Professional Indemnity Insurance in the Construction Industry

May 2013

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Professional Indemnity Insurance in the Construction Industry

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This publication will be of interest to insurance professionals engaged in the day to day business of construction insurance, underwriting, claims negotiation and risk management. It will also be useful to lawyers, construction professionals and contractors.

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This publication details the application of basic insurance principles, such as utmost good faith and subrogation. It examines how liability arises, making reference to the Bolam Test and contractual influences. Policy wording is explained in depth, ensuring readers are informed on the use of both clauses and specific, individual words. The publication is supported by reference to over 100 case studies.

Chapter 1 The Application of Basic Insurance Principles and the Relationship with Other Insurance Products

1.1 Introduction

1.2 Application of Basic Principles

1.3 Relationship with Other Insurances

1.4 Latent Defects Insurance

Chapter 2 How Liability Arises, the Bolam Test, Reasonable Skill and Care, Fitness for Purpose, Duties of Designers, Influence of Standard Building Agreements

2.1 How Liability Arises

2.2 The Statutory Limitation Issue

2.3 Statutory Influences

2.4 Reasonable Skill and Care – The Bolam Test

2.5 The Fitness of Purpose Debate

2.6 Other Factors Affecting Liability

2.7 Extent of Designer’s Duties

2.8 Influence of Standard Building Contracts

Chapter 3 Nature of the Policy Wording, Retroactive Dates, Policy Extensions, Exclusions and Conditions, Policy Schedule
3.1 Introduction

3.2 Legal Costs

3.3 Retroactive Dates

3.4 Policy Extensions

3.5 Change of Partners

3.6 Run-off Liability

3.7 Other Extensions

3.8 Policy Exclusions

3.9 Policy Conditions

3.10 Conditions of Concern to Construction Risks

3.11 Policy Schedule
Chapter 4 Cover for Construction Professionals, Architects, Engineers, Surveyors and Project Managers, Underwriting Criteria

4.1 Architects

4.2 Points to Consider

4.3 Underwriting Criteria

4.4 Legal Aspects

4.5 Surveyors

4.6 Consulting Engineers

4.7 Project Managers

4.8 Specific Cover Issues

Chapter 5 Design and Build Insurance

5.1 Introduction

5.2 Legal Aspects

5.3 Completion Date

5.4 Obligation to Insure

5.5 Dispute Resolution

5.6 Novation

5.7 Matters Affecting the Policy Cover

5.8 Subcontracting

5.9 Design and Build Policy Wording

5.10 Underwriting the Design and Build Risk

5.11 Underwriting Criteria

Chapter 6 Rights of Third Parties, Collateral Warranties, Economic Loss and the Complex Structures Theory

6.1 Introduction

6.2 Collateral Warranties – Legal Background

6.3 Definition of a Collateral Warranty

6.4 Complex Structures Theory

6.5 Contents of Collateral Warranties

6.6 Other Issues Surrounding Collateral Warranties

6.7 Contracts (Rights of Third Parties) Act 1999

6.8 Third Parties (Rights Against Insurers) Act 2010

Chapter 7 Claims

7.1 Introduction
7.2 Notification of Professional Indemnity Claims

7.3 Adjudication

7.4 Claims Handling

7.5 Time Limits

7.6 Other Limitation Factors

7.7 Insurance Coverage Issues

7.8 Examples of Claims Against Professionals

7.9 VAT in Construction Claims

7.10 Global Settlements

Chapter 8 Risk Management for Professionals

8.1 Introduction

8.2 Reputation is No Defence

8.3 Professional Risk Management

8.4 Checklists for Architects and Engineers

8.5 Collateral Warranties

8.6 Safety Aspects

8.7 Environmental Liability Issues

8.8 Risk Financing

8.9 Disaster Recovery Plans

8.10 Tips for Notifying Claims

As an insurance broker and risk consultant with 30 years’ experience in handling construction accounts, I have encountered several publications on the subject of professional indemnity insurance. However, none of these relate solely to the risks associated with the construction industry.

Apart from the conventional cover for architects, engineers and surveyors, today’s market is driven by the development of the design and build method of procurement, which today accounts for an estimated 70% of all work carried out under standard building agreements.

The book will be of interest not only to insurance practitioners, but also to lawyers, construction professionals and contractors. I hope that it will be of use to the many employees engaged in the day to day business of construction insurance, underwriting, claims negotiation and risk management.

Witherbys

Witherbys titles are developed using scripts developed by technical experts that are peer reviewed within work groups. Typically, they seek to improve understanding of the regulations, recommendations and guidelines issued by Industry.

Witherbys staff have significant expertise in the fields of navigation and hazardous cargoes as well as in the presentation of complex subjects in a graphic and easy to understand manner.

John D. Wright

John D. Wright FCII is Principal Marine Surveyor at Lloyd’s Register of Shipping. His time serving in the role of Quality Manager has informed his writing on the subject of indemnity insurance.

