What level of cover should we carry?

That is a commercial question for you to decide.

A $250k limit is the minimum required by the NZIA AAS terms of engagement, but in residential projects that limit may be unenforceable as a result of the consumer protection legislation, and many non-residential projects clients are seeking a higher level of cover. The prospect of potentially facing uninsured losses (ie a claim above your level of cover) may be unacceptable.

In the 21/22 year, approximately 25% of members carried only $250k cover, and these were typically 1 to 3 person firms.  Less than 5% of members carried either $350k-$400k or $600k-$750k.  The remaining 70% of firms carried either $500k, $1m, and higher cover.  Future premiums will vary according to rates yet to be negotiated with insurers, and also according to your practice income and type of work, but, subject to those changes, increasing a $250k cover to $500k would represent a premium increase of about 10%  and around 20% for $1M

When starting in practice, it is common to take a $250k limit whilst in ‘start up’ mode. How long ago was that? It might be time to review your PI limit.

Bear in mind the following:

  • For the type of work you are doing, what is the potential value of a claim?
  • What is the probability of such a claim?
  • If the claim is more than your cover, what might then happen?
  • If the consequences are that you might be personally liable, what is in place to protect your assets or the welfare of your family?
  • The value of your projects may have only a tenuous relationship with the appropriate level of cover:  the complexity and nature of those projects (and clients) may be more significant.
  • Under the Consumer Guarantees Act you cannot put a cap on your liability in respect of services supplied for personal or household use.  (The curious can explore NZIA Practice Note 1.206). This applies to most, if not all housing projects done for private sector clients or which are on-sold to consumers, and there is the potential for courts to expand the net wider.

What do you do when a client asks for your insurance certificate?

The minimum PI cover under the NZIA AAS terms is $250,000;  it is not unusual for commercial clients to ask for more.  The PI cover you actually have in force – and the terms of that cover – is a confidential matter between you and your insurers:  clients have no right to access that information, and you have no obligation to disclose it unless required to do so by the discovery processes as part of court proceedings.  Indeed, insurers will be VERY UPSET if you divulge those terms to others!

If the engagement terms require you to prove that you have PI cover at a level of (say) $500,000, then all you need do is to provide a certificate to that effect:  there is no need to divulge that you actually have cover of (say) $2,000,000.

When Aon confirmed your cover (typically November/December if you did a yearly rollover) they also provided you with a certificate which shows the “Limit of Indemnity”.  If that dollar value corresponds with the engagement terms, you can – if asked for – provide a copy of that certificate to your client.  If the engagement terms require cover LESS than that certificate, contact and they will supply a suitable certificate.  If the engagement terms require cover MORE than that certificate, contact to discuss a variation to your cover.  In the unfortunate event that your entire limit of cover is required to settle a claim, the additional legal costs to get to that point are – under the NZACS policies – also covered.

There are client-specific terms of engagement we have seen that ask for PI cover to “at least the value of the project”.  Usually that is not appropriate:  what is the chance that you (alone) might be held liable for the entire rebuild of the works?  A discussion with your client about a realistic level of cover, along with the additional costs (to their account) of increasing it at their behest may be useful.  Alternatively (or in addition) you could make sure they are aware of the lesser cover you carry, and that they accept your engagement on that basis.

What can influence the cost of insurance?

Insurers set a base rate for the architectural profession based on claims trends, regulation, known risks and anticipated emerging risks;  they also factor in the cost of managing their business.

They then apply a level of discounting to the NZACS facility.

NZACS members represent a lower risk than non NZACS members (based on the claims data (frequency and cost)) and as such, members benefit from broader cover and lower base premiums than a ‘stand-alone’ policy holder would get.

From this ‘base rate’, individual members’ premium is calculated against fee income, the type of activities, claims, the amount insurers have paid in claims verses the premium collected, and the policy limit required.

Extensions for higher weathertightness limits, changes to the coverage and taking higher ‘voluntary excess’ then add or reduce the price.

Other companion policies have similar rating models but most also factor in staff numbers.

The risks in being self-insured

If you are in business, you are taking on responsibility and are exposed to risk. 

  • You can choose to ignore the risk; 
  • You can assess that the level of risk in relation to the work you are doing; 
  • You may assess that your risks can be covered by the resources at your disposal; 
  • You can (at a cost) pass that risk onto insurers in whole or part. 

What you cannot do is assume that the risks magically evaporate, that others will ignore the consequences of your failures, or that events outside your control won’t affect you.

Yes, you can contract out of a risk, but that will not prevent a claim being brought in tort, by either your client or others with whom you had no contract. 

If it is a residential project, you cannot limit the liability (Consumer Guarantee’s Act). 

Alas, risks are not necessarily proportional to the value of the work being done, nor its complexity. 

Even proving “innocence” comes at a cost.

In short, the risks in being self-insured (“going bare”) are that your assets and reputation are at risk.

