AUST – HENDRY building surveyors advise that property owners or managers wishing to commission a consultant to perform a BCA Audit, Due Diligence Audit or Building Audit need to ensure that the professional indemnity insurance policy chosen by their consultant provides adequate risk cover in the event of a claim. Since most consultants utilise the services of sub-consultants such as structural engineers, electrical/ mechanical engineers, land surveyors and quantity surveyors, paramount in minimising risk for the property owner / manager is the need to understand the extent to which the policy covers the consultant and the sub-consultant, and how the property owner’s / manager’s interests are protected in these circumstances.
Specialist Professional Indemnity Insurance Broker, Darren Pavic from Bovill Risk and Insurance Consultants, provides some insight into the policy workings that cover consultants and sub-consultants providing a BCA Audit, Due Diligence Audit or Building Audit.
Are your sub-contractors insured?
Understanding precisely who is insured under a professional indemnity insurance policy is critical in assessing the appropriateness of the insurance program, especially if a claim is made due to perceived negligence in a BCA Audit. Policy operation with respect to claims arising out of the actions of sub-consultants is often misunderstood by the consultant’s clients and principal consultants and sub-consultants alike.
The use of sub-consultants by professionals in the property, construction and engineering industries is common practice, whether it is a building inspector undertaking mandatory building inspections for a building surveyor, a specialist design engineer being engaged to assist with a specialist area of a project, or performing various audit reports such as a Building Audit.
Often misunderstood is how liability (risk) is apportioned between the “principal consultant” and “sub-consultant”, how professional indemnity insurance policies operate to insure the various parties, and the potential insurance coverage “gaps” that may exist for each party. We will examine these issues from the perspectives of the principal and sub-consultant.
The extent to which a principal consultant can be found vicariously liable for the actions of their sub-consultant is subject to various factors which include; the nature of services provided, the contract(s) wording utilised and the application of any legislation pertaining to the circumstances. An example of this legislative influence is the ability for a building surveyor in Victoria to reply, in good faith, upon a certificate issued by another building practitioner under the Building Act 1993 (VIC).
While the extent of apportionment of liability is a legal question, from a professional indemnity insurance perspective the key issues for professionals to understand are:
- Whether their policy will respond if they are found liable for the actions of another party
- To what extent, if any, are they insured by another party’s professional indemnity insurance
Whilst every policy is different, there are some general industry standards that one should expect their policy to meet if it has been arranged by a proficient broker. The Insured is usually a defined term in the policy, with this definition including the entity named in the policy schedule, and its directors and employees. A typical policy approaches the sub-consultancy issue as follows:
We agree to provide cover in respect of any Claim against the Insured resulting from the conduct of any sub-consultant, subcontractor or agent in the Professional Business of the Insured and for whose acts, errors or omissions the Insured is liable. We will not cover the sub-consultant, sub-contractor or agent.
The above clearly spells out that if the Insured is liable for the actions of their sub-consultant the policy will respond to cover the Insured, but will not extend indemnity to the sub-consultant. In practise one would expect the Insurer to seek recovery from the negligent sub-consultant in the event that a claim was paid on account of their actions.
The above also highlights the important difference between (claims arising from) the “work” of a sub-consultant being covered, versus the actual sub-consultant being insured in their own right.
While the above policy clause is a typical industry approach, we have come across certain policy workings that actually operate to exclude cover for the insured when a claim arises out of the acts of others. Policies containing such exclusions are fundamentally flawed, and should be avoided.
Principal consultants holding a professional indemnity insurance policy meeting the above minimum industry standard, can take some comfort in knowing that they should be protected for claims arising from the acts of others when providing either a BCA Audit, Due Diligence Audit or Building Audit. Prudent business practice also dictates professionals ensure that their sub-consultants also maintain their own professional indemnity insurance.
Whilst this is in part a duplication of insurance, it ensures that each party carries an equitable responsibility for arranging insurance to cover their own professional liability. This provides a means by which the principal consultant can manage the extent to which they will carry increased future premiums, or other impositions resulting from a claim that is in part attributable to another party.
We are surprised by the number of sub-consultants that do not maintain their own professional indemnity because either they believe that they are covered by someone else’s policy, they believe they are not required to carry professional indemnity insurance, or feel there is no need to take out insurance because their client has not requested they maintain professional indemnity insurance.
Because the Insured is defined in the policy and this definition rarely extends to include external parties, one should not assume sub-consultants or sub-contractors have the benefit of an insurance policy unless they have evidence that they have been specifically named in the contract as an Insured. Due to the “claim made” nature of professional indemnity insurance in particular, we would advise against relying upon another party to arrange insurance on your behalf, unless organised by an appropriately qualified insurance professional.
It is important to appreciate the separation of a contractual obligation to procure insurance, and the professional liabilities that may be protected by that insurance. To put it simply, whether or not the client (the building owner / building manager) requests the consultant to maintain professional indemnity insurance has no bearing upon the professional duty of care that the consultant may owe to that client or any other party.
Sub-consultants unsure of the adequacy of their professional indemnity insurance, should speak to an insurance broker.
From the client’s (building owner’s or building manager’s) perspective, ensure all consulting parties have adequate insurance appropriate to your needs.
Reference and disclaimer:
To the extent that any of the above content constitutes advice, it is general advice without reference to your needs or objectives and therefore cannot be relied upon. Before acting on any advice you should obtain advice specific to your needs.
Darren Pavic is the Broking Manager of Bovill Risk & Insurance Consultants Pty Ltd (BRIC). BRIC is a specialist professional indemnity Insurance Brokers company and the recommended provider of insurance broking services to AIBS members. For further information contact Darren at firstname.lastname@example.org or phone 1800 077 933.
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