Title: Professional Indemnity Insurance in the Construction Industry
Number of Pages: 164
Product Code: WS1393K
ISBN: ISBN 13: 978-1-85609-588-4 (9781856095884), ISBN 10: 1-85609-588-6 (1856095886)
Published Date: May 2013
Binding Format: Paperback
Book Height: 250 mm
Book Width: 190 mm
Book Spine: 8 mm
Weight: 0.40 kg

Customer Reviews

Excellent Review by PF - November 2014: Excellent updated book on the subject (Posted on 07/04/2015)

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PROFESSIONAL INDEMNITY INSURANCE IN THE CONSTRUCTION INDUSTRY by John D Wright FCII Witherby Insurance and Legal A Division of Witherby Publishing Group Ltd 4 Dunlop Square, Livingston, Edinburgh, EH54 8SB, Scotland, UK Tel No: +44(0)1506 463 227 - Fax No: +44(0)1506 468 999Email: [email protected] - Web: www.witherbyinsurance.com iii Preface PREFACE As an insurance broker and risk consultant over a period of 30 years handling construction accounts, I have encountered several publications on the subject of professional indemnity insurance, but none of these relate solely to the risks associated with the construction industry. Apart from the conventional cover for architects, engineers and surveyors, today’s market has been driven by the development of the design and build method of procurement, which today accounts for an estimated 70% of all work carried out under standard building agreements. With the country in recession and the construction industry lacking growth, now may not appear to be the most judicious time to go into print, but the industry has always been litigious and the risks remain the same in any economic climate, as the volume of case law over the past few years has demonstrated. The industry has also had its fair share of legislation to contend with. Better control of risk is more necessary than ever. All of these areas are dealt with here, along with policy wordings, underwriting and claims. The book should be of interest, not only to insurance practitioners, but also to lawyers, construction professionals and contractors. It is hoped that it will be of use to the thousands of employees engaged in the day-to-day business of construction insurance, underwriting, claims negotiation and risk management. v Contents CONTENTS PREFACE III TABLE OF CASES XI TABLE OF STATUTES AND REGULATIONS XV 1 INTRODUCTION, APPLICATION OF BASIC INSURANCE PRINCIPLES, AND THE RELATIONSHIP WITH OTHER INSURANCE PRODUCTS 3 1.1 Introduction 3 1.2 Application of Basic Principles 3 1.2.1 Utmost Good Faith 4 1.2.2 Insurable Interest 5 1.2.3 Indemnity 6 1.2.4 Subrogation 7 1.2.5 Contribution 8 1.2.6 Proximate Cause 9 1.3 Relationship with Other Insurances 10 1.4 Latent Defects Insurance 12 2 HOW LIABILITY ARISES, THE BOLAM TEST, REASONABLE SKILL AND CARE, FITNESS FOR PURPOSE, DUTIES OF DESIGNERS, INFLUENCE OF STANDARD BUILDING AGREEMENTS 17 2.1 How Liability Arises 17 2.2 The Statutory Limitation Issue 18 2.3 Statutory Influences 19 2.4 Reasonable Skill and Care – The Bolam Test 19 2.5 The Fitness of Purpose Debate 20 2.5.1 Supplying a Product 20 2.5.2 Common Law and Contractual Influences 21 2.6 Other Factors Affecting Liability 22 2.6.1 Legislation Unfair Contract Terms Act 1977 22 2.6.2 Defective Premises Act 1972 22 2.6.3 Occupiers’ Liability Acts 1957 and 1984 22 2.6.4 Law Reform (Contributory Negligence) Act 1945 22 2.6.5 Joint Tortfeasors and the Civil Liability (Contribution) Act 1978 23 2.6.6 Other Factors 23 2.7 Extent of Designer’s Duties 23 2.7.1 23 2.7.2 Statutes and Building Regulations 23 2.7.3 Negligent Misstatements 24 Professional Indemnity Insurance in the Construction Industry vi 2.7.4 Site Factors 25 2.8 Influence of Standard Building Contracts 29 3 NATURE OF THE POLICY WORDING, RETROACTIVE DATES, POLICY EXTENSIONS, EXCLUSIONS AND CONDITIONS, POLICY SCHEDULE 33 3.1 Introduction 33 3.1.1 Nature of the Policy Wording 33 3.1.2 Typical Operative Clause Wording 33 3.1.3 The Claims Made Basis 34 3.1.4 “The insurer agrees to indemnify …” 34 3.1.5 “… in respect of any sum or sums which the policyholder may become legally liable to pay …” 34 3.1.6 “… as damages …” 35 3.1.7 “… for breach of their professional duty …” 35 3.1.8 “… as a result of any claim or claims made against the policyholder during the period of insurance …” 35 3.1.9 “… and arising out of the conduct of the business described in the Schedule …” 35 3.1.10 “… as the direct result of any negligent act, error or omission …” 35 3.1.11 “… committed by the policyholder …” 36 3.2 Legal Costs 36 3.3 Retroactive Dates 37 3.4 Policy Extensions 38 3.4.1 Loss of Documents 38 3.4.2 Libel and Slander 39 3.4.3 Dishonesty of Employees and Partners 39 3.4.4 Fees Recovery Costs 39 3.4.5 Breach of Warranty of Authority 40 3.5 Change of Partners 41 3.5.1 Incoming Partners 41 3.5.2 Outgoing Partners 41 3.6 Run-off Liability 42 3.7 Other Extensions 42 3.8 Policy Exclusions 42 3.8.1 Goods or Products Supplied 43 3.8.2 Jurisdiction and Territorial Limits 43 3.8.3 Personal Injury and Property Damage 43 3.8.4 Prior Circumstances 44 3.8.5 Warranties and Guarantees 44 3.8.6 Joint Ventures and Project Partnering 44 3.8.7 Related Companies 44 3.8.8 Intellectual Property 44 3.8.9 Miscellaneous Exclusions 