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.

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 nzacs@aon.com and they will supply a suitable certificate.  If the engagement terms require cover MORE than that certificate, contact nzacs@aon.com 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.

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.

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.

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

Some smaller practices may have difficulty in meeting the criteria for cyber cover because they are not undertaking the appropriate security processes in their systems.  Covid, and the increase in working from home, has provided increased scope for opportunistic cyber-crime, and Aon has an Australian U-Tube clip which makes useful viewing (if you can cope with the background music!):  https://www.youtube.com/watch?v=ZjDT1UOPTwQ&t=3s

In reviewing your own systems, the following questions cropped and copied from the last PI renewal form may suggest actions to think about:

• Are all computer systems, mobile devices and websites firewalled or have intrusion prevention systems on them?
• How often are protections and procedures updated?      Daily ? – Weekly ?

Does the Practice or Entity:

• Use firewalls to prevent unauthorised access connections from external networks and computers systems to internal networks?
• Use anti-virus protection and procedures on all desktops, e-mail systems and mission critical servers to protect against viruses, worms, spyware and other malware?
• Have physical security controls in place to prohibit and detect unauthorised access to their computer system and data centre?
• Have access controls in place (e.g. passwords) for employees and other users to deny access to sensitive data on computer systems
• Have backup and recovery procedures for all data and IT systems
• Have any domiciled operations or derive revenue from USA, Canada, UK, Europe or Australia?

Has the Practice or Entity sustained a single loss or losses, or suffered from any cyber breaches (including, but not limited to data loss, network intrusion or hack attack including telephone hacking), or been subjected to any fines in the last three years, for which this proposed insurance may be relevant?

The level of cover is for your practice, for all projects for the insurance year.  PI cover does not relate to individual projects, but if you need to, you can increase your cover at any stage during the year.

A key decision you need to make is the level of cover you are seeking.  Some clients are requiring a minimum level of cover, and if you want to work with them you will need to carry that level of cover in order to meet the terms of engagement.  Otherwise, it is a matter of the risk you are prepared to carry, versus the cost of passing that risk to an insurer.

The purpose of the PI cover is to protect your assets and business in the event of a claim.  You need to think carefully before exposing those resources to risk.  A doubling of your cover (for example) would typically be at a marginal cost (maybe 20-50%) and not a doubling of the premium.  

Many smaller practices and sole traders are tempted to limit PI cover to the minimum $250k set out in the NZIA AAS agreements.  But those practices also tend to be doing residential work, where the liability will NOT be capped at $250k, because the Consumer Guarantees Act exposes those practices to unlimited liability.  Yes, you might attempt to hide behind a family trust or a limited liability company to avoid the prospect of becoming personally liable for that part of a successful claim in excess of $250k.  BUT claimants have successfully recovered money on the basis that a beneficiary to a trust has the resources of the trust available to meet a claim.  AND if you were a director of the company and personally involved in the failed project, then the prospect of a personal claim against you is very real. 

Insurance is a mechanism of transferring your risk to another party i.e. an insurer. In exchange for consideration, often referred to as ‘premium’ the insurance company will agree to pay an agreed sum of money, referred to as an indemnity, when an event or events happen.
The insurance policy is a contract agreement and like any form of contract sets out the terms of agreement; what the contract is for, when to call on the contract, and the types of events covered, as well as the types of events not covered.
This commentary focusses on Professional Indemnity insurance and factors to consider if contemplating changing insurance provider.

Policy Coverage
Professional Indemnity insurance (PI) policies offer cover on a negligence or civil liability basis. Civil liability policies are the most common policies and cover a broad range of risks.
For Architects, Architectural Designers or Draughtspersons, claims can have allegations of negligence, breach of the duty of care that a client could reasonably expect from you, defamation, breach of confidentiality, breach of copyright, breach of intellectual property, unfair competition or breach of contract.
In addition to paying the compensation claim “the settlement”, the PI insurance arranged through NZACS also provides cover for your associated defence costs. This includes lawyers’ fees and expert witness costs.
CHECK – Is the Policy
• Negligence only or Civil liability?
• Are the defence costs paid in addition to the Indemnity limit or part of the Indemnity limit?
• Does the policy include Quasi Judicial or Registration Board investigations or enquiries (such as NZRAB or LBP Board)?
(For the policies arranged through NZACS, the answers are “Negligence and civil liabilities”; “Yes”; “Yes”)
It isn’t just about the number of policy extensions a policy has. Often policy extensions are noted separately as a way of limiting or defining the cover and would already be included within the definition of the Insuring clause.
(The policies arranged through NZACS are specifically written around the risks faced by architects)
CHECK – What to look for:
• The policy needs to be read in its entirety. Insuring clauses and the definitions, extensions and exclusions and policy conditions.
• What is important for you and your practice?
• What do you need to have cover for and what is ‘nice to have’ but not essential?

Claims Made Basis
PI policies fall into a category of insurance known as ‘claims made’.
This means that you need to meet certain conditions to access the indemnity. These may differ policy to policy, and it is important that you understand your policy conditions if you are aware of a claim or circumstance and are thinking of changing provider.
Common policies require the following:
• You must have a current policy in place at the time a claim is made against you and/or you become aware of circumstances that could result in a claim being made against you.
• You must notify the claim or circumstance before the policy due date passes (the policy expires).
• The claim or circumstance must relate to a period after any policy Retroactive date.
• The notification must contain sufficient information to meet the policy claims conditions.
Retroactive date:
Claims can arise long after a project is complete. In most instances PI policies can offer indemnity for past projects, and this cover is given by way of a Retroactive date. It means that you are covered for claims that relate to your activities carried out from the retroactive date going forward.
CHECK – Maintain existing Retroactive date?
• Most insurers will accept your existing Retroactive date even if they are not your current provider.
• NZACS carries your existing Retroactive date into the new policy provided you provide evidence of current insurance and the Retroactive date.
Maintaining Continuous Cover
Try and avoid being uninsured i.e. allowing one policy lapse before you arrange the next one. If you become aware of a claim or circumstance during an uninsured period, then you will not have any insurance cover, even if it is related to a project you did when you had cover (such is the nature of “Claims Made”)
Insurers will accept your existing Retroactive date provided you do not have a prolonged period without insurance cover.
Claim Time
Claims are unforeseen and unexpected but if they happen then you will expect the insurance contract to make good on its obligations and indemnities.
Claims can be stressful, complicated and take a long time to resolve.
CHECK –
• What happens if I need to make a claim or circumstance?
• How much do I have to contribute towards the claim and when is it payable (your excess)
• What support in addition to policy cover can I get?
o How is my claim managed – what experience does my association/broker/insurer have in the types of claims someone in my profession could have?
o What experience are the lawyers should I need one?
o Do I get help mitigating the claim – often an experienced adviser can work with you to resolve the claim long before it reaches litigation?
(The NZACS Claims Committee is available to assist members insurers and lawyers in the event of a claim or threatened claim; the lawyers are all on a “panel” which has proven skills and experience in claims made against architects and engineers)
(This article was provided by Aon, the insurance brokers who manage the NZACS PI cover.)