The Institute of Loss Adjustors of Southern
Africa
A Discussion of professional indemnity
insurance for ‘built environment’
professionals
Glenhove Conference Centre
Melrose
23 May 2013
Kristy Carr
1
But the problem is…
Okay…
2
But the problem is…
Please clean table after dying? Thank
you for your corporation?? …
3
What is the built
environment?
• “The term built environment refers to
the human-made surroundings that
provide the setting for human activity,
ranging in scale from buildings and
parks or green space to
neighbourhoods and cities that can
often include their supporting
infrastructure, such as water supply, or
energy networks. “
4
What is the built
environment?
• “It has been defined as “the humanmade space in which people live,
work, and recreate on a day-to-day
basis”.[1] The “built environment
encompasses places and spaces
created or modified by people
including buildings, parks, and
transportation systems”.
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Who are built environment
professionals?
• 2. Engineers
• 3. Quantity surveyors
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What do built environment
professionals do?
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Professional indemnity –
policy triggers
1.
2.
3.
4.
5.
Your legal liability;
To pay compensation;
As the result of any actual or alleged;
Negligent act, error or omission;
In the performance of the professional duties of the
insured.
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Professional indemnity – large
claims on CESA Scheme
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Professional indemnity – large
claims on CESA Scheme
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Professional indemnity – premium
collection chart: CESA Scheme
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What is a billion?
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What is a billion?
It depends. In the USA one billion is one
thousand million (1,000,000,000). However in
the UK a biillion has always been regarded as
a million million (1,000,000,000,000). However,
the British billion is gradually going into
disuse as more and more people, especially in
the financial field, are using the American
version, and, when the British government
talk about things costing x amount of billions,
it is the Americam version they use..
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Professional indemnity
insurance schedule
• Insured: ?
• Insurers: Certain Underwriters at Lloyd’s (Marketform
Syndicate)
• Underwriters: General and Professional Liability
Acceptances (Pty) Ltd (GPLA)
• Certificate no: PRO 1628
• Business description: Quantity surveyors and project
managers .
• Period of insurance: 1 April 2011 to 31 March 2012.
• Limit of indemnity: R15 million each and every claim.
• Excess: R100,000 each and every claim
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Claims’ made cover
Jan 2011
policy
incepts
Jan 2010
July
2010
incident
Jan 2012
July
2011
claim is
made
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Insured and claims
reporting
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The Professional Consultants
Services Agreement (“PROCSA”)
“6.0 CONSULTANT’S OBLIGATIONS
6.2. The consultant shall exercise reasonable
professional skill, care and diligence in the
performance of his obligations in terms of
this agreement.”
(emphasis added)
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What is reasonable?
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What is reasonable?
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Consultant’s obligations
• What is reasonable?
• Is this affected by the region/country of the project
and the different levels of sophistication in that
region?
• What is the benchmark in terms of reasonable skill?
• What if your firm holds itself out to have a particular
expertise in a certain field?
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The test for negligence
1. Would the reasonable person/expert in the position
of the defendant have foreseen harm?
2. If the reasonable person/expert, placed in the
same circumstances, would have foreseen harm,
would they have taken steps to avoid that harm
from occurring?
If the answer to both questions above is yes, then the
defendant will generally be found to have been
negligent.
21
Contracting to Design on
‘fit for purpose’ basis
• You expose yourself to contractual liability.
• Generally not picked up under a professional
indemnity policy.
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Professional indemnity –
policy triggers
1.
2.
3.
4.
5.
Your legal liability;
To pay compensation;
As the result of any actual or alleged;
Negligent act, error or omission;
In the performance of the professional duties of the
insured.
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Limit of consultant’s
liability cont.
“ 7.1. Notwithstanding 6.0, the consultant shall
specifically not be liable for the following:
7.1.4 Any reasonable deviations from any estimates of
costs and/or budgets.”
• Again, what is reasonable?
• You are ‘on the line’ if the deviation is deemed to
be unreasonable.
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Cost over-runs
• Does your professional indemnity policy cover you
for cost overruns?