44 3.9 Policy Conditions 45 3.9.1 Common Conditions 45 3.9.2 Data Protection Act 1998 45 vii Contents 3.9.3 Premium Payment 45 3.9.4 Third Party Rights 46 3.10 Conditions of Concern to Construction Risks 46 3.10.1 Adjudication Provisions 46 3.10.2 Payment of Policy Excess 47 3.10.3 Pollution and Contamination 47 3.10.4 Subrogation 47 3.11 Policy Schedule 47 4 COVER FOR CONSTRUCTION PROFESSIONALS, ARCHITECTS, ENGINEERS, SURVEYORS AND PROJECT MANAGERS, UNDERWRITING CRITERIA 51 4.1 Architects 51 4.2 Points to Consider 52 4.3 Underwriting Criteria 52 4.3.1 Qualifications and Experience 53 4.3.2 Number of Offices and Employees 53 4.3.3 Fee Income 53 4.3.4 Contract Sizes 54 4.3.5 Use of Modern Technology 54 4.3.6 Work Overseas 54 4.3.7 Retroactive Exposure 55 4.3.8 Claims Experience 55 4.4 Legal Aspects 55 4.5 Surveyors 56 4.5.1 Legal Aspects 57 4.5.2 Points to Consider 59 4.5.3 Underwriting Criteria 59 4.6 Consulting Engineers 63 4.6.1 Introduction 63 4.6.2 Underwriting Criteria 64 4.6.3 Contract Details 66 4.6.4 Overseas Work 66 4.6.5 Joint Ventures and Single Project Partnerships 66 4.6.6 Acting as a Contractor or Supplying a Product 66 4.6.7 Claims and Cover Levels 66 4.7 Project Managers 67 4.8 Specific Cover Issues 67 5 DESIGN AND BUILD INSURANCE 73 5.1 Introduction 73 5.2 Legal Aspects 73 5.3 Completion Date 74 5.4 Obligation to Insure 74 5.5 Dispute Resolution 75 5.6 Novation 75 Professional Indemnity Insurance in the Construction Industry viii 5.7 Matters Affecting the Policy Cover 76 5.8 Subcontracting 78 5.9 Design and Build Policy Wording 78 5.9.1 The Operative Clause 78 5.9.2 Professional Activities and Duties 78 5.9.3 Mitigating Costs Clause 80 5.9.4 Subcontractor’s Clause 80 5.9.5 Joint Ventures and Consortia 80 5.9.6 Indemnity Limit and Excesses 80 5.9.7 Collateral Warranties 83 5.9.8 Extensions to the Basic Cover 84 5.9.9 Policy Exclusions 84 5.9.10 Policy Conditions 85 5.10 Underwriting the Design and Build Risk 85 5.11 Underwriting Criteria 86 6 RIGHTS OF THIRD PARTIES, COLLATERAL WARRANTIES, ECONOMIC LOSS AND THE COMPLEX STRUCTURES THEORY 93 6.1 Introduction 93 6.2 Collateral Warranties – Legal Background 93 6.3 Definition of a Collateral Warranty 95 6.4 Complex Structures Theory 96 6.5 Contents of Collateral Warranties 96 6.6 Other Issues Surrounding Collateral Warranties 100 6.7 Contracts (Rights of Third Parties) Act 1999 101 6.8 Third Parties (Rights Against Insurers) Act 2010 101 7 CLAIMS 107 7.1 Introduction 107 7.2 Notification of Professional Indemnity Claims 107 7.2.1 Typical Notification Condition 109 7.2.2 Other Factors Affecting Notification 110 7.3 Adjudication 112 7.4 Claims Handling 114 7.4.1 Initial Notification 115 7.4.2 Investigation 117 7.4.3 Negotiation 118 7.4.4 Settlement 119 7.4.5 Use of Experts 120 7.4.6 Part 36 Offers 121 7.4.7 Disclosure and Inspection 122 7.4.8 Arbitration 123 7.4.9 Mediation 123 7.5 Time Limits 124 7.5.1 Other Factors 125 7.5.2 When Does Time Start to Run for Insurers? 126 ix Contents 7.6 Other Limitation Factors 127 7.7 Insurance Coverage Issues 127 7.7.1 Non-admission of Liability 127 7.7.2 Duty to Co-operate 127 7.7.3 Insurer Entitled to Defend 128 7.7.4 Costs Proviso and Discharge of Liability 128 7.7.5 Mitigating Costs 128 7.7.6 Subrogation Rights 129 7.7.7 Contribution 129 7.8 Examples of Claims Against Professionals 130 7.9 VAT in Construction Claims 131 7.10 Global Settlements 132 8 RISK MANAGEMENT FOR PROFESSIONALS 137 8.1 Introduction 137 8.2 Reputation is No Defence 137 8.3 Professional Risk Management 138 8.4 Checklists for Architects and Engineers 139 8.4.1 Selecting the Client 139 8.4.2 Selecting the Specialist Consultant 140 8.4.3 Documentation 140 8.4.4 Specifications 140 8.4.5 Materials and Equipment 140 8.4.6 Running the Project 140 8.4.7 Extent of Services 141 8.4.8 Partial Services Commissions 141 8.5 Collateral Warranties 141 8.5.1 Initial Questions 142 8.5.2 Express Warranties 142 8.5.3 Indemnity Clause 142 8.5.4 Fitness for Purpose 142 8.5.5 Assignment 143 8.5.6 Insurance Clause 143 8.5.7 Novation 143 8.5.8 Copyright 144 8.5.9 Economic and Consequential Loss 144 8.5.10 Net Contribution Clause 144 8.5.11 Limitation of Liability 145 8.5.12 Contracts Signed as a Deed 145 8.5.13 Dos and Don’ts when Signing Warranties 145 8.6 Safety Aspects 146 8.7 Environmental Liability Issues 146 8.8 Risk Financing 147 8.9 Disaster Recovery Plans 147 8.10 Tips for Notifying Claims 147 xi Table of Cases TABLE OF CASES Page Ackbar v C F Green & Co Ltd (1975) QB 582 126 Acrecrest Ltd v W S Hattrell & Partners (1979) 56 Anns v Merton London Borough Council (1978) 24, 94 Ashcroft v Mersey Regional Health Authority (1983) 2 All ER 245 20 Bagot v Stevens Scanlan and Co Ltd (1964) 3 All ER 577 18 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (1995) 2 WLR 607 58 Barclays Bank plc v Fairclough Building Ltd (1995) 22 Baxall Securities Ltd v Sheard Walshaw Partnership (2002) 18 Birkett v James (1977) All ER 801 125 B L Holdings v Robert J Wood & Partners (1979) 12 BLR 3 CA 24, 55 Blyth & Blyth Ltd v Carillion Construction Ltd (2001) 60, 75, 98, 143 Blyth v Birmingham Waterworks Co (1856) 4WR 294 19 BNP Mortgages Ltd v Page & Wells and Sun Alliance & London