusions’, discussed in section 9.2.6.

Under the insuring clause set out above, the legal liabilities must result from a claim first made and notified during the period of the policy. It is irrelevant when the damage occurs; all that matters is when the claim is made against the insured and notified to the insurer.

To activate the policy:

  • the claim must relate to a breach of professional duty, and
  • the breach must have occurred during the course of the insured’s professional business.

These requirements narrow the focus of the insurance cover to professional negligence, as opposed to negligence in any other area linked to the architect’s working life. If the architect negligently crashes into someone else’s car, causing damage, this damage will not be covered by a PII policy because it was not incurred as a result of a failure by the architect to discharge their professional duty of care. ‘Professional business’ may be defined by the PII policy to further limit the scope of the cover, for example by describing the architect’s professional business as:

In this way the insurer seeks to ensure that their insured only engages in business activities that are within the reasonable scope of the insured’s professional competence.

9.2.6 Exclusions: points to look out for

Exclusions may come in many forms, dealing with:

  • types of loss
  • types of claim
  • areas of work
  • contractual arrangements (liabilities of an architect as part of a single-project joint venture are often excluded), or
  • geographical coverage (the United States and Canada are particular favourites for exclusion, but an insurer may be wary of providing coverage for any overseas projects).

Warranties and penalties

The most important standard exclusion clause relates to the type of legal liability that will trigger policy coverage. Historically, PII coverage was intended to protect the insured architect against the risk of damages for negligence. Nowadays, the scope of coverage is better understood as protection against civil liability as a whole, including contractual liability, but with limits; proof of negligence is still a basic requirement for a claim under most PII policies.

Many insurers, while providing a relatively broad civil liability cover, do nevertheless seek to exclude coverage for contractual liability to the extent that such contractual liability goes beyond that which would have been imposed on the architect anyway, at common law, in the absence of the contract. The exclusion clause may read:

Strictly understood, this clause would exclude liability for certain claims under collateral warranties; for example, in relation to purely economic losses, for which the law of negligence now provides no actionable duty of care. To avoid this outcome, many policies go on to specifically include cover for liabilities arising under collateral warranties.

The sample wording above seeks to make sure that all claims are based on proof of negligence, in order to exclude cover for claims based on a more onerous duty of care – such as a claim based on the breach of an indemnity or a fitness for purpose clause. Any such claim would in all likelihood not be covered by a standard PII policy. Taking the example of a fitness for purpose obligation, an architect’s design might not be fit for purpose even though it has been produced using reasonable skill and care; there is no need for the claimant to prove negligence if they can show that a design is not fit for purpose.

The sample wording can be read even more restrictively. In the absence of a contractual duty of care, the common law duty imposed on any professional, including an architect, is to carry out their work exercising the reasonable skill and care to be expected of an ordinary skilled professional – nothing more. So in theory, any enhanced standard of care contained in a professional appointment or collateral warranty may call into question the architect’s PII coverage because the PII policy is likely to be based on the common law standard. PII policy wording may expressly provide that the insured must not agree to any duty more onerous than the exercise of reasonable skill and care; or this may be implied, as in the sample wording above, by referring to liability that would have existed in the absence of the contractual provision.

An architect should always seek to limit their duty of care to the standard of the ordinary skilled professional. However, as discussed above in the context of duty of care clauses generally, it would be rare for an insurer to take this point in isolation as a basis for denying cover. The enhanced duty of care is discussed further in section 5.2.6.

Asbestos, pollution, contamination and date recognition

It is quite usual for pollution, contamination and, less often, date recognition (a nod to the concern that took hold in the build-up to the year 2000, when many predicted a deluge of claims relating to a potential failure by computer systems to respond properly to the changeover from ‘99’ to ‘00’ – it never came!) claims to be subject to an annual aggregate limit even if the PII policy overall provides cover on an each and every claim basis. Claims relating to asbestos are likely to be subject to a further reduced annual aggregate limit, or in some policies excluded altogether.

These exclusions and limitations reflect the exceptionally unpredictable nature of the risks involved; the discovery during a project of an asbestos issue could result in a claim which has a quantum and a longevity out of all proportion to the architect’s fee for involvement in the project. It is important that the wording of any professional appointment or collateral warranty insurance obligation properly reflects not just the headline PII figure, but also any internal limitations or major exclusions within the policy.

