Professional Indemnity Insurance. Professional Indemnity Insurance What s s it all about?

(1)

Ian McCallum

RIAS Insurance Services

A trading arm of Marsh Limited

Professional Indemnity Insurance

What

’

s it all about?

RIBA Advanced

RIBA AdvancedDiploma Diploma

in Professional Practice in Architecture in Professional Practice in Architecture

(RIBA Part 3) (RIBA Part 3)

Professional Indemnity Insurance

Agenda

-

Headliners

The Insurance Market

Why Have Cover?

The Policy Coverage

Risk Management

Source of Claims

Cost of Claims -

Cost of Claims

-Examples

Examples

(2)

Professional Indemnity Insurance

MARSH LimitedMARSH Limited

Finpro NationalFinpro National

30 Staff in Edinburgh, 30 Staff in Edinburgh,

Glasgow, Belfast Glasgow, Belfast

Edinburgh Edinburgh --Schemes forSchemes for

--ArchitectsArchitects --EngineersEngineers --AccountantsAccountants

Professional Indemnity Insurance

RIAS Insurance Services

PI for Scottish ArchitectsPI for Scottish Architects

Operational since 1984Operational since 1984

Joint Venture with RIASJoint Venture with RIAS

Two Schemes Two Schemes -

--Main SchemeMain Scheme

--Small Practice SchemeSmall Practice Scheme

550 Architects Firms550 Architects Firms

(3)

Professional Indemnity Insurance

The Market

0 10 20 30 40 50 60 1996 1998 2000 2002 2004 2006 2008 2010

Professional Indemnity Insurance

The Market

0 10 20 30 40 50 60 1996 1998 2000 2002 2004 2006 2006 2008 2010 P re m iu m S p e n d

(4)

Professional Indemnity Insurance

The Volatile Market of the 80s

0 10 20 30 40 50 60 1980 1982 1984 1986 1988 1990

Professional Indemnity Insurance

The Market

0 10 20 30 40 50 60 70 1994 1996 1998 2000 2002 2004 2006 2008 2010 P re m iu m S p e n d

(5)

Professional Indemnity Insurance

The Market

Stability and

Confidence

US Accounting

Scandals

Scandals -

-

ENRON

World Financial

Markets

September 11th

Professional Indemnity Insurance

The Market Post 9/11

Aviation / Insurance Industry

Reinsurance

–

Swiss Re, Munich Re

Higher Retentions

Higher Premiums

(6)

Professional Indemnity Insurance

The Market Post 9/11

Engineering &

Construction

Accountants

Surveyors

Lawyers

Contractors

and

Architects

Professional Indemnity Insurance

Why Have Cover?

ARB RequirementsARB Requirements

Client DemandsClient Demands

Hedley Byrne Hedley Byrne --vv-

-Heller & Partners (1964) Heller & Partners (1964)

Established Duty of Care Established Duty of Care

What is at Risk?What is at Risk?

-- Business / LivelihoodBusiness / Livelihood

-- Good NameGood Name

(7)

Professional Indemnity Insurance

Why Have Cover?

Balance Sheet ProtectionBalance Sheet Protection

LitigationLitigation--Conscious Conscious

Society Society

““Where thereWhere there’’s Blame s Blame

there

there’’s a Claims a Claim””

SUEDSUED S = Stress S = Stress U = Unfamiliar U = Unfamiliar E = Error E = Error D

D = Don= Don’’t do somethingt do something

Professional Indemnity Insurance

The Policy

–

Who Is Covered?

Current Firm or PracticeCurrent Firm or Practice

Current Partners and Current Partners and

Employees Employees

Past Partners and Past Partners and

Employees Employees

Incoming Partners and Incoming Partners and

Employees Employees

PartnersPartners’’EstatesEstates

SubSub--Consultants Consultants

employed by the Firm employed by the Firm

(8)

Professional Indemnity Insurance

The Policy

–

What Is Covered?

Civil Liability

Any One Claim /

Unlimited

Excess

Claims Made Wording

Endorsements:

Housing Regeneration Act 1996

Year 2000 (Millennium)

CDM Regulations 1994 and 2007

Professional Indemnity Insurance

Collateral Warranties

Run parallel to the Run parallel to the

Building Contract Building Contract

Extend Liability to Third Extend Liability to Third

Parties who are not party Parties who are not party to that Contract to that Contract -- FundersFunders -- PurchasersPurchasers -- TenantsTenants

And they are now being And they are now being

tested!! tested!!

(9)

Professional Indemnity Insurance

Risk Management

Why do we practice Risk Management?

“

“An effective and embedded Risk

An effective and embedded Risk

Management strategy provides the

management with the understanding and

assessment of the business risks and

whether they are within their appetite

leading to enhanced mitigation, reduced surprises

and losses

and losses”

”

Professional Indemnity Insurance

Risk Management

This provides support so that we can

make better decisions

manage our businesses better

(10)

Professional Indemnity Insurance

Risk Management

–

What is Risk?

“

The combination of the probability of an

event and its consequences

”

Probability = likelihood/frequency

Consequences = impact/cost/severity

This can constitute:

Threats (downside/hazard)

Opportunities (upside)

Professional Indemnity Insurance

Risk Management

So if a Risk is something which could

happen in the future, Risk Management is

concerned with understanding

…

--

what risks we face

--

how serious they are

--

how much risk we are willing to take

(11)

Professional Indemnity Insurance

Risk Management

In business, Risk Management is no more

than GOOD Management meaning:

understand what

’

s happened in the past

understanding what

’

s happening today

predicting how it will impact in the future

and considering the action needed to

reduce the probability or impact

Professional Indemnity Insurance

Risk Management

We are

all

Risk Managers!

