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The Institute of Loss Adjustors of Southern AfricaA Discussion of professional indemnity insurance for built environment professionals

Glenhove Conference CentreMelrose23 May 2013Kristy Carr

11But the problem is

2OkayBut the problem is3Please clean table after dying? Thank you for your corporation??

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. 4What is the built environment?It has been defined as the human-made 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. 5Who are built environment professionals?2. Engineers3. Quantity surveyors6

What do built environment professionals do?7

Professional indemnity policy triggers1. 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.88Professional indemnity large claims on CESA Scheme9

9Professional indemnity large claims on CESA Scheme10

10Professional indemnity premium collection chart: CESA Scheme11

11What is a billion?12

12What is a billion?13It 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..13Professional indemnity insurance scheduleInsured: ?Insurers: Certain Underwriters at Lloyds (Marketform Syndicate)Underwriters: General and Professional Liability Acceptances (Pty) Ltd (GPLA)Certificate no: PRO 1628Business 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 claim1414Claims made cover15Insured and claims reporting

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The Professional Consultants Services Agreement (PROCSA)6.0 CONSULTANTS OBLIGATIONS6.2.The consultant shall exercise reasonable professional skill, care and diligence in the performance of his obligations in terms of this agreement.

(emphasis added)17What is reasonable?18

What is reasonable?19

Consultants obligationsWhat 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?

20The test for negligenceWould the reasonable person/expert in the position of the defendant have foreseen harm?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.21Contracting to Design on fit for purpose basisYou expose yourself to contractual liability.Generally not picked up under a professional indemnity policy.22Professional indemnity policy triggers1. 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.2323Limit of consultants 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.

24Cost over-runsDoes 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.25Limitation of amount of liability7.2 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.26Limitation of amount of liability questionsDoes 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 the27Limitation 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 hand-over trying to prevent or mitigate a claim? Are these amounts included or excluded from the limit of compensation?28Limitation of amount of liability some pointsThe 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 Client-Quantity Surveyor Agreement of 1998, only provide a limitation of liability and no indemnity from the client for claims made by third parties.29Limitation of liability with regard to time period7.3 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.30Tsimatakopoulos v Hemingway, Isaacs & Coetzee CC and Another

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Tsimatakopoulos v Hemingway, Isaacs & Coetzee CC and AnotherFacts:

The seller engages a firm of engineers to design a retaining wall.The seller sells the property to the purchaser.The retaining wall falls over and will cost R39,000 to replace.

32Tsimatakopoulos v Hemingway, Isaacs & Coetzee CC and AnotherQuestion: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?33The requirement to obtain professional indemnity insurance8. PROFESSIONAL INDEMNITY INSURANCE8.1 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.34The requirement to obtain professional indemnity insuranceEmployers 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?35Schedule A of the PROCSA agreementA.10 limit of liabilitySelect 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)36Question?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?37AnswerNo.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) VAT38What limit of cover is adequate?39

What limit of cover is adequate?40The highest limit you can afford.Factors to consider:Claims made nature of cover.What is the nature of the work that you are undertaking? Is it considered to be relatively high risk?What is the value of the contract that you are working on?What limit of cover is required by your clients?Dont forget to make sure that all your 2 x fees What limit of cover is adequate?415. .fees arrangement is covered by your current limit.Your limitation of liability with your client is usually with regard to damages.VAT inclusive or exclusive limit?Each and every claim or aggregate limit?Potential for multiple claims arising from one cause leaving you with one aggregate limit to meet all claims. What limit of cover is adequate?42Limit in place at time you notify potential claim needs to be enough down the line when claim eventually notified.Interest begins to run from date of demand.Contractual limitation of liability in terms of time and amount?Prescription runs from date that you become aware that you have suffered a loss.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.

Section 8(8) VATThe Department of Finance - Inland Revenue has ruled that:where a claim payment is made to a third party by an Insurer in respect of loss or damage caused by an Insured; and the loss or damage was caused in the carrying on of his enterprise, the Insured, if he is a vendor, will be deemed to have received a payment in respect of a taxable supply in terms of Section 8(8); and

43Section 8(8) VAT5. 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.

44Deductible InfillEmployer/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.45Design and Construct PoliciesWhat 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.

46Design 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.

47Design 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.

48French Law and Decennial Liability10 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.49ReferencesWikipedia: http://en.wikipedia.org/wiki/Built_environment CESA year-end report 2011 prepared by Malcolm Padayachee atAon South Africa5050Contact DetailsKRISTY CARRCFP Brokers CCAn Authorised Financial Services Provider: FSP 42892Telephone No.s: 011 794-8166 / 011 794-7169Fax No: 011 794-7401 or 086553 5547Cell No: 082 330 5829Email 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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