Legalese: Make sure your professional indemnity insurance reflects a realistic level of risk for the project in hand, says Mark Klimt
The days when architects had to be coy about professional indemnity insurance are long gone, as it is a legal and professional requirement for it to be maintained. It also features in appointment terms, and there is frequently animated discussion as to the level of insurance that should be required.
Architects are increasingly keen, once a level has been agreed, to secure agreement from the client that this shall be the limit of their liability. The two are separate issues: the architect’s overall liability on the one hand, and the amount that the parties accept represents a sensible insured amount for the architect’s potential liability on the other. The RIBA’s terms conflate the two by providing for the architect’s liability not to exceed the amount inserted in the project data for insurance. Some (unusual) clauses go further for the architect’s benefit and seek to limit the architect’s liability to the amount and extent of insurance. So if, for some reason, the policy does not respond in the full amount, it is the lesser response that fixes the architect’s liability.
Insurance has, therefore, moved firmly centre stage. What then is the appropriate level of insurance to offer and is it always appropriate for the architect to agree liability up to the limit of that insurance level? The common amounts of insurance maintained by architects tend to range from £250,000, via £500,000-£750,000, £1 million, £2 million, £3 million and £5 million to £10 and £20 million and beyond. The level of insurance is supposed to reflect a sensible, informed estimate of the loss that the architect’s default could cause. In practice, the parties will usually look at the overall projected construction cost and negotiate a level of insurance based on a percentage of that. Projects of about £1 million in value would attract insurance of, perhaps, £500,000. Once projects have a budget of, say, £5 million, clients will tend to look for insurance at levels of £2 million or £3 million. The ‘sensible’ insured amount will be somewhere just below 50 per cent of project value. But there is no incontrovertibly logical approach. Project value is not necessarily an accurate indicator of ultimate loss, because there may be consequential losses (for example multiple tenants’ claims for business interruption occasioned by delays) that will dwarf the construction cost. On the other hand, it is unlikely that a single error from an architect is going to have the sort of catastrophic consequences that insurance at (say) £5 million provides for.
As for whether the architect’s total potential liability should be fixed at the amount of required insurance, a client will argue that the insured sum is the minimum but not the maximum that it is prepared to accept, while the architect will argue that, if it is going to the expense of maintaining insurance at a level the client is comfortable with, the architect is entitled to the security of knowing it will not face a claim against personal assets.
On some projects, though, liability could sensibly be capped at a level calculated not by reference to the project size or the amount of agreed insurance, but to the architect’s fee (assuming that will give a lower figure). The client will, of course, be aware that the amount of insurance actually being maintained is higher than the liability cap on offer, so may be unlikely to accept it, but such higher insurance amount could be available for third party claims, rather than the client’s direct contractual claims.
It is a good idea for architects to negotiate as low a contractual liability cap (and as low a required insurance amount) as possible, because the higher the figures that are bandied about, the greater will be the expectation in the event of contractual claims. But any figure agreed in an appointment needs also to reflect in some way the realistic level of risk, however imperfect the method of calculation, if it is to have a chance of being agreed.
Mark Klimt is a partner at law firm DWF