When you put your seat belt on in the car

When you write a list before a holiday

When you put an umbrella in your bag

When you wait for the

“

green man

”

at a

pelican crossing

(12)

Professional Indemnity Insurance

Risk Management

Identification of

the Risk

Management of the

Risk

Transference of the

Risk

Professional Indemnity Insurance

Risk Management

Identification of the

Risk

Management of

the Risk

Transference of the

Risk

(13)

Professional Indemnity Insurance

Risk Management

Identification of the

Risk

Management of the

Risk

Transference of

the Residual

Risk

Professional Indemnity Insurance

Risk Management Tips

Write it down!Write it down!

Record all MeetingsRecord all Meetings

Record the MinuteRecord the Minute

ClientClient’’s approval and Sign s approval and Sign

Off on Alterations Off on Alterations

Copies to Other PartiesCopies to Other Parties

If itIf it’’s not there, it doesns not there, it doesn’’t t

exist! exist!

(14)

Professional Indemnity Insurance

Risk Management

AppointmentsAppointments

Planning ApplicationsPlanning Applications

Design/BuildDesign/Build

Site InspectionsSite Inspections

CertificationCertification

Final AccountsFinal Accounts

Defects After CompletionDefects After Completion

Assume Nothing!Assume Nothing!

Professional Indemnity Insurance

Claims

If in doubt, notify!If in doubt, notify!

““Claims MadeClaims Made””policypolicy

CircumstancesCircumstances

Innocent NonInnocent Non--DisclosureDisclosure

Mitigation Costs Mitigation Costs --but not but not

betterment betterment

(15)

Professional Indemnity Insurance

Claims

-

Source 0f Claims

Site or Survey DeficiencySite or Survey Deficiency

Failure of SpecificationFailure of Specification

Roof, windows, doors Roof, windows, doors

and heating installations and heating installations

Water IngressWater Ingress

Approvals and GrantsApprovals and Grants

Supervision? No Supervision? No

Inspection? Yes Inspection? Yes

Professional Indemnity Insurance

Claims

-

Examples

Inadequate SpecificationInadequate Specification

Water IngressWater Ingress

Wrong Type of WindowsWrong Type of Windows

Refuse AccessRefuse Access

Defective BricksDefective Bricks

Soot DamageSoot Damage

(16)

Professional Indemnity Insurance

Large Claim

Construction Cost Construction Cost

£

£95,00095,000

Site Cost Site Cost

£

£25,00025,000

ArchitectArchitect’’s Fees Fee

£ £ 7,5007,500

Professional Indemnity Insurance

Example of a

Large Claim

Construction Cost Construction Cost ££95,00095,000

Site CostSite Cost ££25,00025,000

Architect FeeArchitect Fee ££ 7,5007,500

ArbiterArbiter’’s Award of s Award of

Damages

Damages --

£

195,000

Including Including ££5,000 for 5,000 for Solatium,

Solatium, ££2,000 for Hotel 2,000 for Hotel costs and

costs and ££1,000 for 1,000 for Kennel Costs

(17)

Professional Indemnity Insurance

Example of a Large Claim

Own Defence Costs

at

£

100,000

Professional Indemnity Insurance

Example of a Large Claim

Pursuer

’

s Costs

including three

Expert Witnesses

at at

£

300,000

(18)

Professional Indemnity Insurance

Example of a

Large Claim

Total Settlement

Costs

£

700,000

Professional Indemnity Insurance

Legislation, Litigation and Run Off Cover

Blyth & Blyth -

Blyth & Blyth

-v

v-

-Carillion Construction

Carillion Construction

Limited (2001)

Merrett

-v

-

v-

-

Babb

(2001)

(19)

Professional Indemnity

ARB Complaints

Claimant makes complaint to ARB directlyClaimant makes complaint to ARB directly

ARB ask their Member to respond : he must respond ARB ask their Member to respond : he must respond

within a prescribed period of 14 days within a prescribed period of 14 days

““Open LetterOpen Letter””available to the complainer available to the complainer ––and the and the

complainer then gets right of reply complainer then gets right of reply

Registrar of ARB decides whether the matter requires Registrar of ARB decides whether the matter requires

further investigation

further investigation ––but it can be rejected at that but it can be rejected at that stage (and there is no right of appeal!)

stage (and there is no right of appeal!)

If itIf it’’s investigated then its investigated then it’’s referred to the Investigation s referred to the Investigation

Committee which can: Committee which can:

Professional Indemnity

ARB Complaints

Reject the Complaint; orReject the Complaint; or

Admonish the Architect; orAdmonish the Architect; or

Refer it to the ARB Board Solicitor who will appoint an Refer it to the ARB Board Solicitor who will appoint an

expert Architect to investigate expert Architect to investigate

When they have the Report a Hearing will be fixed and When they have the Report a Hearing will be fixed and

attended by the Complainer, the Architect and three attended by the Complainer, the Architect and three members of the ARB Professional Conduct Committee members of the ARB Professional Conduct Committee

(20)

Professional Indemnity

ARB Complaints

Sanctions range fromSanctions range from

Reprimand and/or Fines to period of suspension from Reprimand and/or Fines to period of suspension from

the Register the Register

Removal of the ArchitectRemoval of the Architect’’s name from the Registers name from the Register

Architect can apply for Judicial Review of the DecisionArchitect can apply for Judicial Review of the Decision

PI Policy does not cover this but prudent insurers will PI Policy does not cover this but prudent insurers will

make contribution to costs in the hope that successful make contribution to costs in the hope that successful defence at this stage will reduce the possibility of a defence at this stage will reduce the possibility of a claim.