Insurance plc (1994) 108, 148 Bolam v Friern Hospital Management Committee (1957) 2 All ER 118 19 Bourne v McEvoy Timber Preservation Ltd (1976) 57 Bovis Construction Ltd and Eagle Star Insurance Co Ltd v Commercial Union Assurance Co plc (2000) 99 Bowmer & Kirkland Ltd v Wilson Bowden Properties (1996) 27, 131 Bradley v Eagle Star Insurance Co Ltd (1989) 1 AC 957 102, 133 Brickfield Properties Ltd v Newton (1971) 131 British Steel plc v Wyvern Structures Ltd (1996) 27 BLISS 21 125 Brown & Brown v Gilbert Scott & Payne (1993) 130 Callaghan and Another v Dominion Insurance Co Ltd (1997) 126 Carreras Ltd v D E & J Levy (1970) 61 Carter v Boehm (1766) 4 Cartledge v E Jopling & Sons Ltd (1963) 1 All ER 341 124 Caudle v Sharp (1995) LR 433 81 Chapman v Walton (1833) 19 Clay v A J Crump & Sons Ltd (1964) 1 QB 533 56 Clayton v Woodman & Son (Builders) Ltd (1962) 2 QB 533 2 All ER 33 CA (1962) 55 Co-operative Retail Services Ltd v Taylor Young Partnership (2002) UKHL 17 99 Cooper v Langdon (1841) 40 Crown Estates Commissioners v John Mowlem & Co Ltd (1994) 131 D & F Estates Ltd and Others v Church Commissioners for England and Others (1988) 2 All ER 992 94 Deepak Fertilisers and Petrochemicals Ltd v Davy McKee (London) Ltd (1991) 1 All ER (Comm) 69 CA 6 De Lassalle v Guildford (1900/1903) All ER 495 95 Dept of Transport v Chris Smaller (Transport) Ltd (1989) 1 All ER 897 125 Donoghue (or M’Alister) v Stevenson (1932) AC 562 17, 24, 94 Dutton v Bognor Regis Urban District Council (1972) 22 Eames London Estates Ltd and Others v North Hertfordshire District Council and Others (1980) 18 BLR 50 24, 25, 126 East Ham Corporation v Bernard Sunley & Sons Ltd (1966) 28 Eckersley v Binnie & Partners (1988) 123 Electrochrome Ltd v Welsh Plastics Ltd (1968) 93 Enterprise Oil Ltd v Strand Insurance Co Ltd (2006) EWHC 58 (Comm) 26 133 Professional Indemnity Insurance in the Construction Industry xii Equitable Debenture Assets Corporation Ltd v William Moss Group Ltd and Others (1984) 26, 27 Fairchild v Glenhaven Funeral Services Ltd and Others (2003) 3 WLR 89 23 Feasey v Sun Life Assurance Co of Canada and Another (2003) EWCA Civ 885 6 Freeman v Marshall & Co (1966) 58 Gale v Motor Union Insurance Co (1928) 1 KB 359 8 George Fischer Holding Ltd v Multi Design Consultants Ltd (1996) 130 Gerald R Smith & Partners v Wylie (1994) 123 Glasgow Airport Ltd v Messrs Kirkman & Bradford (2007) Scot CS C SIH 47 100 Glengate KG Properties Ltd v Norwich Union Fire Insurance Society Ltd (1996) 2 All ER 487 CA 5, 38 Gloucester Health Authority and Others v M A Torpy & Partners (1997) 55 Con LR 124 21 Goddard & Smith v Frew (1939) 4 All ER 358 CA 35 Gorham v British Telecommunications Ltd plc and Standard Life Assurance Co (2000) 5 Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd and Others (1984) 24 Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners (1975) 1 WLR 1095 CA 20, 64, 76 Guinness Peat Properties Ltd v Fitzroy Robinson Partnership (1987) 122 Hadley v Baxendale (1854) 127 Hancock v W Brazier (Anerley) Ltd (1966) 20 Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd (1970) 9, 119 Harris v Wyre Forest District Council (1988) 57 Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963) AC 465 17, 24, 95 Herbert Leach and Another v Norman Crossley & Partners (1984) 131 Holland Hannen & Cubitts (Northern) Ltd v Welsh Health Technical Services Organisation and Others (1981) 25 Howe v David Brown Tractors (Retail) Ltd (Rustons Engineering Co Ltd, third party) (1991) 4 All ER 30 125 Hutchinson v Harris (1978) 28 IBA v EMI and BICC (1980) 21, 54, 76 Independent Broadcasting Authority v EMI Electronics Ltd and BICC Construction Ltd (1980) 14 BLR 1 21, 54, 76 Jacobs v Coster (2000) 109 Jacobs v Morton & Partners (1994) CILL 965 96 Jenkins v Bentham (1855) 57 Jewson Ltd v Kelly (2003) 77 John Lelliot (Contractors) Ltd v Byrne Brothers (Formwork) Ltd (1992) 31 Con LR 89 77 Junior Books Ltd v Veitchi Co Ltd (1982) HL 94 Kajima UK Engineering Ltd v The Underwriter Insurance Co Ltd (2008) EWHC 83 (TC) 108 Kensington and Chelsea Area Health Authority v Wettern Composites Ltd (1984) 18, 130 Kier Construction Ltd v Royal Insurance (UK) Ltd (1992) 110 Laker Vent Engineering Ltd v Templeton Insurance Ltd (2009) EWCA Civ 62 115 Lanphier v Phipos (1838) 19 Layher Ltd v Lowe (1997) 109 Le Lievre v Gould (1893) 57 Leppard v Excess Insurance Co Ltd (1979) 1 WLR 512 CA 6 Lister v Romford Ice and Cold Storage Co Ltd (1957) 47 Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Co Ltd (2003) UKHL 48 81 London Borough of Merton v Lowe and Pickford (1981) 27 London Congregational Union Inc v Harriss & Harriss (a firm) (1988) 1 All ER 15 125 Lumbermens Mutual Casualty Co v Bovis Lend Lease Ltd (2004) EWHC 2197 132 Mabey & Johnson Ltd v Ecclesiastical Insurance Office plc (No 2) (2003) EWHC 1523 (Comm) 82 xiii Table of Cases Mark Rowlands Ltd v Berni Inns Ltd (1980) 120 Matrix Securities Ltd v Theodore Goddard and Another (1997) 21 McKenzie v Potts and Dobson Chapman (1995) 130 Merrett v Babb (2001) 41, 57 Midland Bank Trust Co Ltd v Hetts Stubbs & Kemp (1978) 3 WLR 167 18, 64 Mitsubishi Electric UK Ltd v Royal London Insurance (UK) Ltd (1984) 2 Lloyds Rep 249. 