Tales of Woe – Variations, warranties, costs, and deflections

1.            Architect commissioned on minimum terms basis for about 30 townhouses of three basic plan formats and three varying cladding types in several blocks on a site with varying levels excavated out of sloping land.  “Typical” plans elevations sections and retaining walls only provided – almost all at 1:100 – with 1:20 details at a few critical/typical junctions; generic specification with “choices” all left for construction phase.  Developer runs the whole of the tendering/contract admin/project management using NZS3915 (no “engineer to contract”):  directly contracts out the bulk excavation which is done as the tenders are submitted for the building construction.  Disputes arise when contractor seeks variations as follows:

a.            Recessed shower bases (ie cut 12mm or so into the walls – not detailed) compromise fireratings at timber inter-tenancy walls and require substantial nogging and adaption of prenailed frames

b.            Chosen kitchen extract requires ducting to end wall of unit, boxed out ceilings, adaption of prenailed  frames, additional gib fixing and finishing

c.             Elevations show where the different claddings were to be used, but there are additional costs of detailing to deal with changes in cladding types within the plan types (typical details apply to cladding types but not junctions between them)

d.            Additional costs to accommodate trimming of bulk excavation

e.            Additional costs of retaining walls varying between architect’s drawings and final levels created by bulk excavation.  Ditto various site-directed stormwater items required to suit.

f.             Additional costs because the bulk excavation creates a steep embankment for which no retaining wall is provided in the contract until after there is a subsidence and damage sustained to the main contractor’s half-built work.

2.            Architect engaged for gym with specialist sprung floor system.  After much research, local franchisee of global brand is appointed as nominated subcontractor, at least partly on the basis of the warranty available.  Construction proceeds to completion to everyone’s satisfaction and the warranty formalities are actioned.  A few short years afterward it is apparent that the floor is failing, and the only remedy is total replacement at a significant sum.  Local franchisee immediately folds, and the global principal is called upon to make good the warranty.  Polite letter by overseas airmail points out that the global entity unconditionally stands by their product but offers no underwriting of franchisee performance and therefore from their point of view the matter is at an end.

3.            Clients engage architect for fancy house on their existing site and on the basis of a very preliminary chat about psm costs which sets the preliminary budget.  Many changes by the client along the way  substantially add to costs, but the architect is determined to create a masterpiece nevertheless.  Clients independently seek builders estimate at an early stage, arrange finance and update architect on that basis, shift out to another house they owned and had previously rented out, and demolish existing house.  18 months delay while client diverts available funds into unrelated business opportunity.  Project recommences and is eventually put out to tender.  Wildly varying tenders received, but the lowest is significantly above any expectations:  the client abandons the project and seeks damages from architect.  (It later transpires that the business has sucked them dry also, and that they are content with minor alterations to their alternative accommodation instead).

4.            Structural engineer designs steel beam (ie calculations, PS1 and pencil sketches) for architect to incorporate into drawings.  House completed (to the delight of the clients), but the floor over the beam is very bouncy and gib ceilings crack.  Ceilings pulled away, beam strengthened, clients have to move out and pay for motel while the remediation is completed at engineer’s cost.  Architect’s final fee claim returned unpaid and with a short note that if it is pursued there will be a counter-claim.

Tales of Woe – the perils of admitting liability

In a recent newsletter to engineers there was a case study from the late 1970s that is still relevant – even to architects – today.  (a contribution from Board Member Michael Davis)

The Facts

An engineer was engaged by a contractor to design temporary works for a bridge project.  After some work was carried out it was discovered that it had been incorrectly set out.  The engineer agreed that they had made an error and to pay for the correction of the fault.  This was done as a verbal agreement, and the engineer did not consider it worthy of advising their insurer because the matter had been settled amicably.

The bridge was eventually completed but at the same time the contractor’s company went into liquidation.

The appointed receiver then laid a claim against the engineer alleging that their error had contributed to the delay and the company’s financial difficulties.

The liability that arose from this (including all the legal fees to defend the action) was not covered by the engineer’s insurance because they had not advised their insurer.

What are the Professional Liability Lessons?

In the first instance, the engineer should not have admitted liability – regardless of how obvious the error might have been.  The engineer should also have notified their insurers of the event as soon as they were aware of the likelihood of a claim being made against them.  Both issues are a standard requirement of your contract with an insurer for Professional Indemnity. 

Further, in trying to settle the matter quickly and amicably, the engineer should have obtained a written discharge from the contractor in respect to the claim and any matters arising from the claim.  In the absence of that, and of some insurance and legal advice on the wording of such an agreement, the engineer left the door open for a further claim.

Tales of Woe – site and survey matters

A few examples of site and survey matters:

Architect designs a building to the maximum allowed by height to boundary controls.  One or more of the following happens (ie these have all happened on one or more jobs!) and the breach will result in replanning/rebuilding/resource consent with attendant costs and delays:

Owner points out boundary position lies just inside a thick wide hedge.  Regrettably, owner is mistaken, and the boundary is at the other side of the hedge, and at a much lower level.

