The fine line between professional indemnity and general liability

ANZIIF’s 2022 New Zealand Liability Conference was a great success, with the industry honing in on many curly areas of practice.

Philippa Fee, Partner, Fee Langstone, took on the scope of professional indemnity and general liability policies.

She told the conference that the kinds of claims where issues arise are many and varied.

'For example, if a builder takes on a construction contract, it is usual for the principal under the contract to require professional indemnity and general liability covers. But exactly what do these policies cover?'

'In the context of the manufacturer, who makes representations as to the quality and suitability of a product? Do these representations fall within the scope of a professional liability or general liability risk?'

The nature of a communication

Fee says typically, advice in a professional context is the core of the risk covered by a professional indemnity policy.

'And again typically, advice requires communication to a client, rather than simply internalised, expert opinion,' she says.

'Communication comes in all manner of forms and contexts, so in what circumstances will a communication be considered within the scope of a general liability or professional liability policy?'

Addressing the question at the 2022 ANZIIF New Zealand Liability Conference in July, Fee said it's not always straight forward to clarify whether a representation should be considered as part of the contract of supply of a specific product or work, or whether it sits better within the insured’s professional indemnity policy.

Another common problem is identifying whether an error in construction is a workmanship or design defect. 

‘Some insurers provide defective workmanship cover, with a low sublimit, but exclude design or specification defects,’ Fee explains. 

‘The line between workmanship and design or specification errors is extremely hard to draw.’    

Equally, issues often arise in relation to certificates of compliance, such as producer statements. 

‘Are they part of the supply of goods or work, or do they attract liability (and therefore cover) in their own right?’

When construction goes wrong

Fee says her firm is seeing ‘a significant uptick’ in claims which are based on a dispute between principals and head contractors, or between head contractors and subcontractors. 

‘It has become commonplace for principals to include terms in their construction contracts that require the construction entity to take out both general liability and professional indemnity cover,’ she says. 

‘But all too frequently, exactly what risk the policies are intended to cover is left unsaid, and poorly understood.’ 

Fee says the uncertainty comes to the fore when something goes wrong, and either the principal or the construction entity seeks indemnity from the insurer.

‘There is an assumption that because there is liability under the construction contract, there must be insurance cover for it,’ Fee says.  ‘But sadly, that’s not always the case.’

In terms of the risks, General liability policies cover property damage, while professional indemnity policies cover economic loss resulting from a breach of professional duty. 

But when the insured carries on an activity which makes a ‘thing’ — such as a product or a building —the requirements for cover under professional indemnity and general liability policies are starkly different. 

Devil in the detail

Specifically, a general liability policy will generally not cover the efficacy of insured’s product but will cover any resultant damage to the product. 

Meanwhile, a professional indemnity policy will not cover the liability arising from the supply of the ‘thing’ but will look to the economic loss flowing from a reliance on a professional relationship. 

‘The trigger for a general liability policy is the occurrence of the event causing property damage, so it will go back to the date of manufacture or supply,’ Fee explains. 

‘In contrast, the trigger for a professional indemnity policy is the date of claim, so each kind of policy has an entirely separate trigger date.’

This factor alone highlights the difficulty of bundling general liability with professional indemnity covers in the same policy.   

Scope of the cover

Fee says the key risk that arises for construction and manufacturing industries under professional indemnity policies is the scope of the cover. 

‘Typically, insurers will aim to limit the cover to the consequences of an insured exercising what could loosely be called “professional judgment”,’ she says. 

‘Therefore, insurers sometimes require the insured to subcontract professional risks to a suitably qualified consultant or supplier.

‘In this instance, the policy in effect becomes a defence costs cover, as the insurer will require that the supplier has a professional indemnity policy of its own.’

If a particular claim does not fall within the scope of the professional indemnity policy because it is deemed an instance of “poor workmanship” on the part of a manufacturing entity, the insured’s professional indemnity policy may not respond. 

‘So, depending on the terms of a particular policy and the facts of the claim, it may be that poorly constructed work is not covered by either the general liability or the professional indemnity policy,’ Fee says.    

‘Consequently, significant areas of exposure remain that are unlikely to be covered by any insurance policy, which represent the insured’s own commercial risk.

‘The existence of these uninsured commercial risks are little understood, but clearly need to mitigated as much as possible.’

Mitigating the risks

Fee suggests the way forward when negotiating construction contracts is to be very clear about the scope of the cover to be taken out by each policy. 

‘Given that there will be areas of potential liability that will remain uninsured, ensure that the insured takes proper mitigation steps to minimise any uninsured exposures.’  

Philippa Fee was a speaker at the ANZIIF New Zealand Liability Conference. The ANZIIF Australian Liability Conference is coming soon!

Find out more about the Australian Conference