Client reactions

It is generally not realistic for a client to object to a proposed amendment that is required to bring the appointment into line with the PII cover actually maintained by the architect. There is no advantage for the client in insisting on imposing an obligation which is not covered by the architect’s insurance, and this argument is often enough to convince a client. Some clients will require written proof from the insurer or broker that the architect’s interpretation is correct and that the existing wording would jeopardise the architect’s cover. Other clients will refuse to compromise.

It will sometimes be possible to agree a one-off amendment to the policy (an ‘endorsement’) to deal with the client’s concern, but this will not always be possible or may only be available subject to an increased premium, which could make the change unrealistic for the architect.

If the architect has checked with their broker that a particular provision in an appointment or collateral warranty does create a PII policy coverage issue, and the client is still unwilling to compromise and no amendment to the policy is possible, the architect is left with a commercial decision to make. It is never sensible to agree a contractual obligation that is known or suspected to be outside the scope of your insurance. But you should weigh up the importance of the job and the client against the likelihood of the uninsured obligation leading to a claim and the potential size of any such claim. Overall, is the risk one that can be borne by your business without the benefit of PII cover?

9.2.7 Notification requirements

Every PII policy will contain a clause setting out how and when the insured must inform the insurer in the event of a claim, or potential claim, with wording such as:

In the wording above, the giving of notice by the insured is an express condition of cover, so any failure by the insured to comply strictly with the obligation to give notice as soon as possible will give the insurer reason to refuse to indemnify the insured. The notice has to be given at the right time and with the correct content. Dust off the policy itself – what does it require you to do? Speak to your broker to ensure your approach is correct.

The notification clause wording raises further questions for the architect:

  • How soon is ‘as soon as possible’?
  • What is a ‘circumstance or event which is likely to give rise to a claim’?
  • Is there any disadvantage in simply notifying every incident or communication that may remotely lead to a claim?
  • Can the insurer reject a notification if it is too tenuous?

Every case depends on its particular circumstances, especially in relation to timing of the notification. In 2008, in the case of Aspen v Pectel the High Court had to consider PII policy wording that required the insured to give ‘immediate written notice with full particulars of any occurrence which may give rise to an indemnity’. The insured architect had not notified insurers of a fire on one of the insured’s projects in 2004. Nearly 3 years later the architect received a copy of a solicitor’s letter from the client alleging liability on their part; notification was then sent to the insurer, but the insurer denied coverage on the basis that notification had not been given in line with the policy requirements. The Court agreed, and held that the fire itself was an occurrence which may have given rise to a claim and therefore notice to the insurer should have been given immediately afterwards. In the 2009 case of Laker v Templeton, the Court of Appeal took a more lenient approach when it had to decide whether an insurer was entitled to deny cover because the insured architect’s notification followed not the event itself, but the instigation of a formal dispute resolution procedure against the insured. The difference may have been the policy wording; the policy being considered by the Court of Appeal required notice to be given immediately of circumstances which were ‘likely’ to give rise to a claim. It is a fine distinction, but the formulation ‘circumstances which may give rise to a claim’ seems to require more notifications than the phrase ‘circumstances which are likely to give rise to a claim’.

In practice it is best to err on the side of caution and provide as much information as you can to the broker and insurer as soon as possible. Take advice from your broker in borderline cases – they have a duty to advise you whether action is required, and it is what they are there for – but if there is any doubt it is best to notify. An excessive number of notifications may have an impact on the premium your insurer decides to charge when it comes to renewal time; but failure to promptly notify a claim has the potential to be far more expensive, if the insurer declines cover as a result. An insurer can reject a notification; but an insured party should in such circumstances be persistent and repeat the notification. If the event does develop into a full-blown claim, the insured architect’s persistence will have been justified, and if it does not there is generally no harm done by the architect’s cautious actions.

If notification is necessary:

  • make sure that the form and content are in line with your policy requirements
  • make sure that the correct party is notified, as set out in the policy
  • put the notification in writing; if you have given an initial notification by telephone in an emergency, follow this up with notice in writing
  • even if day-to-day contact about your PII policy is with your broker, you should also inform the insurer directly
  • if it is unclear whether you should give notice to your local office or to the insurer’s head office, copy your notice to both.