• Argument can be made that no loss has been
suffered by the client.
• Be aware that cost-overruns are usually specifically
excluded under single project/principal controlled
insurance.
• Remember that as a consultant, your professional
indemnity insurance may cover you for cost-overrun
claims but your client would still need to prove that
they have suffered a loss.
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Limitation of amount of
liability
“7.2 The maximum amount of compensation payable
by the consultant to the client in respect of liability is
limited to an amount selected in the schedule.
If no selection is made in the schedule, then the
maximum compensation shall be twice the fees
payable by the client to the consultant in terms of 9.1.
The client waives all claims against the consultant
exceeding the aforesaid maximum amount of
compensation payable.”
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Limitation of amount of
liability questions
• Does “compensation” include or exclude legal
costs incurred by the client.
• What about the costs of an arbitration?
• How is compensation defined?
• Is this limit an aggregate limit or does it apply in
respect of each claim made?
• What about an order for specific performance?
• What happens if your client sells the building? Does
this contractual limitation pass to the purchaser who
was never a party to the contract? Do you as the
consultant, have a greater delictual liability to the
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Limitation of amount of
liability questions cont..
• purchaser than you had to the client with whom
you originally contracted.
• What about if you have written off amounts owed
to you by the client or spent money before handover trying to prevent or mitigate a claim? Are
these amounts included or excluded from the limit
of compensation?
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Limitation of amount of
liability some points
• The client can only waive his own claims in terms of
the contract.
• He cannot waive claims by third parties against the
consultant.
• ‘Waives’ is not the same as indemnifies.
• Be careful. Some contracts, for example, the ClientQuantity Surveyor Agreement of 1998, only provide
a limitation of liability and no indemnity from the
client for claims made by third parties.
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Limitation of liability with
regard to time period
“7.3 All claims against the consultant shall lapse after
a liability period of five (5) years which period shall
commence on the earlier of:
7.3.1 Practical or other equivalent completion of
the works.”
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Tsimatakopoulos v Hemingway,
Isaacs & Coetzee CC and Another
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Tsimatakopoulos v Hemingway,
Isaacs & Coetzee CC and Another
Facts:
1. The seller engages a firm of engineers to design a
retaining wall.
2. The seller sells the property to the purchaser.
3. The retaining wall falls over and will cost R39,000 to
replace.
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Tsimatakopoulos v Hemingway,
Isaacs & Coetzee CC and Another
Question:
Can the purchaser claim directly from the engineers
or should they rather obtain a cession of any
contractual claim that the seller might have against
the engineers?
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The requirement to obtain
professional indemnity insurance
“8. PROFESSIONAL INDEMNITY INSURANCE
8.1 The party responsible shall provide
professional indemnity insurance as stated in
the schedule.” (see notes further on about
adequacy of the limit and VAT implications).
8.2 The party responsible shall maintain the
insurance policy for the duration of the liability
period in terms of 7.3 and shall upon request by
the other party, provide a certificate of proof of
such insurance.”
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The requirement to obtain
professional indemnity insurance
• Employers beware some consultants ask their
brokers to provide them with different proofs of
insurance for different amounts.
• Insurance policies are annually renewable. Are you
going to ask for proof that the insurance has been
maintained for 5 years after completion of the
project?
• If there are bad claims, the insured may become
uninsurable.
• Has the premium been paid?
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Schedule A of the
PROCSA agreement
• “A.10 limit of liability
Select one of the following:
1. The proceeds of any claim against the professional
indemnity insurance (yes/no)
2. Specific amount as stated
3. An amount of twice the fees payable by the client
to the consultant (yes/no)
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Question?
• You use the PROCSA agreement with a client and
in Schedule A, you indicate that the limit of liability
will be R10 million (inserted in the space next to 2).
• You then obtain professional indemnity insurance in
the amount of R10 million.
• In the event of a claim from your client for the full
limit of R10 million are you sufficiently covered?
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Answer
• No.
• Is your limit each and every or aggregate.
• Each and every becomes aggregate where
multiple claims arise from one cause.
