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Professional Indemnity Insurance for Architects
Introduction
Architecture is one of the older established professions and, as such, Architects are regarded as a "traditional" profession. All Chartered Architects are associates or fellows of the Royal Institute of Chartered Architects (RIBA) although not all Architects are members. Like all those involved in the building industry, Architects have been affected by legislation. The Housing Grants, Construction and Regeneration Act 1996 became law in May 1998. It was designed to tackle problems such as excessive delays in claims and protracted and costly disputes within the construction industry. The legislation did so by incorporating adjudication procedures into all but a few building contracts so that disputes that give rise to claims can be settled in a matter of weeks. Contracts involving private residences at one end and very large engineering projects at the other, are excluded from the new process.What do Insurers look for?
As with other traditional professions, insurers will look for qualifications or experience. If a consultant is unqualified the Insurer will want to see a CV. Insurers will analyse a breakdown of the fee income, attention commonly being paid to:Architectural work - new build. Higher hazard. Particularly work involving structural design for industrial or commercial clients. Attention is paid to public sector clients where the work may involve repetitive design e.g. low cost housing or Housing Association work.
Architectural work - non structural. Lower hazard. where work is in the private residential sector but increasing hazard where work is in the commercial sector. Claims tend to be less expensive as the remedial work does not involve the building's "skeleton".
Town planning. Lower risk as nothing is being designed for construction but sizeable losses can occur.
Feasibility studies. Lowest risk of all because at the stage of feasibility no actual building work has taken place. If the project fails to materialise then the risk to insurers is very low indeed.
Architectural consultancy. A "catch-all" for other miscellaneous work done by Architects - if it is a large proportion of the annual fees then an explanation is most likely needed.
Interior design. Low hazard but increasing where work involves the retail sector, where contract sizes can be high and often with a significant amount of supervisory responsibility. Interior design by its nature tends to be transitory - particularly in the retail sector where premises "re-invent" themselves regularly.
Quantity surveying. Project managing and project co-ordinating. Lower hazard.
Project managing. Architects rarely carry out the QS function but they may find themselves project managing with a responsibility to appoint all other consultants as their sub-contractors. This is a much higher hazard as any claim, regardless of fault, would come through the Architect whose insurers would then have to subrogate against the party at fault. It is essential that the Architect ensures that all others in the design team and the contractor maintain adequate Professional Indemnity.
Project Co-ordination. The Architect carries out a project management role but does not appoint the others (they are appointed directly by the client) this is better from a risk perspective.
Surveys. Higher hazard. Architects would rarely carry out surveys for lending purposes but are far more likely to do a condition survey as part of a job. It is unusual for a condition survey to be carried out in isolation unless the job is then aborted which would be of little risk to insurers. Other areas of interest for underwriting purposes include:
- Contract sizes. There is a direct relationship between the size and complexity of the job and the exposure.
- Technology. Is the firm using "cutting edge" technology or standard, tried and tested processes?
- Overseas exposure. Does the practice carry out work for overseas clients? Careful consideration would be paid to such work carried out for US or Canadian firms.
- Retroactive exposure. Does the practice have an exposure to claims arising from past work, whether in the current firm or a former practice?
Example of Professional Indemnity Claims
Negligent design on industrial new build. Design failure in respect of industrial distribution warehouse. Building incapable of housing refrigeration plant due to incorrect design of internal load bearing roof. Settled £75,000.Negligent design on commercial new build. Incorrect design of fuel tanks in respect of new petrol station development led to failure of standard industry health and safety check. Alterations cost £18,500.
Negligent design on residential new build. Architect signed practical completion certificate on a residential new build job. Dozens of snagging problems then arose which the contractors failed to resolve. Settled £5,000.
Failure to seek planning permission. Architect instructed to plan and design office development. Although planning permission requested and received from Local Authority, there was a failure to seek permission for the correct area. Settled £9,000.
