Legal Q&A – Adjudication
Claudia Russell, Of Counsel, CMS Cameron McKenna Nabarro Olswang
THE past few years have seen an increasingly hardening insurance market, which has particularly impacted upon professional consultants seeking to obtain (or maintain) professional indemnity (PI) insurance. Consultants not only require this for protection of their own business interests (and sometimes personal assets too where the business is a sole trader or partnership), but also to provide clients with the comfort they require that the consultant’s professional undertakings and contractual obligations are insurance backed.
Most commercial developers will include in consultant appointment agreements an obligation on the consultant to maintain a specific level of insurance cover, for a period not just whilst they are providing the services, but the duration of their contractual liability (which may extend to 12 years, or even longer).
As professional indemnity insurance is on a ‘claims made’ basis, it is the level of cover in place at the time that a claim is made that the time that the allegedly defective services were provided.
The Grenfell Tower tragedy in 2017, the inquiry that followed and the resultant legislative changes have all had a huge impact on the terms on which insurers are willing to provide cover.
For this reason, developers want to know that the insurance will still be in place some time down the line, at the point a defect becomes apparent in the development and causes the developer to seek out the sub-standard design or specification which has given rise to the issue. Developers will want assurance that the level of PI cover held is sufficient to cover the likely level of loss that the consultant could possibly cause them, on a ‘worst case scenario’ basis.
Often appointment agreements also contain a clause enhancing duty of care owed by consultants to place a higher standard than the law might otherwise impose, making claims of this nature easier for developers to establish than they might be without a robust contract. Of course, in the absence of a fully functioning crystal ball, at the time that these contractual obligations are taken on the consultant will have no real idea of what may be round the corner in terms of the insurance market.
Availability of cover
The Grenfell Tower tragedy in 2017, the inquiry that followed and the resultant legislative changes have all had a huge impact on the availability of professional indemnity cover generally, and the terms on which insurers are willing to provide cover. These issues are further compounded by the fact that insurers have suffered significant losses due to other circumstances such as extreme weather events and the COVID pandemic, resulting in increased premiums across the board for insurance products.
Test cases brought by the Financial Conduct Authority to obtain clarity on the scope of cover provided by business interruption insurance policies following covid related losses have, in addition, served to make insurers more cautious.
Exclusions
The Supreme Court’s finding in favour of very wide interpretation of ‘causation’ (the link needed between an event and the losses caused by that event) has impacted on the approach of insurers on all types of policies.
The Supreme Court’s finding in favour of very wide interpretation of ‘causation’ (the link needed between an event and the losses caused by that event) has impacted on the approach of insurers on all types of policies, encouraging them to narrow down categories of insured losses through specific wording and stated exclusions.
Recurring themes that we are seeing for consultants involved in construction projects are:
- Lower levels of cover
- Aggregate cover in place of each and every claim cover, so that the insurer knows the maximum pay-out it can be faced with in one insurance year
- Complete exclusions for claims in respect of fire safety and cladding.
Many of these changes will mean that, on the face of it, consultants are not complying with the undertakings they have provided in their past appointments. Thankfully for consultants, however, it is generally market practice in consultant appointments to permit a degree of flexibility in the obligation to maintain PI cover, with appointments usually stating that in the event that the stated level and basis of insurance is no longer available on commercially reasonable rates and terms, then the consultant will advise the developer (in order that they can discuss how best to proceed) or put in place the maximum lower level of cover as is available.
In terms of staying on the right side of your appointment it will always be sensible to get as much flexibility as possible in this clause of their appointments as possible at the time of negotiation – for example by stating a lower level as the minimum requirement than that held at the time of entering into the appointment, and by requesting that any wording about the policy having ‘no exclusions or carve outs’ be removed.
It is also becoming more common place for consultants to safeguard their own assets by limiting their liability under the contract using exactly the same wording as is stated in their insurance policy. This could avoid a bad year becoming a very bad (or terminal) year for a business, and although developers would always prefer to avoid this type of exclusion, the shift in the market has made this stance more difficult for them to insist upon.
More exclusions
This could avoid a bad year becoming a very bad (or terminal) year for a business, and although developers would always prefer to avoid this type of exclusion, the shift in the market has made this stance more difficult for them to insist upon.
Where developers do take issue with the policy on offer, discussing the limits and carve outs in the context of the actual services being provided can be helpful. For many consultants, an exclusion for cladding related claims may be a nonissue where specifying cladding does not form part of their services.
For those that do specify cladding, the developer may wish to have further assurances, fire testing certificates, approval of certain aspects by specialist fire engineers, for example, to get comfortable with any limitations on liability/corresponding PI.
Exclusion of liability (and cover) for ‘fire safety claims’ may cause more concern, as this could fall within the remit of a number of consultants – those responsible for layout, fire strategy, electrical works, specification of materials, alarm systems, sprinkler/misting systems. It is worth consultants knowing the detail of their policy rather than the headlines of the policy cover note only, in order that assurances can be provided that the cover does in fact cover what it needs to for the consultant’s role – which is ultimately the common objective.
Claudia Russell, Of Counsel, CMS Cameron McKenna Nabarro Olswang