The renewal of professional indemnity (’PI’) insurance arrangements has been a major business event for every construction consultant in both 2020 and 2021. For most, there have been significant changes in cost, cover and/or level of retained risk – and for some there has been no appetite from insurers for their risk, at any price.
Against that wider market context, the Griffiths & Armour scheme has managed to continue to maintain the support from many key insurers and a broad coverage specification generally. The lack of available insurer capacity and reduction in underwriters’ risk appetite characterise this particular ‘hard’ market. One other area where this increased rigour is applied is in the area of claims; most particularly, the points of knowledge and notification.
It is widely known that all PI insurance policies contain particular conditions relating to notification of potential claims, and in many cases these conditions can be both explicit and strict. Compliance with those conditions can be challenging for professionals in practice because whilst the relevant wording might seem clear enough on paper, experience has shown that they can be innocently misinterpreted, sometimes with painful consequences. The problem is particularly pertinent in current market conditions for the reasons set out later in this article.
Current Market Turmoil
At the beginning of 2020 – and pre-pandemic – we published ‘A Brave New World – Navigating Future Challenges’ which included a whole section on the Market Context and the issues that were unfolding in our engagements with insurers.
The subsequent withdrawal of capacity from the PI insurance market in recent periods has led most obviously to increased premium levels, higher excesses and restrictions in cover. However, it has also rendered it less likely that cover can be maintained with the same insurers from one renewal to the next. During ’soft’ market conditions it is possible to renew cover for ten or more annual policy periods with the same provider, fostering a strong commercial relationship with that insurer and reducing the likelihood of claims being rejected for a technical breach of policy conditions. Indeed, it can appear that there are a number of options that appear ‘the same’ when the offer of continuity is there. But when those insurers withdraw from the market that continuity is broken and the ‘claims made’ operation of PI policies is thrown into particular focus.
This is a major reason for our Scheme philosophy of fostering long-term continuity with a range (or panel) of insurers. We are not immune from change but always look to have a smooth pathway to manage any change responsibly and with minimum disruption.
So, if we are in a period where the market conditions dictate that change is highly likely, what are some of the key factors that a construction consultant (or indeed any professional) should consider?
Claims Made Covers
Claims made, as a classification tag for PI insurance, is in fact shorthand for ‘claims made and notified in accordance with policy conditions’. PI policies respond only to Claims (as defined) which are both made against the policyholder during the policy period and also notified to the insurers during the same period. If claims are not notified within the correct period then the relevant condition will not have been satisfied and the insurers will be entitled to refuse indemnity.
Claims vs Circumstances
The definition of Claim under any PI policy wording usually refers to the instigation or threat of some formal procedure along the lines of arbitration, adjudication or legal proceedings, but by extension it usually also encompasses any articulated form of demand for compensation sitting outside such proceedings. Fortunately the definition won’t usually contain any surprises and furthermore the natural reaction of most professionals upon becoming aware of any such communication would be to contact their brokers as a matter of priority. In practice therefore it is relatively unusual for Claims not to be reported promptly and within the relevant policy period (although see below in relation to ’Spurious Allegations’).
Misunderstanding is more likely to arise in relation to the separate obligation to notify ‘circumstances which might give rise to a Claim’ (there are different versions of this wording but the variations are only minor and they amount to the same thing). Any such misunderstanding can be fatal if it leads to notifiable circumstances not being communicated to the insurers within the correct policy period.
The Two Pronged Test
In practice a telephone call to Griffiths & Armour to discuss a specific situation will always be the best way for any of our clients to decide whether their circumstances are notifiable for insurance purposes if they are unsure. However, and as an insight into where any such conversation might lead, it may be useful to bear in mind not only any definition of ‘circumstances’ that might appear in the policy wording but also the simple and well established legal principles which will always govern our advice.
Essentially there is a two stage test, the first of which might in practice only be applicable in hindsight:
- The objective test – there must be circumstances which might give rise to a Claim. This question must be approached impartially, as a matter of fact, and without regard to any discussion around whether or not defences might be available. All that is important under this limb is whether it could be anticipated by someone with an all-seeing eye that a Claim might be attempted against the professional.
- The second limb (the subjective test) then recognises that the policyholder doesn’t have an all-seeing eye or the benefit of hindsight until after the event, and it recognises that under a claims made policy wording one can only notify circumstances (considered objectively) of which one has an awareness within the policy period.
Both limbs of the test have to be satisfied in order for a circumstance to be notifiable. Some examples might help to illustrate this:
An engineer’s client has engaged solicitors and commissioned an independent expert witness report which is highly critical of the engineer’s work.
This satisfies the objective test outlined above, but if all of the engineer’s staff are oblivious to these facts then the subjective test is not satisfied and the circumstance is not notifiable. It will become notifiable as soon as any such knowledge reaches the engineer, whether by the arrival of the solicitor’s letter or an unofficial tip off that such a letter is in the pipeline.
An architect is worried because recent invoices remain unpaid. The lay client is a difficult character and is on a steep learning curve with his first construction project. He has not reacted well to some unforeseen additional contracting expenses which the architect, as project manager, regards as normal but which the client hadn’t anticipated.