What to put in the notice

In addition to any basic content requirements set out in the terms of your PII policy:

  • make clear that the notice being given is a formal notice under your policy
  • include as much detail as possible about the circumstances of the claim
  • stick to the facts, and never try to put a particular (for example, unduly positive) spin on the situation – this could lead to problems later on if the notice, on reflection, could be considered misleading
  • remember that if the notice is too narrowly drawn, it may not effectively cover all the aspects of the claim that you wish to notify; it can be difficult to achieve the right balance, but the notification must be detailed but also sufficiently widely drawn to cover all elements of the claim
  • if new elements of the claim emerge after the initial notification, these should be subject to a separate notice if it is clear that they have not already been covered.

It is in the interest of the architect that the PII policy wording incorporates an ‘innocent non-disclosure’ clause. This may offer some protection against refusal of cover in circumstances where there is an innocent late notification without any intention to mislead or defraud and which does not prejudice the insurer’s position. The PII policy wordings arranged through the RIBA Insurance Agency, for example, incorporate an innocent non-disclosure clause, and also offer the added benefit of allowing an RIBA member insured with the RIBA Insurance Agency to refer any dispute with the Agency to the President of the RIBA, in addition to the possibility of arbitration in the event of a dispute. As a minimum requirement, the architect should ensure that any PII policy they take out incorporates an arbitration clause to deal with disputes.

9.2.8 Practical ways to comply with the policy notification requirements

Every firm should have a designated individual (with a deputy to cover holiday and illness absences) who is available to facilitate the notification process and deal with other issues relating to the firm’s PII cover and risk management more generally. In most practices, acting as ‘insurance manager’ will not be a full-time role and can be combined with other duties. The important point is that other people within the practice are aware of the role, know what the insurance manager does and have the ability and the confidence to contact them when an issue arises. The insurance manager should be the focus for queries about potential claims; theirs should be the first number that a person knows to call if there is a problem on a project that may require a PII notification.

The insurance manager must be familiar with the requirements of the PII policy, both in terms of timing of any notification and also the level of detail required for a notification to be valid beyond dispute. They in turn must have the confidence to make sound decisions about whether a particular set of circumstances is likely to give rise to a claim. They must make sure they have sufficient information to make the correct call, taking advice from solicitors and the broker as necessary.

The insurance manager should have sufficient experience to recognise not only clear-cut instances when an issue should be notified, but also when notification is not necessary and when the broker should be consulted. If the notification can be trusted to the insurance manager, this frees up the project team to deal with the equally important client-facing practicalities:

  • managing the client relationship to avoid the problem becoming a formal claim
  • taking remedial action as necessary
  • establishing a paper trail
  • locating all important project documents in case they are needed to produce a legal defence to a formal claim.

The project team should bear in mind one golden rule, while all the time trying to maintain good relations with the client – never admit liability.

9.3 Risk management

Risk management is the process of reducing the number of opportunities for mistakes to occur, and so reducing the number of claims that may be made against an architect. Effective risk management will also enable an architect to be better prepared to defend, and ideally defeat, claims when they do arise.

As part of their insurance package, insurers and brokers often offer risk management advice though newsletters, seminars and occasionally by going into the business of the insured architect and carrying out a risk audit. There is a reason for this; the insurer has a vested interest in the ability of their insured architects to manage risks and prevent, as far as possible, formal claims arising. It is of course also in the best interests of an insured architect to manage risks proactively and take action to prevent claims. Architects who regularly notify claims tend to find that their premiums go up, and there are in any case always costs (management time, legal fees) incurred when dealing with a claim that may not be covered in full by insurance, even if the PII policy covers the claim itself. It is best to avoid the negative impact of claims by taking steps to manage them out. The RIBA Insurance Agency, with the RIBA Practice Department, has produced a ‘Guide to Understanding Risk Management’, which can be downloaded free of charge at:

  • www.architectspi.ajginternational.com/Pages/RiskManagement.aspx

Underlying everything are the day-to-day decisions of individuals. How people act on a project and react to potential problems will govern how well an organisation manages risks. Some of the areas where experience, training and written guidelines can help individuals to make better decisions and consequently minimise risks are set out below.