81 Moresk Cleaners Ltd v Hicks (1966) 2 Lloyds Rep 338 55 Murphy v Brentwood District Council (1990) 2 All ER 908 18, 95 National Employers Mutual Insurance Association Ltd v Hayden (representing Lloyds Underwriters) (1978) 2 Lloyds Rep 149 CA 8, 129 Nicholas G Jones v (1) Environcom Ltd and (2) Environcom England Ltd and MS plc (t/a Miles Smith Insurance Brokers) (2010) EWHC 759 (Comm) 5 Norta Wallpapers (Ireland) Ltd v John Sisk & Sons (Dublin) Ltd (1977) 27 Norwich Union v Harrison and Others (1987) 123 Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) (1997) UKHL 53 58 Oldschool v Gleeson (Construction) Ltd (1976) 4 BLR 103 63 OT Computers (in administration) (2004) EWCA Civ 653 102 Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (1994) 3 All ER 581 4 Perry v Sidney Phillips & Son (1982) 58 Petrofina (UK) Ltd v Magnaload Ltd (1984) 6 Philips v Ward (1956) 58, 119 Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd (1985) 2 All ER 395 102 Pirelli General Cable Works Ltd v Oscar Faber & Partners (1983) 1 All ER 65 124 Plant Construction plc v Clive Adams Associates and Another (2000) CA 137 27, 55, 131 Platform Home Loans Ltd v Oyston Shipways Ltd and Others (1999) HL 58 Post Office v Norwich Union Fire Insurance Society Ltd (1967) 2 QB 363 132, 133 Re: OT Computers (in administration) (2004) EWCA Civ 653 102 Richard Roberts Holdings Ltd v Douglas Smith Stimson Partnership (1989) 130 Robinson v P E Jones (Contractors) Ltd (2010) EWHC 102 (TCC) 18 Ruxley Electronics and Construction Ltd v Forsyth (1995) 119 Sansom v Metcalfe Hambleton & Co (1997) 121 SCM (United Kingdom) Ltd v W J Whittall & Son Ltd (1970) CA 93 Scottish Widows Services Ltd v Harmon/CRM Facades, Building Design Partnership and WSA Inc (2010) CSOH 42 100 Shanklin Pier Ltd v Detel Products Ltd (1951) 95 Sidaway v Board of Governors of the Bethlem Royal Hospital and Others (1984) 26 Singer & Friedlander Ltd v John D Wood & Co (1977) 57 Smith v Eric S Bush (1989) 57 South Australia Asset Management Corporation v York Montague Ltd (1997) UKHL 10 58 Sparham-Souter v Town and Country Developments (Essex) Ltd (1976) QB 858 124 Spartan Steel & Alloys Ltd v Martin & Co (Contractor) Ltd (1972) CA 94 St Martin’s Property Corporation Ltd v Sir Robert McAlpine Ltd (1993) 96 Stormont Main Working Men’s Club Ltd v J Roscoe Milne Partnership (1989) 130 St Paul Fire and Marine Insurance Co (UK) Ltd v McConnell Dowell Constructors Ltd and Others (1995) 4 Sutcliffe v Thackrah (1974) AC 727 (1974) 1 All ER 859 HL 29, 56 Tesco Stores Ltd v Norman Hitchcox Partnership (1997) 131 Professional Indemnity Insurance in the Construction Industry xiv Thorman and Others v New Hampshire Insurance Co (UK) Ltd and Others (The Times 12th October 1987) 108, 116 Tootal Broadhurst Lee & Co v London and Lancashire Fire Insurance Co (1908) 9 Tyrer v District Auditor for Monmouthshire (1973) 60 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 127 Viking Grain Storage Ltd v T H White Installations Ltd (1985) 33 BLR 103 21, 77 Wimpey Construction UK Ltd v D V Poole (1984) 2 Lloyds Rep 499, 27 BLR 58 20, 26, 36, 121 Yianni v Edwin Evans & Sons (1981) 57 Young & Marten Ltd v McManus Childs Ltd (1969) 20, 26, 74 xv Table of Statutes and Regulations TABLE OF STATUTES AND REGULATIONS Chapter Access to Justice Act 1999 7 Arbitration Act 1996 7 Architects Act 1997 2, 4 Civil Liability (Contribution) Act 1978 2, 5, 6, 7 Civil Procedure Rules 1998 7 Construction (Design and Management) Regulations 2007 2, 3, 4, 5, 8 Conditional Fee Agreements Regulations 2000 7 Consumer Insurance (Disclosure and Representations) Act 2012 1 Contracts (Rights of Third Parties) Act 1999 2, 3, 5, 6 Control of Asbestos Regulations 2012 5, 8 Corporate Manslaughter and Corporate Homicide Act 2007 2 Companies Act 1985 6 Courts and Legal Services Act 1990 7 Data Protection Act 1998 3 Defective Premises Act 1972 2, 4, 5 Environment Act 1995 2, 8 Environmental Protection Act 1990 8 Estate Agents Act 1979 4 Finance Act 1989 7 Health and Safety at Work etc Act 1974 2, 8 Housing Grants, Construction and Regeneration Act 1996 2, 3, 4, 5, 7 Latent Damage Act 1986 2, 3, 4, 7 Law Reform (Contributory Negligence) Act 1945 2, 4, 7 Limitation Act 1980 2, 3, 4, 5, 6, 7 Limited Liability Partnership Act 2000 8 Local Democracy, Economic Development and Construction Act 2009 7 Marine Insurance Act 1906 1, 8 Occupiers’ Liability Acts 1957 and 1984 2 Partnership Act 1890 3 Property Misdescriptions Act 1991 4 Rehabilitation of Offenders Act 1974 1 Riot (Damages) Act 1886 1 Scheme for Construction Contracts (England and Wales) Regulations 1998 (amendment) (England) Regulations 2011 7 Supply of Goods and Services Act 1982/1994 2, 5 Sale and Supply of Goods to Consumers Regulations 2002 2, 5 Third Parties (Rights Against Insurers) Act 2010 2, 6 Unfair Contract Terms Act 1977 2, 5, 7, 8 Value Added Tax Act 1994 7 Water Resources Act 1991 8 Cover for Construction Professionals, Architects, Engineers 55 4.3.7 RETROACTIVE EXPOSURE The proposer for insurance may have an earlier retroactive date which the new insurer needs to take into account. Such liability may arise from the activities of the current business or from a predecessor’s business. 