Helpful Loss Lessons for Architects

This claims scenario offers helpful loss lessons for Architects that may prevent and/or minimise the size and impact of a claim against you in your Professional capacity under your Professional Indemnity Insurance.

Claim Circumstances

A new Owners Corporation for an apartment building took action against the Builder ‘Build-em-up Pty Ltd’ for defective workmanship and non-compliance with the building code.  The issues that arose related to the external walls, extreme deterioration of cladding, moisture behind render and ineffective flashing. The Builder ‘Build-em-up Pty Ltd joined the Architect ‘Wayne Brilliant Architects’ in the action against them.  ‘Build-em-up’ claimed that the suggested method did not meet the approved standards and it wasn’t their fault that the external walls were then sub-standard as they were following the architects plans.

The claim was notified to the Professional indemnity insurer, DEF Insurance in July 2012 and Insurers appointed solicitors to act on behalf of Brilliant Architects.   The Insurer DEF Insurance initially declined the claim as Brilliant Architects was an entity that was not named as Insured on the policy.

Wayne Brilliant Architects was a business name of Fantastically Brilliant Architects Pty Ltd and not a related entity.  However, the broker pointed out that the ABN of his legal entity has been declared in each and every proposal form submitted to the Insurer for the past four years. The full professional fees earned by this legal entity have been declared on the proposal form since 2008 and the large projects engaged/invoiced by this legal entity have been declared on the proposal form since 2008.  All of these entities activities have been declared in every proposal form since 2008. The only omission was that the insured did not list the actual legal name of his business.  It was not reasonable to deny the claim when the architectural services in dispute were performed by Wayne Brilliant.

The policy should respond to any demand for compensation made against Wayne Brilliant and/or Fantastically Brilliant Architects Pty Ltd for the provision of architectural services. This was the legal entity/structure he has run his business under as far back as 2006.  Subsequently DEF Insurance agreed to reverse their earlier decision and defend Wayne Brilliant Architects.

The Owners Corporation for the Apartment block requested rectification meetings in which ‘Build-em-up’ attended, but Wayne Brilliant Architects didn’t attend these initial rectification meetings or respond to notices and a complaint was made against them to ARBV and the Building Commission.

The Proceedings went to VCAT and the Owners Corporation joined the Architects and Building Surveyors as second and third respondent to the Builder.

The Owners Corporation was successful in recovering for the defective works and the Insured’s portion was $210,000 of $480,000.  Indemnity was granted by the Insurer less $10,000 excess.  This proportion allocated against the Architect was however considered reasonable and a good result given the independent opinion was critical of architect’s design and building surveyor approving the design.

Loss Lessons

 1.    The importance of documenting the architect’s role, in particular his/her obligations

According to the Insured, he was initially engaged by the original project architect to assist it in developing the design documentation for the proposed development. This arrangement was subsequently altered when the Insured agreed to effectively take over from the original project architect by providing services directly to the owner/developer.

Crucially, The Insured did not document his retainers with the original project architect and the owner/developer which in turn, made it difficult to:

(a) establish the precise nature of The Insured’s obligations to the original architect and the owner/developer;

(b) determine what, if any, limitations of liability or contractual indemnities terms were agreed upon by the parties;

(c) determine to what extent the design in question was prepared by the original architect or The Insured or a combination of both;
2. The importance of maintaining a document register

The Insured submitted a number of drawings and specifications to the owner/developer for its consideration. According to The Insured, unbeknown to him, the design documentation was used by the owner/developer to obtain a building permit.

Relevantly, The Insured did not maintain a document register, which in turn made it difficult to identify when and which particular design document was provided to the owner/developer and for what purpose (i.e., for consideration/discussion; for building permit; for construction, etc

3. The importance of notifying the client of design concerns

The Insured stated that during the course of construction he became aware that his preliminary design documentation had been used by the owner/developer to obtain a building permit which the builder was relying on to build the development. Notwithstanding being concerned about this course of action, The Insured opted to not raise the issue with the owner/developer.

Relevantly, had The Insured raised his concerns, the onus of ensuring that the design documentation was adequate would have fallen at the feet of the owner/developer and thereby substantially reducing his overall exposure.

4. It is necessary to ensure Full Disclosure at the time of initially taking up Professional Indemnity Insurance and at each renewal Disclose all present, past entities whether related or not related as Insureds on all proposal forms each year.  Ensure they are all shown as Insureds on the schedule.

Whilst this client declared ABN’s and Fee income, problems with the claims department would have been circumvented if all relevant names were disclosed.

5. Negotiate early and be helpful to your client

Where problems arise it is important for the client to look to negotiate early and respond promptly to minimise on-going litigation without admitting liability.

Hopefully you don’t find yourself in the scenario of this insured, but if a scenario eventuates these loss lessons are important to consider and act upon to prevent and/or minimise a claim.  Actions of this nature can be protracted, costly and stressful therefore if you can implement strategies to avoid reaching this point with your clients it may allow you to avoid these kinds of distractions and concentrate on the business of being a successful Architect.

 This advice and comments are provided in the capacity as your insurance broker and should not be construed as legal advice.  Separate legal advice relating to the interpretation and implication of this article for your individual contracts should be obtained.