9.3.1 Appointment of sub-consultants

This is not simply an insurance issue. Architects need to be alive to the risks associated with the appointment of sub-consultants. Does the sub-consultancy agreement always have to be a formal written agreement? The administrative hassle can be daunting, and when the agreement is finalised, how can the architect be sure that the sub-consultant’s obligations fully cover the services and performance standards required, and fully protect the architect’s position? If it is the architect’s choice to appoint a sub-consultant, and if the sub-consultant is carrying out services for which the client is paying the architect, then the client is entitled to sue the architect in the event of any default.

In the absence of any restriction in the appointment, the architect is free to engage a sub-consultant to carry out any part of the services. A bespoke appointment is more likely to contain a clause requiring the architect to notify the client and obtain their consent to the engagement of the sub-consultant; sometimes the client will also have a right to approve the terms of appointment of the sub-consultant. The architect should seek wording in the appointment to the effect that consent cannot be unreasonably delayed or withheld, and retrospective consent should not be required for any sub-consultants already engaged by the architect prior to execution of the architect’s own appointment.

Back to back: specific provisions

There are two critical issues an architect must deal with in a sub-consultant’s appointment:

  • the terms and conditions that apply to the appointment of the sub-consultant must be ‘back to back’ with the terms on which the architect was appointed
  • the sub-consultant must have adequate PII cover in place.

Because of the need to be able to enforce these obligations against the sub-consultant if necessary, there should always be a written sub-consultancy agreement, and if the architect’s appointment is executed as a deed, so must the sub-consultancy agreement. If not, the architect may have to face the final 6 years of exposure under their appointment with no scope for passing liability on to the sub-consultant. In addition, a written sub-consultancy agreement may be a pre-condition of the client’s consent to the sub-consultant’s engagement.

‘Back to back’ in this context is not a precise term; it is a commonsense requirement best illustrated by giving examples. If the architect’s appointment requires the architect to carry out their services:

it is not sensible for the architect to sign up the sub-consultant to carry out their services:

In this example, the architect’s standard is more onerous; the sub-consultant could complete their services fully in accordance with the terms of the sub-consultancy agreement but still put the architect in breach of their appointment with the client.

In addition to marrying up the basic standard of care in the appointment and the sub-consultancy agreement, there are often a number of obligations in the architect’s appointment that should be specifically stepped down into the sub-consultancy agreement, for example:

  • the obligation to provide collateral warranties
  • the provision of a copyright licence or assignment of copyright
  • the obligation to maintain PII cover at a specified level
  • the obligation to comply with statutory requirements or agreements with third parties.

Back to back: catch-all wording

As well as specific provisions ‘stepping down’ obligations from the architect’s appointment into the sub-consultancy agreement, the architect should consider including catch-all wording to avoid any risk of obligations slipping through the net:

The indemnity wording above may be subject to the same objection as any indemnity wording in an architect’s appointment – is it insurable? It may not be, in which case a more limited form of words covering the main point (that the sub-consultant must not cause or contribute to any breach of the architect’s appointment) should be acceptable.

As part of the set of current RIBA PSC 2018 suite, the RIBA publishes a Sub-Consultant PSC to help facilitate sub-consultant appointments that are back to back with the RIBA Standard, Concise and Domestic PSCs.

9.3.2 Recognising a potential claim and acting appropriately

As discussed above, the main influence on the number of claims a practice is subject to, and the impact those claims have on the practice, will be the calibre of the individuals within the practice and the way in which they are trained and managed.

Everyone in the practice needs to know about the role of the insurance manager and the procedure for identifying and notifying potential claims to them. If there is no individual identified as insurance manager, there must be another clear and well-publicised procedure for passing information about potential claims up the management chain. All employees need to understand the PII policy requirements for prompt notification.

The practice must also have an adequate procedure for identifying circumstances likely to give rise to a claim and which must be brought to the attention of insurers as part of the PII renewal process. Part of the insured architect’s duty of utmost good faith when completing their renewal paperwork is to bring potential claims, not previously notified, to the insurer’s attention. The insurer cannot properly assess the risk of providing cover if the insured party has withheld information, whether deliberately or because the insured has made inadequate interna inquiries. If a PII policy is written or renewed on the basis of inadequate or incomplete information, the insurer may not be obliged to provide cover when a claim is made.