4.3.8 CLAIMS EXPERIENCE The previous claims record is a major underwriting factor. This can be a sensitive issue because the notification provisions in the policy are strict and policyholders may feel that, to declare every incident that might give rise to a claim, will spoil their chances of securing competitive renewal terms or may even result in cover not being available on the basis required. These incidents do need to be declared and the solution lies in an analysis of the incidents reported so that any unlikely claims can be weeded out and any likely claims updated so that accurate information is fed to the new insurer. This is the time when the proposer’s insurance adviser can be of real assistance. Claims procedures and case law examples are set out in Chapter 7. 4.4 LEGAL ASPECTS The following cases provide examples of where an architect may be liable either solely or jointly with other parties. An architect may not delegate the work entrusted to him by his client. In Moresk Cleaners Ltd v Hicks (1966) 2 Lloyds Rep 338, the architects had been appointed to design and arrange contracts for a laundry extension. Two years or so after completion, defects occurred in the extension and a claim was submitted against the architect, alleging negligence in the design, resulting in the defects. Liability was denied on the grounds that it was an implied term in the architect’s contract with the client that he could delegate specialist design work to a subconsultant. The architect also argued that he had the client’s implied authority to act as the client’s agent and, on the strength of this, he employed the subconsultant to carry out the design. The court held that the building was defective, the architect was negligent in approving the drawings and also there was no implied authority to appoint subconsultants. The architect was therefore liable. An architect is also expected to be familiar with the law concerning the type of work undertaken, although he is not expected to be a legal expert. An example of the extent of such knowledge occurred in the case of B L Holdings v Robert J Wood & Partners (1979) 12 BLR 3 CA. The architect became aware of an incorrect procedure in a planning application for his client, but did not warn the client that the planning permission may be void. It was found that the architect was entitled to assume that the local authority knew what they were doing, ie that they had a better knowledge of planning law than the architect had. Whether other similar cases would produce the same result now is open to doubt as the duty to warn (in respect of defects) now seems well established following cases such as Plant Construction plc v Clive Adams Associates and Another (2000) CA 137. Another aspect of an architect’s responsibility lies in the supervisory role. If an architect is asked to undertake the supervision of the construction work, he owes the contractor a duty of care in his supervisory duties, although this does not go as far as instructing the constructor on how the work should be carried out. The architect should not assume that a contractor is competent and, if he knows that the task required is difficult for the average builder, he could be found liable for any consequences. Such a situation occurred in the case of Clayton v Woodman & Son (Builders) Ltd (1962) 2 QB 533 2 All ER 33 CA (1962). The court of first instance found the architect to be at fault for not providing instructions for supporting a gable wall even though the property owner had said that it Professional Indemnity Insurance in the Construction Industry 56 should be supported. The builder was injured when the gable collapsed. The Court of Appeal reversed that decision on the basis that the architect had not taken on the responsibility of telling the builder to do dangerous work or to do it in an unsafe manner. An architect may be jointly liable with others in some situations. If advice is given of a defect and another party, such as a local authority building inspector, is also aware of a situation that might give rise to a claim, both would be held liable and damages apportioned between them based on the particular facts (Acrecrest Ltd v W S Hattrell & Partners (1979)). Similarly, where a dangerous situation is created, any party involved in the project who has fallen short of their duty of care would be held jointly liable. In Clay v A J Crump & Sons Ltd (1964) 1 QB 533, a wall had been left standing following a site clearance. The architect had not inspected it and the building contractors did not inspect it properly either. The wall collapsed, injuring an employee of the builder. Damages were apportioned 42% to the architect, 38% to the demolition contractors and 20% to the building contractors. The architect may be granted some relief where the contract requires him to incorporate some state-of-the-art or novel components. Introducing a feature that the average architect is not familiar with does not make him liable if the feature does not work. When issuing interim certificates, the architect is under a duty to act fairly in making the valuation and would be liable to either of the contracting parties who may suffer