Professional Indemnity Insurance

In the last few years, it has been increasingly common to encounter Consultancy Services Agreements (CSA) that impose obligations on the Consultant to:

  • give the Principal a copy of the Consultant’s professional indemnity insurance policy;
  • immediately notify the Principal of any claim by the Consultant on their professional indemnity insurance;
  • immediately notify the Principal of the occurrence of any event which might give rise to a claim on the Consultant’s professional indemnity insurance; and
  • update the Principal regularly on the status of claims on the policy.

This transparency drafting is new. There is an an unstated assumption that during the project the Consultant will have the benefit of cover under a professional indemnity insurance policy that is taken out specifically, and only, for the project. Such a policy is known as a project specific professional indemnity insurance policy (PSPI).

In large infrastructure projects it is common for the Project Principal to take out a PSPI policy that covers the entire Project. Such policies usually name each of the major Contractors and Consultants as being specifically insured under the policy. Where there is no such project-wide policy, the Consultant’s fee for the project will be expected to include allowance for the full cost of a PSPI policy that is to be taken out by the Consultant to cover their own scope.

This article concerns the recent trend of requiring this kind of drafting where there is no such cost allowance for PSPI policies.

What is driving this drafting trend and what are the risks for Consultants who accept obligations of this nature?

Derivative Drafting

One reason for this trend may be that lawyers working for project owners have taken inspiration from drafting found in key contracts for major public infrastructure projects where PSPI is a common requirement.

When it comes to drafting design and construction contracts, there aren’t many lawyers who start with a blank sheet of paper. The high-quality drafting found in big dollar infrastructure contracts is assembled by the most experienced and capable specialists in the field. It also frequently drives change in the wider contracting market because construction lawyers often assemble contracts from a variety of sources, including adopting drafting from other projects. As they say, imitation is the sincerest form of flattery.

Contracts for public infrastructure projects are fertile ground for novel and interesting drafting.  Sometimes the new drafting reflects lessons learned from disputes on projects. In some cases, the trigger for change is legislative reform or a change in economic circumstances, like a recession or pandemic. For example, after the arrival of Covid19, the agreements prepared for new public infrastructure projects included drafting to deal with the government-preferred approach to pandemic related risks. It didn’t take long for the new Covid19 drafting to take root in regular contracts used in the wider D&C market.

Although the drafting in public infrastructure contracts is of the highest quality, it should be obvious that the drafting is bespoke for contracts of a particular size and shape – and budget. These contracts are customised with sophisticated features which aren’t found in regular contracts. None of these features come for free, and so also represent a particular cost/benefit trade-off. Many of the specific requirements for these projects are not relevant to regular projects, even those with a substantial construction budget. Often this is not clear until the client is presented with the additional cost of implementing these features, at which point they frequently decline to pursue them further, as their cost/benefit trade-off is different. One of these specific requirements is PSPI.

Government favours PSPI because it provides a higher than usual level of transparency and certainty.  Unlike a standard professional indemnity policy, PSPI:

  • involves a bespoke policy arranged around the needs of one project over an agreed term (for example, 10 years);
  • names the D&C Contractor and some or all of the major subcontractors and consultants working on the project;
  • is only available for the biggest projects; and
  • is extremely expensive

As a result, the full cost of PSPI policies is generally borne directly by the Principal. This  enables the Principal to optimise the overall cost. It also enables the Principal to retain full control over the policy details.

Because PSPI policies are taken out solely for the purposes of the project, the Principal has a high level of visibility of the terms of the policy and any claims made on it. This transparency allows obligations to be imposed on the design and construction parties that wouldn’t be acceptable to a party relying on a corporate professional indemnity policy which covers the Consultant’s work across all projects being undertaken (House Policy).

 

Risks for Consultants

Unlike a PSPI policy, a House Policy doesn’t allow for transparency. It covers the Consultant’s work across all projects being undertaken, rather than one project.

It is usually a condition of any insurance policy that the terms and conditions of that policy must be kept confidential. This means that the terms and conditions of any House Policy taken out by a Consultant must be kept confidential by the Consultant.  A certificate of currency can be provided to clients but this is limited to certification of generic information.

Information about claims made on the House Policy are treated as commercially confidential between the Consultant and their insurer.  There are also confidentiality obligations between the Consultant and the various clients on the other projects.

In many cases there are provisions in the House Policy which expressly prevent the Consultant from sharing information with others about claims.  In some cases, the Consultant may be at liberty to share that a claim has been received but there is a prohibition on sharing information that may prejudice defence of the claim.

Even where there is no prohibition in the terms of the House Policy that prevent sharing information that a claim has been made, accepting an obligation to share this information with a Principal may still create a problem. When a Principal is told a claim has been made, the next question is obvious. It is easy to see the Consultant finding themselves in a situation where the Principal demands information that the Consultant is not at liberty to share without breaching confidentiality obligations to the insurer and other clients. A breach may also prejudice defence of the claim. There is also the financial risk that the Principal will view the policy as solely for their own benefit and push for the Consultant to take out additional cover, in case the claim is ultimately successful.

It is sometimes suggested that the notification obligation can be adjusted so the Consultant is only required to notify where the claim is likely to prejudice the availability of insurance proceeds to cover future claims.  However, if a Consultant notifies the Principal that the claim is likely to prejudice availability of insurance proceeds, that sends a message to the Principal that legal advice has been received that the claim may succeed. This is exactly the kind of information that Consultants should be trying to keep confidential in order to protect their own commercial interests, and that insurers specifically require be kept confidential for the same reasons.

Where the Consultant does not have the benefit of PSPI, accepting an obligation to provide a copy of the House Policy or to notify the Principal of actual or contingent claims on the House Policy is fraught with risk. There are obvious confidentiality and probity problems associated with agreeing to keep one client updated on the status of a negligence claim involving another client’s project. There is a risk this may place the Consultant in breach of their House Policy. Conduct by the insured that is viewed by the insurer as adversely impacting the interests of the insurer may damage the valuable relationship of trust with the insurer and undermine the future availability of insurance cover.

It is difficult to see how it is in the interest of either the Principal or the Consultant to include obligations in a CSA that create a situation where the Consultant inadvertently blows up their own insurance policy that is covering their work on the Principal’s project, not to mention the Consultant’s work on other, unrelated projects.

In summary, Consultants should carefully consider whether accepting these transparency obligations could cause major problems. Even where the obligations are described as mandatory flow down, it may be appropriate to raise concerns and to insist on amendment to the drafting.

Penny Swain provides specialist legal advice on construction, engineering and infrastructure projects.

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