The flow of information internally is key to both processes: claim notification and full disclosure on renewal. If at all possible, the best and simplest practice is to have an insurance manager to act as a focus for the flow of information upwards, either directly from individual project team members or through their managers. Internal education is important; employees should be reminded regularly of the firm’s notice and disclosure obligations under its PII policy, and how to go about passing information on. Prior to renewal, it is good practice for the insurance manager to run seminars to remind staff of the importance of full disclosure of any potential claims as part of the renewal process. The insurance manager should then send out to all staff members (not just managers or senior staff) an email or memorandum requesting information in respect of any circumstances that may give rise to a claim. Returns, positive or negative, must be compulsory.

Outside the renewal process, there has to be a clearly defined and understood route for information about a potential claim to get from the member of the project team dealing with the matter up to the manager, partner or director who will make the decision about whether or not to notify. Monthly meetings of managers are not necessarily enough. The risk of failing to notify a claim when a problem arises must be something at the forefront of the minds of project team members lower down the chain. Communication between managers is important, but the training given to all employees is arguably more important; if a project team member cannot identify a potential claim or does not know what to do when a problem arises, the process cannot begin.

9.3.3 Recruitment, management and training

Recruitment

Effective risk management starts with the quality of the people in your business, and therefore it is important to ensure that only personnel of a suitable calibre are recruited.

  • Check the qualifications claimed on a candidate’s CV – ask for proof of the qualifications obtained by a candidate in the form of certificates from the relevant institution.
  • Ask for references and take them up.
  • Do not be afraid to check a candidate’s practical ability – set a sample piece of work to be carried out.
  • Interview promising candidates more than once.
  • Conduct a less formal meeting with candidates – as well as the formal interview process, it is often useful to invite promising candidates back for an informal meeting over drinks or lunch; the candidate may have the qualifications and experience, but an informal meeting may tell you more about what sort of person they are.

None of these checks guarantees the quality of a candidate – it is only really possible to get a full picture of a candidate’s abilities and deficiencies when they begin work in earnest within the practice – but taking recruitment seriously can go some way to minimising the risk of taking on an unsuitable candidate.

  • Ensure that all employees have a written contract of employment.
  • Implement an initial probation period of up to 11 months for new joiners.
  • Plan for a formal appraisal of a new joiner midway through their probation period.

Management

There must in any practice be an established and understood management and reporting structure.

  • Regular team meetings should be held to discuss both current projects and past projects where problems have been reported.
  • Team members must have the confidence to raise issues without fear of being blamed.
  • Individual managers should maintain spreadsheets listing the projects for which they are responsible; problems once identified should be noted in the entry for the relevant project, and should stay on the spreadsheet for discussion at each subsequent meeting until resolved.
  • Managers should also meet regularly so that information about problems identified at project team level can be passed up the management chain, to the insurance manager if necessary.
  • Meetings should always have an agenda, to ensure the discussion is as focused and productive as possible.

Effective management is also about assigning the right people to the right projects – the work must be appropriate for the particular qualifications, skills and experience of the team members.

  • Once assigned, the work of the project team must be monitored and the proper level of supervision must be provided; different people will require different levels of supervision in different contexts, and no one is too senior to be supervised.
  • Effective supervision must also allow individuals to take responsibility in order to create a dynamic business.
  • Supervision and review should be against objective standards set out in a policy applicable to the whole practice; some form of ‘tick box procedure may be useful as a starting point, but there has to be room for experienced managers to use their own initiative.

Training

Continuous professional development is important to maintain high standards of performance.

  • The need for continuous professional development applies to staff at all levels.
  • A practice should ensure that its know-how, precedents and intranet/library are up to date.
  • There should be a standard procedure for knowledge sharing, ideally through an office intranet accessible by all members of project teams.
  • Take advantage of training on legal, insurance and risk management topics that may be provided by your insurance brokers and solicitors.

9.3.4 Office procedures

It can be difficult to encourage staff within a practice to focus on such matters when they just want to get on with their core practice of architecture, but following correct office procedures and maintaining accurate records need to be seen as integral to the core practice. All staff should be trained to follow correct procedures.