a loss due to under or overvaluation. In the well-known construction case of Sutcliffe v Thackrah (1974) AC 727 (1974) 1 All ER 859 HL, the claimant employed a contractor to build a house and also appointed the defendants as architect and quantity surveyor. Interim certificates were signed and, based on the valuations, the claimant paid the sums due. The project did not go well and the builders were dismissed and replaced by another firm, who discovered incomplete and incompetent work. The claimant pursued the architects, alleging negligence in supervision and in certifying work that had not been completed. The architects pleaded that their role was that of an arbitrator and this absolved them from negligence. The House of Lords did not agree and held that the architects had failed in their duty to act fairly in making their valuation. A further head of liability is breach of statutory duty. For example, Section 1(1) of the Defective Premises Act 1972 imposes a duty on those taking on work for the provision of a dwelling house to see that the work is carried out in a workmanlike or professional manner with proper materials so that, as regards that work, the dwelling will be fit for habitation when completed. This duty applies to any professional involved in the process as well as to the contractor. The limitation statutes also apply. If a building becomes defective due to negligence, the time period under the Limitation Act 1980 begins to run when the building becomes a danger to the health and safety of the occupiers. However, for a breach of statutory duty, it begins to run at the time when the property is completed. If further work is required and this results in a claim, the time will begin to run from when the further work is completed. 4.5 SURVEYORS The surveying profession has its own professional body, the Royal Institution of Chartered Surveyors. However, not all surveyors are chartered surveyors. The work carried out by surveyors is extremely varied and not all surveyors are involved in actual surveys but concentrate instead on matters such as estate agency and residential property management. Surveying is high risk for insurers, who have suffered some poor underwriting years, particularly in periods of economic downturn where optimistic building valuations have resulted in severe losses. Cover for Construction Professionals, Architects, Engineers 57 4.5.1 LEGAL ASPECTS Case law has demonstrated that property valuations are a serious issue. A negligent valuation can result in a client making wrong decisions and failure to spot a defect in the structure can result in considerable financial loss. Outside influences can also produce claims, eg in a buoyant property market, a laissez-faire approach to valuations can develop, particularly in relation to mortgage applications. Surveyors are also subject to concurrent liability in contract and in tort. The tort duty is wider and is owed to a wider class of persons. In Bourne v McEvoy Timber Preservation Ltd (1976), a surveyor was held responsible to persons who were not in a contractual relationship with the surveyor when they relied on the findings of a report commissioned by another party. This duty to other parties, and in particular with mortgage valuations, is a regular source of claims. Surveys carried out for a financial institution can result in a claim from the mortgagee if they suffer a loss due to the negligent survey (Yianni v Edwin Evans & Sons (1981) and Smith v Eric S Bush (1989)). Even where the report is not disclosed to the borrower and there is no evidence of reliance, the surveyor may still be liable (Harris v Wyre Forest District Council (1988)). The surveyor can find himself personally liable for claims based on a negligent survey even though they were working for a company at the time. The case of Merrett v Babb (2001) was mentioned earlier when considering run-off liability. Due to a combination of unfortunate circumstances, the surveyor found himself without insurance cover some time after he had retired, and after the practice for whom he had worked had ceased trading, without maintaining any professional indemnity insurance on a run-off basis. Valuations in a changing property market can be a problem and, to try to alleviate this, a 10% margin guideline on valuations was laid down in the case of Singer & Friedlander Ltd v John D Wood & Co (1977). If a valuation is outside this guideline, certain matters have to be proved: (a) That the valuer omitted some matter that he ought to have considered (b) He took into account a matter that he should not have done (c) He failed to adopt the procedure and practice adopted as standard in the profession (d) He failed to exercise reasonable skill and care. The surveyor can protect himself by providing clear provisos to his report, eg “… we have assumed that full planning consents have been obtained”. This could help by having the damages reduced considerably under the contributory negligence law. Surveyors should also possess at least a reasonable knowledge of the law relating to the work they are doing. In Jenkins v Bentham (1855), the surveyors were instructed to value ecclesiastical property. The basis