Contractual Confusion: Professional Indemnity versus Public Liability Insurance

September 2015

Confusion between the operation and scope of professional indemnity and general (public and products) liability insurance policies often results in client drafted contracts imposing obligations to arrange insurance upon consultants that are onerous or unrealistic. These obligations may be to arrange insurance of a type or with features that are not typically available. They may also require the inappropriate naming of various parties on your insurance policies. These demands are commonplace and generated by both public and private sector customers.

To assess the merit of such contractual insurance requirements we must have a clear understanding of the nature of the insurance products and how they operate;

Public Liability Insurance covers your legal liability arising out of personal injury or property damage happening during the policy period caused by your business. Products liability is a standard extension to public liability policies that broadens the cover to include your liability for personal injury or property damage arising out of your products, including tangible goods that are manufactured, sold or maintained by your business.

Public and Products Liability policies are triggered by the cause of the liability, namely personal injury or property damage, and may exclude cover for pure financial loss claims where no property damage or personal injury has occurred.

For professional consulting firms products may be limited to tangible elements of reports, stationery, gifts or promotional material provided to clients. Public and products liability policies often require the occurrence (injury or damage giving rise to a legal liability) to happen during the policy period and there is no particular requirement for the insured to notify the insurer immediately that they become aware of the matter.

Professional Indemnity insurance covers legal liability for claims arising out of an actual or alleged breach of professional duty. Unlike public liability insurance, the claim types are not normally defined in the insuring clauses of the policy and can include personal injury, property damage or financial loss. Professional Indemnity insurance is triggered by the cause of the liability, typically an actual or alleged breach of professional duty. It is a claims made policy meaning it responds to claims made (and notified to the insurer) during the policy period.

Any overlap between public and products and professional Indemnity insurances is usually avoided by the use of exclusions with public and products liability policies often having some form of design or advice exclusion. In a similar fashion professional indemnity policies often contain exclusions relating to personal injury or property damage matters unless arising out of a breach of professional duty.

Problematic insurance requirements that we regularly come across in consultancy agreements include:

Principal to be insured under the consultants public and products liability policy

Public and products liability policies often contain a principals indemnity clause that provides indemnity to a principal of the named insured for vicarious liability arising out of the conduct of the insured. The naming of the principal in the policy (as principal) may simply reinforce this entitlement. Problems can arise when a consultancy contract requires the consultant policy to insure the principal in its own right rather than for its vicarious liability arising out of the conduct of the consultant because doing so broadens the scope of the policy into ill-defined areas of exposure.

Principal to be insured under the consultant’s professional indemnity policy

Unlike public liability, professional indemnity policies do not usually contain a principals indemnity clause but often contain clauses excluding claims made by parties insured under the policy. The naming of a third party in the insurance policy may therefore mean that the policy would not respond to a claim made by that party. This negates any benefit of the policy to both the insured and the principal.

Cross Liability Clauses

Where multiple parties are insured under a public and products liability policy it is common for the policy to contain cross liability clauses which means that each party is insured in their own right as if a separate policy had been issued (however the total limit of liability is not increased by this provision). This effectively means the policy will respond to liability incurred by one insured party to another insured party.

Cross liability clauses are typically required by construction contracts whereby either the principal or head contractor is required to arrange a policy that covers both principal and contractor. 
Where multiple consulting entities are insured under a consultants public liability policy this type of clause is also beneficial, however problems arise when a principal requires a consultants public and products liability policy to have a cross liability clause and also require the policy to insure the principal. Such arrangements reinforce that the principal is insured in its own right beyond its vicarious liability for the conduct of the consultant.

Waiver of subrogation clause

Consultancy contracts sometimes require the consultants public liability insurer to waive subrogation rights against the principal. Such clauses prevent the insurer recovering (subrogating) the insureds rights of recovery against the principal in the event that the principal caused or contributed to a matter that the consultant was legally liable for. Consultants and their insurers should be wary of such requests because they may leave the consultants insurer 100% liable for a matter that they were only legally 1% responsible for. 

It is reasonable that a public liability insurer extend to cover a principals liability arising from the conduct of an insured consultant however maintaining an insurers recovery rights (in relation to liabilities arising from matters other than the conduct of the consultant) is an important element in ensuring the consultants insurer is only liable for matters to the extent the insured caused or contributed to a matter.

Failure to satisfy contractual insurance obligations may place the consultant in breach of their consultancy agreement before the provision of services have even commenced. The above are typical examples that we regularly see however there are a multitude of variations of these types of clauses. Consultants should carefully review their contractual insurance obligations to ensure they are realistically satisfiable by their insurance program. If in doubt you should seek the advice of your insurance broker. 

A specialist insurance broker should be able to advise to what extent an insurance program satisfies particular contractual obligations and where necessary tailor an insurance program to suit.
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 the above information you should obtain advice specific to your needs.



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