  • Maintain clear and comprehensive written records for every project – having proper records can make the difference between being able to defend a claim and having to accept liability.
  • Keep notes of telephone conversations – a contemporaneous note is far more persuasive for a court or any tribunal than a note written up later from memory.
  • Take contemporaneous meeting notes – make sure your notes are legible.
  • Write the date on your notes.
  • Date stamp incoming mail.
  • Keep electronic and hard copy files and employ secretarial staff as necessary to maintain them in good, logical order.
  • Establish a system for archiving and retrieval of files – files should be kept for a minimum of 16 years (the long-stop period for liability in negligence for latent defects is 15 years).
  • Ensure that your computer system is properly maintained, secured and backed up.

9.3.5 Dealing with clients

It is essential that you develop a strategy for assessing the risk of taking on a potential new job. These pre-agreement matters are considered in detail in section 7.1.2 in the context of what the architect should look for in a client. An architect must also develop strategies for managing the relationship with the client during the course of the project.

  • Record or confirm in writing the client’s brief and all specific instructions.
  • Ensure that all communication with the client is clearly understood and properly recorded.
  • Record everything in writing – there is no way of telling which decisions or issues may become important later on in the project.
  • Double check with the client that the more technical communications have been understood – those covering costs, timing and specification, for example.
  • On a very practical level, avoid responding to an email by answering points within the body of the initial email – reply point by point in a new email to avoid confusion.
  • Make sure that all parties who should be copied in to an email are in fact copied in.
  • Ensure that professional appointment terms are properly handled – they must be recorded and agreed in writing.
  • Make sure that, as well as the terms and conditions and schedule of services, the fee and schedule of fee payments is set out in writing.
  • If at all possible, schedule fee payments to be monthly – in this way the architect can discover quickly, and take appropriate action, if the client misses a payment because they are in financial difficulty, rather than continue to carry out work, possibly over several months, for which payment may never be received.
  • Ensure that the client has the opportunity to make formal complaints through a specified point of contact under the professional appointment – few clients will be interested in litigation as a first step, and if the client has a way of making their displeasure known, through a process that gives the promise of a positive and cost-free outcome, then the client is likely to use that process. The architect can take steps to address the complaint and prevent the problem developing into a formal dispute.

9.3.6 Legal advice

One factor that should not be overlooked as a risk management tool is the importance of good legal advice, both when considering or drafting the terms of the professional appointment, and during the course of the project in response to client queries or perceived potential problems. Legal advice is also vital as and when complaints are received or disputes arise – legal advice provides a framework within which the architect can manage the client relationship. If an accusation of professional negligence is made, you should never admit liability, but only your legal advisor will be able to tell you what the chances are of you actually being found to be liable. In such circumstances, your solicitor will be able to give advice on how best to manage your response to avoid giving away arguments that you could later use in your favour to reduce your liability, or your share of liability.

How do you find a good legal advisor?

As with all professional relationships, word of mouth is often the surest way, but there are a number of other routes to obtaining the services of a suitable legal advisor:

  • Your broker may have a recommendation.
  • The RIBA runs a helpline which provides direct access to solicitors for an initial query; a professional relationship may flow from that if the enquiry becomes an ongoing matter. Further details about the RIBA Chartered Membership benefits and services are available on the website www.architecture.com.
  • The Law Society, the solicitors’ professional body, has a website on which you may search for a solicitor by location and specialism: www.lawsociety.org.uk.

You should in any case arrange a face-to-face meeting with a potential legal advisor, if at all possible, before agreeing terms with them. Good legal advice is not often cheap, and it is important to get a good feel for your advisor.

  • Do they understand your business?
  • Will they go the extra mile for you when you really need them?
  • Will they provide free seminars on legal topics for you?

It is important that you are made to feel well looked-after, and are made to feel that your work is important to your solicitor, because you will generally only be dealing with them in a neutral or negative context. They will draft and negotiate your appointment terms, which you will only need to rely on in the event of a dispute; they will be the call you make in a panic when an adjudication notice arrives from your client.

Chapter summary
  • Architects must maintain professional indemnity insurance (PII) at a level appropriate for the complexity and value of the projects it works on.
  • PII should be seen as one element in an architect’s overall strategy for managing risk.
  • Preventing claims – through effective procedures for contract management, professional recruitment, continuing professional development and complaints handling – should be a priority for any architect.
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