• Limit is inclusive of legal costs and expenses.
• Section 8(8) VAT
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What limit of cover is
adequate?
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What limit of cover is
adequate?
• The highest limit you can afford.
• Factors to consider:
1. Claims’ made nature of cover.
2. What is the nature of the work that you are
undertaking? Is it considered to be relatively high
risk?
3. What is the value of the contract that you are
working on?
4. What limit of cover is required by your clients?
5. Don’t forget to make sure that all your 2 x fees
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What limit of cover is
adequate?
5. ….fees arrangement is covered by your current
limit.
6. Your limitation of liability with your client is usually
with regard to damages.
7. VAT inclusive or exclusive limit?
8. Each and every claim or aggregate limit?
9. Potential for multiple claims arising from one cause
leaving you with one aggregate limit to meet all
claims.
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What limit of cover is
adequate?
10. Limit in place at time you notify potential claim
needs to be enough down the line when claim
eventually notified.
11. Interest begins to run from date of demand.
12. Contractual limitation of liability in terms of time
and amount?
13. Prescription runs from date that you become
aware that you have suffered a loss.
14. You can increase your limit at any time and pay a
pro-rata premium. Increased limit will not apply to
claims you are already aware of.
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Section 8(8) VAT
• The Department of Finance - Inland Revenue has
ruled that:
1. where a claim payment is made to a third party by
an Insurer in respect of loss or damage caused by
an Insured; and
2. the loss or damage was caused in the carrying on
of his enterprise,
3. the Insured, if he is a vendor,
4. will be deemed to have received a payment in
respect of a taxable supply in terms of Section 8(8);
and
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Section 8(8) VAT
5. will be liable to pay VAT output tax on the amount
paid to the third party.
Inland Revenue advises that the amount paid to you
by the Insurer (i.e. net of the deductible) in respect of
the Third Party claim should be indicated as output
VAT on your VAT return. Your financial records should
indicate the amount as a debit and credit in a
"Recovery of Indemnity" Account. Furthermore, the
VAT should be accounted for in the Income
Statement under abnormal items.
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Deductible Infill
• Employer/client takes out cover and consultant is
required to cover large excess under the principal
controlled insurance.
• Non-contribution exclusion.
• Need to specifically declare existence of other
policy and make sure that your annual PI policy will
respond.
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Design and Construct
Policies
• What are the implications where you have
contracted on the basis that you will be responsible
for appointing the contractors on the project or on
a turn-key basis?
• Contract between you and your client and
between you and the contractor. No direct
contract between client and contractor. You are
therefore first in the line of fire.
• Description of business activities.
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Design and Construct
Policies cont..
• “The Insurers shall not be liable to indemnify the
insured in respect of claims arising out of any
product manufactured, constructed, installed, sold,
supplied, distributed, treated, serviced, altered or
repaired by or on behalf of the Insured.”
• Covered if for example you failed to adequately
supervise the contractor, i.e., claim arises out of
your own negligence.
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Design and Construct
Policies cont..
• Where you are involved in actual construction or
appointing the people who are doing it, you need
to take out a specialised cover known as a ‘design
and construct’ policy.
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French Law and
Decennial Liability
• 10 years’ strict liability for everyone involved if the
building collapses or partially collapses.
• Cannot contract out of decennial liability.
• Applies in a number of countries eg, Mauritius.
• Many local policies will not cover your liability arising
out of a decennial liability claim.
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References
1. Wikipedia:
http://en.wikipedia.org/wiki/Built_environment
2. CESA year-end report 2011 prepared by Malcolm
Padayachee atAon South Africa
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Contact Details
KRISTY CARR
CFP Brokers CC
An Authorised Financial Services Provider: FSP 42892
Telephone No.’s: 011 794-8166 / 011 794-7169
Fax No: 011 794-7401 or 086 553 5547
Cell No: 082 330 5829
Email address: kristy@cfpbrokers.co.za
Street address: 9 Dale Lace Avenue, Randpark Ridge, 2169
Postal address: P O Box 6497, Cresta, 2118
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