Communique August 2017
The 2016-2017 NZACS professional indemnity policy terms indemnify “the Insured”. By definition, “the Insured” is the name shown in the policy schedule, but this would usually also include any subsidiary that you have declared in the proposal form. The definition then goes on to include the insured’s partners, directors and any person engaged or employed under a contract of service or engagement with the firm or practice in respect of their actions in the normal course of their employment with the firm or practice. Plus other provisions for previous or future persons and Estates.
Attention is drawn to the use of the word employed, which is used to describe a typical employee/employer relationship and the nature of contract being a contract of service or engagement. Contracts of service can be used for a full time employee, or a fixed term employee, a casual employee or a student or person under an internship. The contract of service is typically an employee/employer relationship as would be defined under the Employment Relations Act 2000 (for more go to www.employment.govt.nz )The nature of an employer/employee relationship is one where the ‘employee’ is working within the practice with access to the tools of trade, under the control or supervision of the principals or directors with revenue earned flowing through the practice.In comparison, a contractor may work independently, perhaps from their premises and is responsible for meeting the obligations agreed to in the contract for service, but are not controlled by the principals or directors and they may work at an hourly rate or for a fixed sum which they charge to the practice.Consideration should be given when engaging a contractor on a fixed term or casual basis to ensure the intention of the relationship is clear. Are they considered a notional employee or an independent contractor? Conversely, if you are to be engaged by a firm under contract, the extent and terms of the ‘employment’ should be clarified in the service contract or agreement, and it is important that it makes the nature of the engagement clear. (The IRD may also require the matter to be clear!)
The use of the term ‘any person’ is deliberate: it is the humans that are indemnified and not a legal entity that may attach to them. This approach aligns with the employer/employee relationship, and legal precedent around agency. The use of another term may instead suggest a principal/consultant relationship. If a firm engages any person on a temporary basis, or for a specific project, the NZACS PI policy includes that person, by definition, as “the Insured” (within the definition or under policy clause 7.09). The limitation around this cover is that they must be working exclusively for the firm during the term of their engagement as if they were an employee.
If a firm engages a sub-consultant or any person to work exclusively for the Insured practice, on a temporary basis, or for a specific project under a contract for service and wishes to extend their policy to indemnify that person during that time, the NZACS PI policy provides cover under policy Endorsement 7.09. This recognises that the relationship may not be employer/employee so cover is not automatically provided within the Insured definition; however the person is integrated into the practice when working on the project.For example, the insured firm engages with an architect from an outside practice to bring in their specialty knowledge on a project. During that time, the architect is working closely with the project team, often within the offices of the practice. Whilst working on the project, the architect is not simultaneously working on any other projects because they are fully integrated into that project.If you engage a sole trader (as, for example “Architect for Hire Ltd”) on a temporary employment contract the person would be included under your policy, but your policy would not include Architect for Hire Ltd which is a separate legal entity to the person you have engaged.
If you are a sole trader (as, for example “Architect for Hire Ltd”) engaged on contract to “XYZ Architects” and exclusively working for them at that time, their policy would include you (the person), but it would not include Architect for Hire Ltd. Architect for Hire Ltd would need to carry PI cover for its own projectsIf as Architect for Hire Ltd you are a sole trader whose business is to provide outsourced services to architectural firms, and you are working for several firms simultaneously, then it is probable that the policy terms which require your exclusive integration into the firm engaging you will not be met: you are in reality operating as a consultant in the business of providing outsourced services. You will have consequent liability, and should carry appropriate PI cover.If Architect for Hire Ltd is a team of several people contracted to XYZ Architects, then Architect for Hire Ltd is a sub-consultant, and would need to carry its own PI cover.
The NZACS policy (along with the similar policy provided to engineers through CEAS) is unique in allowing fees paid to other NZACS or CEAS members to be deducted from the annual fee income declared at renewal. On the theory that income will be declared by the other member for the same project work, the potential for “double dipping” is removed. Other insurers require all fee income to be declared.If you are the lead consultant, a vicarious liability exists for you from the work done by your subconsultant. Whilst insurers would not compensate the claimant twice for the same loss, there is cost associated with defending your position and deflecting the claim that has been made against you.If, instead, you are caught up as a subconsultant or contractor, there is cost associated with defending your position and deflecting the claim that has been made against you. Often, claimants will spread the net as far and wide as they can in the hope of improving their recovery: this may not be “fair”, but it is a fact of life.Even if the claim rests solely with your subconsultant (or in the second situation, the lead consultant), you are likely to have to expend your excess. But at least there is the advantage of having both your PI cover and theirs available to respond to the claim.
A PI policy is a contract and like any other contract, and you can seek clarification on the extent or intention of a clause in it by contacting our insurance consultants at nzacs@aon.com or kristene.crook@aon.com. If required, your PI policy can usually be amended during its term to meet a change in circumstances.