Are your Sub Consultants Insured?

October 2008

Understanding precisely who is insured under a Professional indemnity insurance policy is critical to assessing the appropriateness of the insurance program. Policy operation with respect to claims arising out of the actions of sub consultants is often misunderstood by both principal consultants and sub consultants alike.

The use of sub consultants by professionals in the construction and engineering industries is common practice whether it is a building inspector undertaking mandatory building inspections for a building surveyor or a specialist design engineer engaged by one of their peers to assist with a specialist area of a project.

Often misunderstood is how liability is apportioned between the "principal consultant" and "sub consultant" and how professional indemnity insurance policies operate to insure the various parties, and the potential uninsured "gaps" that may exist for each party.

The extent to which a principal consultant can be found liable for the actions of their sub consultant is subject to various factors which include; the nature of services provided, the contract(s) utilised and the application of any particular legislation. An example of this legislative influence is the ability for a building surveyor in Victoria to rely in good faith upon a certificate issued by another building practitioner under The Building Act 1993 (VIC).

The extent of apportionment of liability between the principal consultant and their sub consultant is a legal question however from a professional indemnity insurance perspective the key issues for professionals to understand are:

  1. Whether their policy will respond if they are found liable for the actions of another party;
  2. To what extent, if any, are they insured by another party’s professional indemnity insurance

Whilst every policy is different there are some general industry standards that one should expect their policy to meet. The Insured is usually a defined term in the policy with this definition including the entity named in the policy schedule, its directors and employees. A typical policy approaches this sub consultancy issue as follows:

"We agree to provide cover in respect of any Claim against the Insured resulting from the conduct of any sub consultant, subcontractor or agent in the Professional Business of the Insured and for whose acts, errors or omissions the Insured is liable. We will not cover the consultant, subcontractor or agent."

The above clearly spells out that if the Insured is liable for the actions of their consultant the policy will respond to cover the Insured, but will not extend indemnity to the sub consultant. In practice one would expect the Insurer to seek recovery from the negligent sub consultant in the event that a claim was paid on account of their actions.

The above also highlights the important difference between (claims arising from) the "work" of a sub consultant being insured versus the actual sub consultant being insured in their own right.

The above policy clause is a typical industry approach however we have come across certain policy wordings that operate to exclude cover for the insured when a claim arises out of the acts of others. Policies containing such exclusions are fundamentally flawed and should be avoided.

Principal consultants holding a professional indemnity insurance policy meeting the above minimum industry standard can take some comfort knowing that they should be protected for claims arising from the acts of others they engage to complete some of their work. Prudent business practice dictates that professionals ensure that their sub consultants maintain their own professional indemnity insurance also. This ensures that each party carries an equitable responsibility of arranging insurance to cover their own professional liability. It also provides a means by which the principal consultant can manage the extent to which they will carry increased future premiums or other impositions resulting from a claim that is in part attributable to their sub consultant.

We are surprised by the number of sub consultants that do not maintain their own professional indemnity insurance. Either they believe that they are covered by someone else’s policy, or feel there is no need to take out insurance because their client has not requested they maintain professional indemnity insurance, and/or has specifically stated they are not required to carry professional indemnity insurance.

An important distinction to make is between a contractual obligation to procure insurance and the professional liabilities that may be protected by that insurance. To put it simply, whether or not your client requests you maintain professional indemnity insurance has no bearing upon the professional duty of care that you may owe to that client or any other party.

The practice of engaging professionals via recruitment firms is common practice with recruitment generally involving the recruitment firm sourcing for a fee an individual to meet the employer’s needs. Under such arrangements the employer takes on the individual as an employee and therefore becomes vicariously liable for the individual’s actions with the employer’s professional indemnity policy typically including cover for employees. In recent years there has been an increasing trend for recruitment firms to take on the role of employer or principal consultant and "on hire" either employees or contractors on a periodic basis under service agreements. The liability and insurance implications for such arrangements are often poorly understood for various reasons:

  • Whether the individual providing the professional services is an employee or external consultant of the recruitment firm is likely to impact upon whether or not that individual is insured by the recruitment firm’s own policy;
  • Contractors should not assume that because they are contracting via a recruitment firm they are covered by the recruitment firms insurances;
  • The professional indemnity insurance needs of a consulting engineering practice are likely to vary significantly from that of a recruitment consultancy, yet many recruitment consultants are in effect providing engineering services by "on hiring" professional sub consultants or employees. We often come across professional indemnity policies held by recruitment firms that do not adequately protect liabilities arising from their "on hiring" of professional services;


The definition of Insured under a professional indemnity policy rarely extends to include external parties and where this definition does automatically extend to include sub consultants it is often subject to very specific conditions. Firms or individuals acting as sub consultants therefore should not assume they have the benefit of another party’s insurance policy unless they have evidence of being specifically named in the contract of insurance as insured. Due to the "claims made" nature of professional indemnity insurance in particular, we would advise against relying upon another party to arrange insurance on your behalf unless they are an appropriately qualified insurance professional.

If you engage or act as a sub consultant and are unsure whether you have adequate professional indemnity insurance speak to your insurance broker who should be able to advise on the adequacy of your policy.

To the extent that any of the above content constitutes advice, it is general advice without reference to your needs or objectives and therefore cannot be relied upon. Before acting on any advice you should obtain advice specific to your needs.

 
 

BOVILL RISK & INSURANCE CONSULTANTS

Specialist Insurance Brokers