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Consultants File 2010: Insurance

Continuing financial pressures keep increasing need to clarify professional responsibilities and the critical importance of having insurer support when claims arise. Paul Berg of Griffiths & Armour advises how to beat the claim game.

Against a backdrop of cash-flow difficulties, increasing litigation, adjudication and rising limits of liability, it is little wonder that consultants are concerned about the effects on professional indemnity (PI) insurance.

In 2009, NCE reported that 56% of firms had seen an increase in litigation and 25% said that the sums involved are rising.

But there are several steps that firms can take to help insurers protect them effectively and efficiently should claims arise.

The first concerns net contribution clauses, which are terms that can be included in contract documents to ensure that consultants are only liable for their fair share of their client’s claim and not asked to pick up the bill for others involved in the project through ‘joint and several’ liability.

Without such clauses a consultant could find itself responsible for paying damages that are the fault of the contractor.

“By paying careful attention to terms of their insurance contract consultants could save themselves a lot of time and money”

For example, in a claim where the consultant was found to be 30% responsible and a contractor 70% responsible for a £100,000 claim, the client can enforce the judgement against the consultant for £100,000 leaving the consultant to recover £70,000.

But if the contractor is insolvent and unable to meet the claim or has insufficient insurance arrangements in place, the consultant could find it has no means of recouping the costs.

Although net contribution clauses are widely used, they have only recently been tested in court. In April 2009, Langstane Housing Association sued a firm of structural engineers for £3M of losses following a partial collapse of a building during renovation works.

The housing association claimed that the collapse resulted from the breaches of contract and/or negligence by contractors, the architect and the engineer but sought to claim the entire amount from the engineer on a joint and several basis.

The structural engineer’s appointment was under the ACE B(1) standard form, which contained a net contribution provision.

The judge rejected Langstane’s argument that the net contribution clause fell foul of the Unfair Contract Terms Act by imposing an unreasonable exclusion or restriction of “liability for breach of duty”. Instead, the judge found that the net contribution clause ensures that the party relying on it is only liable for their own breach of duty - not that of a third party.

As such, the clause did not exclude or restrict liability and therefore does not fall within the Unfair Contract Terms Act’s remit.

“Recently there has been a tendency for some contracts to state that an adjudicator’s decision is final.”

This is a significant decision and although future cases can’t be pre-empted, it should reenergise consultants’ attention to the area at a time when the cost of any claim can have significant consequences.

The second area that firms need to be aware of concerns adjudication. In recent years there has been a tendency for some contracts to state that an adjudicator’s decision is final and binding, rather than allowing it to be determined via litigation or arbitration.

But consultants that do not tell their insurers of this condition could be in for a nasty shock. Nearly all PI insurers will object to an adjudicator’s decision being final and binding.

Many PI policies contain specific exclusions relating to claims in circumstances where an adjudicator has the final say and, at the very least, insurers are likely to want full contract details to enable them to decide whether to impose particular terms or an additional premium.

By paying careful attention to terms of their insurance contract and seeking advice from their insurance brokers before agreeing to conditions of engagement, consultants could save themselves a lot of time and money. That can make the difference between a good year and a headache.

  • Griffiths & Armour advise over 2,000 firms of consulting engineers in the UK and Ireland on professional risk and supporting indemnity insurance: strategic advice on insurance, contractual risk and claims management are integral parts of the service.

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