On the face of it this probably doesn’t satisfy the objective test, regardless of how nervous the architect might feel that the client is unhappy. The mere fact of working on a project which is either technically challenging or involves some volatile personalities will not generally be sufficient in itself to satisfy the objective test. The fact that fees are outstanding is similarly not sufficient. There must be something more than this, such as an indication from the client that the fees remain unpaid because he holds the architect partly responsible for the losses he is incurring.
The ventilation system installed as part of a new build extension to a school appears not to be performing as intended. Several classrooms are suffering from poor air quality and uncomfortable temperatures as a result. The school alert the design and build contractor who forward the email chain to both the designer and specialist subcontractor since, pending further investigation, it is not clear whether design, installation or both are at fault. The engineer reviews his design and can find no problems with it. Furthermore he suspects that the contractor is to blame because there were numerous examples of poor workmanship and deviation from drawings on other elements of the scheme.
On balance this probably would be notifiable notwithstanding the engineer’s preliminary conclusions. The fact that investigations are ongoing and the risk that they might result in some criticism of the design is sufficient to satisfy the objective test. Objectively, the fact that the rooms are overheating can be attributable only to three possible causes or a combination of them (design/specification, quality of installation/product or user error). Absent compelling evidence to the contrary, there is a realistic risk that the investigation might produce at least some criticism of the design and a future demand for compensation. Separately, the fact that the designer has been made aware of those investigations is sufficient to satisfy the subjective test.
The third of these illustrations helps to show that if some form of perceived defect has been made known to the professional and the realistic possibility of a design allegation cannot be ruled out then generally the two tests will be satisfied, triggering the policy obligation to notify insurers. Professionals therefore have to be prepared to engage in a degree of speculation against themselves, simply as part of taking a step back and being objective for the purposes of the first test. They are not, however, required to enter the realms of fantasy and dream up far fetched possibilities since clearly that would no longer qualify as an objective view.
A Claim is notifiable even if it is time barred, completely misconceived on its facts or defendable for any other reason – all that is important is that some assertion has been made. On the relatively rare occasions where Claims have not been notified when they should have been, the reason usually given is that the professional didn’t think it was necessary to notify Claims which he never thought would be pursued. Unfortunately this still technically amounts to a breach of policy conditions.
Claims Within the Excess
Similarly the definition of Claim makes no mention of the policy excess and therefore all Claims are notifiable regardless of their value, but subject in practice to a de minimis principle.
Potential Consequences of a Failure to Notify
The professional’s notification obligations are drafted into the policy wording as conditions within the ordinary meaning of the term – they are conditions which must be discharged in order to trigger the insurer’s obligation to provide indemnity. The problem is that the condition can only be discharged within the policy period and there is no opportunity to rectify any breach of this condition once the policy term has expired.
Some policies, including many of our own, contain additional provisions by way of safety valves to allow for cases where the condition was breached in all innocence, as is nearly always the case, but those provisions operate subject to further terms and conditions which may or may not be satisfied. Furthermore they do not operate to log notifications against policies that have expired. They may instead afford cover under a later policy period, depending on when the late notification occurred.
Why is This Now More Pertinent than Ever?
All of our clients are aware of current market conditions following their ongoing discussions with our specialist advisers and from the wealth of published material that we continue to produce. As outlined at the opening of this article, a hard market implies much more than hefty premium increases. It often involves having to forge new relationships with different insurance providers where circumstances force brokers to consider carefully their options within an already limited circle.
New relationships in any context can prove to be fragile beneath the surface if put to the test too soon. One example of this would be asking an underwriter to cover a claim which should have been reported under a previous policy but wasn’t simply because the professional misunderstood his policy obligations.
This is potentially embarrassing even at the best of times because it amounts to a U-turn on the declaration signed at renewal that the professional was not aware of any circumstances which might give rise to a claim. However, it is more palatable to an insurer to cover that claim under the current policy when there has been a continuous relationship with the professional and the claim would have been covered by the same insurer if it had been notified at the correct time under an earlier policy.
Where, on the other hand, continuity has been broken due to movements in the market the equivalent situation is anything but palatable and the possibility of cover being refused for the late notified claim becomes more real, not to mention the negative implications in terms of risk perception for the following year’s renewal.
Conclusions and Further Guidance
In these challenging times underwriters can be easily spooked by what they consider to be negative factors in a practice’s risk profile, but nothing reduces their appetite more than surprises in the form of undisclosed material facts or matters which should have been notified in previous policy periods but weren’t.
The good news is that your policy obligations are the same as they always have been and there is nothing more onerous in Griffiths & Armour’s policy conditions today than has previously existed. Our advice therefore remains the same as ever, but following that advice is more important at a time when the market is continuing to evolve and a change of provider from one year to the next is a very realistic possibility.
In our Information Alert issued immediately after the last renewal of our Schemes in November 2020, whilst we were able to reassure all of our clients that the Scheme facilities had been safely renewed, we highlighted that it had been “…the most difficult negotiation we have had for a generation”. As we move into the final phases of this year’s renewal, the indications are that some insurers’ respective risk appetites may be diverging, making change in some form highly probable.
With that in mind, if ever you find yourself debating whether or not to notify your insurers of a given situation, the likelihood is that a telephone call to your usual contact at Griffiths & Armour will be extremely worthwhile – as always, we are here to help.
If there is any aspect of this update that you would like to discuss, please click below to submit your enquiry to
Stephen Hargreaves | Professional Risks Director, Griffiths & Armour