Architect obtains survey and designs to it.  Surveyor wrongly draws up the site plan (or draftie wrongly reads it) to show the boundary at the top of a retaining wall instead of at its base.

Builder thinks the architect is a wally, and after discussion/agreement with the owner helpfully raises the floor level 200mm without the architect being told or noticing on a site visit.

Boundary levels are more or less consistent, except for a small section which has a pronounced dip about 1.2m across and 400mm deep.  Architect ignores it but the council doesn’t!

Construction proceeding smoothly, framed up with roof about to go on.  Some bright spark in the check-box department of the local council realises that they have not yet got a certificate from a surveyor to verify the HIRB and sends out a routine letter.  Surveyor duly reports to architect that the horizontal dimension between the building and the boundary is 700mm less than the architect used for the roofline.  Architect sadly discovers that at 1:100 scale the dimension line drawn parallel to the boundary is exactly 700mm from it!

Old house in poor condition is to be repiled, refurbished and extended along the boundary. Site levels are taken before the design is started.  Floor level of the extension is later designed to be level through to the existing old house.  After the repiler has straightened and levelled things up, the old house floor level where it meets the new extension is rather higher than before.

Tales of Woe – Site information

Here are some recent or memorable claims arising out of site information.

  1. Ancient large bricked stormwater main was not where it was expected to be:  collapsed during site excavation
  2. Public drain position plotted on council records.  Test drills identified “safe” locations for larger diameter piles which in due course were driven.  Two went through the known but mis-recorded drain, and on review it was discovered that the test drills self-plugged the hole they had made:  so the drain was found, but that was not known at the time.
  3. Piles drilled, reinforcing placed, concrete pour underway.  The volume of concrete in one pile was significantly more than expected:  it turned out that it had been steadily blocking up a public drain seven metres below ground level.
  4. Until a justifiably grumpy roofer complained, no one had flagged the issue that the roof was far too close to overhead power distribution lines.
  5. Infill house on rear site built in a dip, which later proved to be an unrecorded overland flow path, later blocked by well-meaning landscaping efforts, thus creating a local lake around the house.
  6. House built according to the local authority wind zone requirements, but the specific site had a much higher wind exposure.  The cladding details and structural bracing proved inadequate despite a structural engineer’s involvement.
  7. Uphill site retaining wall of non-critical setout but defined height was built ahead of setting out the house.  The builder ignored the (perhaps sparse) drawing information defining the house floor levels and instead set it out from the retaining wall:  a difference of 500mm.
  8. Builder issued with consent-application set of drawings to quote from.  During consenting, the Council required the building to be lifted by 500mm to avoid flooding.  Builder ignored the consent-issue drawings and built from the ones they had quoted on.  Not discovered until the pre-line inspection.
  9. Mis-understood or mis-dimensioned setout drawings, discovered (a) after piles driven (b) after major project boxed and reinforced but in final pre-pour check (c) after slab poured (d) in the attempt to join up the new roof to the existing one.
  10. Mis-understood height control lines:  (a) drafting line wrongly assumed as boundary (b) boundary assumed at top of a retaining wall instead of the bottom (c) position of boundary assumed within large unruly hedge which also concealed a steep drop (d) builder unilaterally decided to set the floor level higher than designed for (e) neighbour (and therefore council) placed significant importance on what reasonably seemed to be an insignificant dip in the boundary profile (f) protracted neighbours dispute over what was the “natural” level at the boundary, and at what date that should apply.

Should I Notify?

The short answer is “if in doubt, notify”. 

PI insurance is very different from (say) house insurance.  If your house is flooded, the loss is obvious – and current – and if you make a claim on your house insurance policy you expect some recovery of your loss.  But if a house you designed for others several years ago is flooded this year the “debate” may be how your design (then) contributed to that loss (now):  in making a notification under your PI policy, you are alerting your insurers of the opportunity to enter that debate.

The nature of PI insurance is that it is on a “Claims Made” basis:  the policy must be current when events which give rise to a claim first become known to the insured and are notified to the Insurer.  This applies whether or not the policy was current at the time that your actions (or inaction) allegedly caused the problems. 

The policy holder has a duty to notify as soon as circumstances are known.

Notifying a claim does not create a “black mark” against you;  if necessary, you can indicate that you have notified on a precautionary basis.  But failing to notify at the earliest reasonable opportunity may mean that the insurer could consider their position has been prejudiced, and decline the claim in whole or in part. 

  • You have an obligation to be open and honest to your insurer, and to assist them in responding to the claim.
  • Never admit any liability to your clients or other parties.
  • Never tell anyone that you’ve advised your insurer…but rather say that you are ‘seeking advice’

An example of situations where notification may be prudent:

  • If the client indicates that they may be seeking recovery from you for some reason
  • If a failure or defect has arisen, and you might be responsible for some of it
  • If you discover an error in your work that has or might later lead to problems
  • If you become aware of specific issues that may later lead to damages or loss
  • If there are disputes between others that you might be drawn into