As you will be aware, the professional indemnity insurance market has hardened in recent years and this trend looks set to continue. Challenges include significantly reduced capacity, increased premiums and restrictions in cover across the market.
Following these recent trends, the Ministry of Housing, Communities and Local Government (the “MHCLG”) pursuant to 47(6) of the Building Act 1984, have amended the insurance requirements for schemes of insurance for approved inspectors.
Further to the above changes, Griffiths & Armour, who insure 98% of the country’s Approved Inspectors (“AIs”), have altered their robust insurance policies to reflect government changes and shifts in the market, and recently had their revised schemes approved by the MHCLG. The new schemes of insurance will have an impact on AIs’ contractual arrangements going forward, and as a consequence, there are some key changes that AIs will need to note, which is the focal point of this article.
The changes to the schemes for insurance for AIs shall impact all contractual arrangements entered into on or after the 1st July 2021.
What are the key changes that AIs need to be aware of before entering into contract and/ or commencing their services?
1. LIMIT OF INDEMNITY AND LIMIT OF LIABILITY
- From 1st July 2021, the AIs’ cover shall operate on an each and every claim basis to the limit of indemnity the AI chooses to purchase (e.g. £5 million on an each and every claim basis).
- AIs will need to carefully think about the appropriate limit of liability to include in their contracts. It is always important that AIs limit their liability to an aggregate amount and ensure that they do not expend the aggregate limit of indemnity under one contract.
- In respect of the limit of professional indemnity insurance to be maintained in each contract, contracts should expressly state that maintenance of professional indemnity insurance shall be contingent on such insurance being available at commercially reasonable rates and terms, and that such insurance shall be maintained in compliance with the guidelines issued by the MHCLG.
2. CONTRACTUAL TERMS TO BE NO MORE ONEROUS THAN THE CIC/ACAI CONTRACT
- Under the new schemes of insurance, all contracts entered into after 1st July 2021 must be no more onerous than the provisions set out in the CIC/ACAI Contract for the Appointment of an Approved Inspector, Third Edition, 2020 (or any subsequently amended version), (the “CIC/ACAI Contract”), otherwise these will be inconsistent with professional indemnity insurance cover. The simplest way to comply with this requirement would of course be to only contract using the CIC/ ACAI Contract. However, we appreciate AIs have their own bespoke standard T&Cs which are more suited to how they operate (or the client imposes an alternative form of contract).
- We strongly advise that AIs immediately (if they have not already done so) carry out a review of their standard T&Cs and where applicable, ensure that any other form of contract entered into by the AI for the provision of approved inspector services contains provisions that are no more onerous than under the CIC/ACAI Contract.
- Some key provisions to include by way of example are:
- an all-encompassing limitation of liability clause;
- an overarching reasonable skill and care clause;
- an express exclusion in respect of any requirement for the AI to provide collateral warranties and/or letters of reliance;
- an express provision stating that the relevant client, and not the AI, will be responsible for the relevant project’s compliance with the building regulations made under the Building Act 1984, including the Building Regulations 2010; and
- a time limitation period that is no longer than 6 years from the date of completion of the services or termination whichever is the earlier.
3. LIMIT OF LIABILITY IN RESPECT OF FIRE SAFETY NOTIFICATIONS (“FSN”)
- From 1st July 2021, cover for FSN is limited to an each and every claim basis and to a total aggregate limit of indemnity with a minimum aggregate of £3 million.
- The cover for FSN applies in respect of any losses, claims, damages, costs, expenses, demands, and/or any other liability directly or indirectly arising out of the fire resistant and/or fire-retardant characteristics of external cladding systems.
- It is essential that AIs consider specifically limiting their liability in respect of these risks in their contracts and carefully consider inserting a low limit of liability, which does not expend the total aggregate amount (e.g. £1 million in the aggregate). A properly drafted ‘evaporation clause’ may also be of use.
4. THIRD PARTY CONTRACTS, COLLATERAL WARRANTIES AND NOVATION
- From 1st July 2021, the new schemes of insurance exclude cover for novation agreements, collateral warranties, third party rights (pursuant to the Contracts (Rights of Third Parties) Act 1999), reliance letters and compliance with third party contracts. Albeit these are often common requirements in construction contracts, these items are not appropriate to the statutory role of an AI and must be resisted for consistency with professional indemnity insurance arrangements.
- In some circumstances, AIs may be required to provide AI services in respect of works for a project for one client initially and then later on be required to enter into a new contract with a different client (e.g. in a design and build context) in respect of the same works. Whilst the new contact may not be a novation agreement, AIs should be aware of the risks of entering into a new contract with a second client, including amongst others, (i) the AI may have overlapping duties to both the first and second client in respect of the Building Act 1984 and the Building Regulations 2010; and (ii) the two separate contracts would create “two pots” of liability. Therefore, AIs should consider how they can best mitigate the risks that arise from the two contracts and seek legal advice if required.
5. ASBESTOS AS ADDITIONAL COVER
- From 1st July 2021, cover for asbestos is no longer an “addition” under the new insurance schemes as cover for these risks is now excluded. Therefore, it is important that liability for asbestos is excluded under all contracts from 1st July 2021.
6. NON-STATUTORY SERVICES
- The new schemes for insurance will only cover liabilities arising from the statutory obligations of an AI. Therefore, any non-statutory services would not be covered by the MHCLG approved insurance cover and would need to be separately insured. Statutory services are services that fall within the remit of an AI under the Building Act 1984 and the Building Regulations 2010 which include, for example, building control services pursuant to an initial notice that are carried out at pre-planning stage and that fall within the functions of an AI as provided under the Building Regulations 2010.
Examples of services that would need to be separately insured would include, amongst others, expert witness work, any advice provided outside of the jurisdiction of England & Wales, technical audit and warranty work and fire risk assessments. The above listed examples are not an exhaustive list of the types of services that would not be covered by the MHCLG-approved insurance cover, however, if you are in any doubt, please do contact Griffiths & Armour to seek clarification.
To summarise, the two key points for AIs to note before commencing any approved inspector services and/or entering into contracts with clients in relation to the same, is that from 1st July 2021, all contracts entered into for the provision of AI services (i) must contain provisions that are no more onerous than those set out in the CIC/ACAI Contract; and (ii) must contain provisions that are consistent with the AI’s professional indemnity insurance cover.
As stated above, the simplest way for AIs to comply with the above requirements would be to only use the CIC/ACAI Contract and ensure that all contract provisions comply with the AI’s specific professional indemnity insurance policy cover. However, as this may often not be practical in all situations, we recommend that AIs ensure that:
- if AIs enter into contracts on the basis of their standard T&Cs, that they (as soon as possible) instruct lawyers to carry out a full review of their standard T&Cs against the CIC/ACAI Contract and their professional indemnity insurance policy; and
- if AIs are required to enter into any other form of contract that may be imposed by clients, that these alternative forms should be resisted in the first instance and where this is not possible, the AI should ensure that each contract is reviewed by a lawyer against the CIC/ ACAI Contract and the AI’s professional indemnity insurance policy.