1. 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

2. But the problem is…
Okay…

3. But the problem is…
Please clean table after dying? Thank you for your corporation?? …

4. 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. “

5. What 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”.

6. Who are built environment professionals?
2. Engineers
3. Quantity surveyors

7. What do built environment professionals do?

8. Professional indemnity – policy triggers
1. 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.

9. Professional indemnity – large claims on CESA Scheme

10. Professional indemnity – large claims on CESA Scheme

11. Professional indemnity – premium collection chart: CESA Scheme

12. What is a billion?

13. 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..

14. 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

15. Claims’ made cover Jan 2010 July 2010 incident Jan 2011 policy incepts
July 2011 claim is made
Jan 2012

16. Insured and claims reporting

17. 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)

18. What is reasonable?

19. What is reasonable?

20. 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?

21. The test for negligence
Would 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.

22. Contracting to Design on ‘fit for purpose’ basis
You expose yourself to contractual liability.
Generally not picked up under a professional indemnity policy.

23. Professional indemnity – policy triggers
1. 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.

24. Limit of consultant’s liability cont.
“ 7.1. Notwithstanding 6.0, the consultant shall specifically not be liable for the following:
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.

25. 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.

26. 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.”

27. 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

28. 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 hand-over trying to prevent or mitigate a claim? Are these amounts included or excluded from the limit of compensation?

29. 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 Client-Quantity Surveyor Agreement of 1998, only provide a limitation of liability and no indemnity from the client for claims made by third parties.

30. 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.”

31. Tsimatakopoulos v Hemingway, Isaacs & Coetzee CC and Another

32. Tsimatakopoulos v Hemingway, Isaacs & Coetzee CC and Another
Facts:
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.

33. 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?

34. 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.”

35. 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?

36. 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)

37. 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?

38. 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

39. What limit of cover is adequate?

40. What limit of cover is adequate?
The 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?
Don’t forget to make sure that all your 2 x fees

41. What limit of cover is adequate?
5. ….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.

42. What limit of cover is adequate?
Limit 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.

43. Section 8(8) VAT
The 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  

44. 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.

45. 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.

46. 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.

47. 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.

48. 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.

49. 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.

50. References Wikipedia: http://en.wikipedia.org/wiki/Built_environment
CESA year-end report 2011 prepared by Malcolm Padayachee atAon South Africa

51. Contact Details KRISTY CARR CFP Brokers CC
An Authorised Financial Services Provider: FSP 42892
Telephone No.’s: /
Fax No: or 086 
Cell No:
address:
Street address: 9 Dale Lace Avenue, Randpark Ridge, 2169
Postal address: P O Box 6497, Cresta, 2118