Professional indemnity has the potential to be a new nightmare for consultants.
The trend of clients passing increased liability to consultants will be all too familiar. A greater awareness of risk and a desire to transfer it elsewhere, combined with tougher competition for contracts has resulted in unlimited liability and open liability now commonly sought.
Unfortunately this frequently creates a situation whereby a consultant’s contractual liability becomes disproportionate to the client’s fee. Smaller firms are turning work away when their insurance fails to meet the new demands, and increasingly consultants are being appointed on the basis of their capacity for liability rather than their suitability for the job.
Other problematic terms now sought by clients include consequential and indirect loss provisions arising from any alleged breach of duty. These can have very significant financial consequences, as liability can extend to commercial matters including loss of rent or reduction in property value.
While the breadth of liability is growing, we are also seeing an increase in the average value of disputes.
I have increasingly seen requests for reliance letters where one consultant or supplier allows another party (such as a purchaser or funder) to rely on its professional advice. A limitation period for reliance (usually six or 12 years) will also be stated and will detail the required levels of PI insurance cover and limitations for that period.
In my experience, reliance letters typically arise late in a transaction process and the amount of time and input between consultants and the legal advisers of the transacting parties needed to negotiate the contents should not be underestimated. It will often be a protracted process and involve an eventual compromise on the terms which each party will accept.
Will the UK market ever return to fairer practices? This feels some way off at the moment.
It is important that there is a clear match between liability levels and PI provisions contained within any appointment or reliance letter. All members of the project team should review their PI insurance and determine what level of risk is realistic in relation to both their reward and insurance arrangements.
Decisions concerning appropriate liability levels should begin with a prudent and realistic assessment of the level of risk likely to flow from the appointment. Once this has been determined then the supplier’s PI insurance cover should be checked. Whenever possible, situations where the liability cap exceeds the available PI cover should be avoided but where this does arise, then a sober assessment of the supplier’s covenant strength should be made.
These basic steps should give a client reasonable confidence there is something to back up the contractual liability provisions of their suppliers. From a supplier’s viewpoint these steps should also enable a reasonable balance to be achieved between risk and reward.
The danger of course is that reliance letters could start developing lengthy disclaimers and limitations and the process of issuing what is today a somewhat informal document, may become considerably more formal; whether that will benefit anyone remains to be seen.
Steve Timbs is executive director with the CBRE Building Consultancy Team