Loss Prevention Alerts

ALERT 28:  The consequences of a hard insurance market on existing collateral warranties

This loss prevention alert has been produced by the Loss Prevention Working Group (LPWG) of the AGS. It highlights issues that the LPWG considers may be of relevance to members. It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

In a hard insurance market, it is generally difficult to obtain insurance cover - including professional indemnity cover - on what seem reasonable terms. This can mean that cover is only available in restricted amounts (perhaps one or two million pounds of cover in the aggregate when previously the specialist had cover of five million pounds per claim), for what might seem a prohibitively expensive premium, with large excesses or endorsed with wide-ranging exclusions.

It seems that beneficiaries of collateral warranties that might have been provided some time ago by AGS members - perhaps many years ago - are querying the amount of professional indemnity cover those AGS members now have in place. The question might be asked: why should beneficiaries of warranties provided some time ago be concerned about the level of PI cover an AGS member has today? After all, at the time he provided the warranty the AGS member might have had what the beneficiary then regarded as perfectly satisfactory PI cover. The answer is that PI cover is written on a claims basis which means that it is the PI cover in force at the time the claim is made against the specialist which triggers, and not the cover in place at the time the warranty was entered into. Because of the nature of AGS members' work, problems arising through advice given or designs provided might materialise a considerable number of years after the warranty is given.

In all probability, and despite the increasing use of standard form warranties such as those published by the British Property Federation the majority of collateral warranties are provided by virtue of a side letter or reliance letter which is wholly silent on the consultant's obligations to maintain professional indemnity cover. In these circumstances, although the beneficiary might justifiably be concerned by the fact that the AGS member has less cover then when he entered into the warranty with the beneficiary, there is nothing that the beneficiary can do about it. There is certainly no express but also no implied term that the specialist should maintain a certain level of professional indemnity cover in these circumstances.

In some warranties, the provider might have given an absolute undertaking to maintain PI cover in a certain amount. In such a case, not having the designated amount of PI cover would constitute a breach of contract and the beneficiary would have a claim for damages, although the precise measure of his damage and how he would enforce his damages claim against an undertaking - in all probability a limited liability company - which has few assets and (which is of course the root of the problem) inadequate insurance cover is a moot point.

Many standard form collateral warranties, such as those published by the British Property Federation, require the warrantor to notify the beneficiary if it becomes impossible to maintain cover. This is said to be :

"…in order that the Funder/Purchaser/Tenant can discuss the means of best protecting the respective positions of the Funder/Purchaser/Tenant and the Firm in the absence of such insurance."

It is difficult to see in legal terms what effect this clause might have, although the draftsman's objectives are easy enough to discern. It has been argued that such a clause might enable the beneficiary to obtain a retrospective latent defects insurance policy and recover as damages from the warrantor the cost of the premium, but in all probability this is not the position. All the clause appears to do is require the warrantor to notify and then "discuss" but it is hard to see how any damages claim against the warrantor might be made out. It seems that some beneficiaries of warranties, and some current and old clients of AGS members, are putting pressure on members to maintain levels of PI cover they cannot afford, by arguing that this is an obligation under the warranties they provided. In all probability this will not be the case, and although it must be remembered that PI cover is for the member's benefit, and the higher the level of cover the greater the protection, members should resist pressure to purchase amounts of cover which, in some cases, seem to be threatening the ongoing viability of their practice.

Prepared for the Members of the AGS by Steven Francis, DLA

Date of Issue:          17 June 2003