Inadequate supervision. Architects instructed to produce specification and supervise the renovation works to a church roof. After contractor went "bust", roof failed after heavy rain and it subsequently transpired that work carried out by contractor was inadequate. Claimant alleged proper supervision by Architect would have avoided problem. Settled £100,000.
Negligent site layout. Architects instructed to design a residential development comprising of ten properties. Dimensions for the site were provided by Surveyors but were incorrectly translated by Architects and the development encroached on to land owned by Local Authority. Additional costs incurred in purchasing additional land. Settled £10,000.
Negligent survey report. Architect instructed by residential property developer to carry out a pre-purchase/exchange survey on a residential property. On the basis of the Architect's report the property was purchased in part-exchange for one of their properties. A subsequent survey by prospective purchasers revealed serious cracks to structural wall. It was alleged Architect should have warned of the problem in order to trigger further expert investigations. Settled £20,000.
Failure to adequately specify. Architects instructed to design a number of hotels. After completion of project one of the hotels suffered a fire which resulted in major damage. During repairs it was noticed that the fire resistant material used in the property was inadequate. It was later alleged that the Architect failed to specify material correctly. The error meant material in all hotels had to be replaced. Settlement £500,000.
Main Bodies with Professional Indemnity Rules
The Royal Institute of British Architects (RIBA). The RIBA is a professional body that represents the interests of the profession. They provide professional training and qualifications and access to information. The RIBA is not a governing body but they do require their members to maintain PI.Architects Registration Board (ARB)*. It is the Architects Registration Board (ARB) that is the governing body. They "police" the profession and they set the guidelines and the minimum standards for PI. The main features of their rules are:
- Policy wording. Cover must be written on a civil liability basis; "neglect, error or omission" is not wide enough.
- Limit of indemnity. Limits must be on an "any one claim/each and every claim" basis, unlimited in any one period.
- Maximum/minimum excess. These are not defined by the ARB other than to say they must be affordable.
- Legal defence costs. Must apply in addition to the limit of indemnity.
- Run-off cover. If the practice ceases, partners must ensure that they purchase run-off cover for at least six years. The limit of indemnity must be maintained at the highest level in the preceding three years to the cessation of the practice.
- Minimum prescribed levels of cover.
- - Fee income less than £100,000 - £250,000 limit of indemnity
- - Fee income between £100,000 and £200,000 - £500,000 limit of indemnity
- - Fee income exceeding £200,000 - £1,000,000 limit of indemnity
Wordings
Wordings are normally required to be written on a "civil liability" basis (covering all civil liability, not just negligence). If the Insured is unqualified, or qualified only to a limited extent, more basic miscellaneous wordings can be offered.Usual Cover
Usually the limit of indemnity will be "any one claim" with legal costs in addition. The excess will not normally apply to insurers' costs and expenses. Being on a civil liability basis, unless specifically excluded (which is unusual) cover would include negligence, liability for dishonesty, liability for lost documents, libel and slander and breach of warranty of authority.The Usual Exclusions
Civil liability policies demand careful attention to exclusions so that non-PI exposures are not inadvertently covered. Typically, policies will exclude:- Death or bodily injury.
- Loss or damage to physical property (but fidelity and loss of documents are covered).
- Punitive or exemplary damages (many policies have no geographical or jurisdiction limitations.
- North American offices.
- Liability to other insureds.
- Nuclear risks.
- Claims and circumstances known at inception of the cover.
- Acting as contractor.
- Onerous collateral warranties.
The Usual Extensions
- Loss of documents.
- Collateral warranties.
- Occasionally, some insurers will offer cover for the litigation costs of recovering unpaid fee accounts.
Associated Links
Royal Institute of British Architects (RIBA)RIBA's mission is to advance architecture by demonstrating benefit to society and promoting excellence in the profession.
The Architects Registration Board (ARB)
The ARB was established in 1997, and is the independent regulator for the architects' profession in the UK. It has a dual mandate to protect the interest of consumers and to safeguard the reputation of architects.
Architect's Journal
On-line information for Architects.
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