of the valuation was too low because they based it on figures applicable to incoming and outgoing tenants rather than to incoming and outgoing incumbents, not appreciating the difference. The judge said that they should have been aware of the general rules regarding valuations of ecclesiastical property, and found them liable. The issue of valuation certificates came before the courts in Le Lievre v Gould (1893) when a mortgagee advanced more money to a builder than was necessary because the certificates were inaccurate. Unfortunately for the mortgagee, his claim based on breach of contract failed because the surveyor was actually under contract to the builder, not the mortgagee. As the law stood at the time, there was no remedy in tort either. Professional Indemnity Insurance in the Construction Industry 58 In Freeman v Marshall & Co (1966), a client who wished to purchase a property for investment and rental income noticed damp in the basement. Being satisfied that the property was generally sound, she called in the defendants to obtain an opinion on the damp basement, but did not call for a structural survey. The defendant was not a qualified surveyor, although he was experienced. His opinion was that the damp was caused by condensation and, subject to being aired properly, there would be little trouble. In fact, a subsequent survey by a chartered surveyor revealed problems with dry rot, wet rot and rising damp. Extensive repairs were necessary, with consequent costs and loss of rental income during the period of repair. The surveyor was found liable. The measure of damages in cases involving negligent survey reports was the subject of a high profile case, South Australia Asset Management Corporation v York Montague Ltd (1997) UKHL 10. The point at issue was whether the negligent surveyor should be held responsible for all the consequences of his negligent act. The bank had advanced money to their client on the strength of the defendant surveyor’s market valuation, which was much higher than the property turned out to be worth. The bank’s argument was that their total losses should be awarded because, had they known the real value of the property, they would not have lent at all and hence would have suffered no losses. The defendant’s argument was, that they should not be responsible for the effect of market falls in the property sector. The measure of damages was, therefore, a difficult one for the courts. The bank had advanced a sum of £11m on the security of the property, valued by the defendants at £15m. A later sale of the property realised only £2.5m. The argument boiled down to whether the surveyor was, at the time of the valuation, acting as an information provider or as an adviser. The distinction is to prevent a valuer from being held responsible for losses that are unconnected with the advice, which in this case would be the fall in value due to market conditions. If the duty was merely to provide information, the valuer would only be responsible for the consequences of the information being incorrect. In this case, the responsibility was based on the difference in the value of the security actually provided and the value of the security that the lenders thought they were getting for the loan that they had decided to make. A duty to advise, on the other hand, involves a duty to take care to consider all the potential consequences of that course of action, and the valuer would be liable for the whole loss if the advice was negligent. The so-called “but for” test in negligence cases was not appropriate in this case because the duty was outside the scope of liability that the parties would reasonably have considered that the valuer was undertaking, ie he was acting as information provider not as an adviser. A similar decision was reached in the case of Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (1995) 2 WLR 607. In another case, Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) (1997) UKHL 53, the House of Lords came to the same conclusion after the court of first instance and the Court of Appeal had both formed the opinion that the total loss was recoverable even though most of the loss was down to market forces. There are occasions when the lender may be guilty of contributory negligence. The general rule is that the relevant damage for the purpose of the Law Reform (Contributory Negligence) Act 1945 is the loss sustained by the lender. If the lender has itself been negligent in respect of the loss, a reduction will be made according to the degree of contributory negligence. The proportionate reduction is applied to the basic loss, not the lesser recoverable loss (Platform Home Loans Ltd v Oyston Shipways Ltd and Others (1999) HL). If there is no discernable market value influence apparent, the measure of damages will be diminution in value, ie the difference between the value placed on the property at the time of the survey and the value that would have been placed on it had the defects been taken into account ( Philips v Ward (1956) and Perry v Sidney Phillips & Son (1982)).

Professional Indemnity Insurance in the Construction Industry

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