Every year professionals throughout the construction industry spend substantial sums of money on indemnity insurance, yet time after time insurers refuse to provide cover on particular claims. This often results from very basic features of the terms of the insurance policy. In many cases, the withdrawal of cover could have been prevented by the insured taking certain simple steps and/or adopting basic procedures when dealing with potential claims. The writer, Richard Palmer of Watson Burton, is a Partner with Watson Burton solicitors, specialising in defending and pursuing claims in professional negligence against architects, engineers, surveyors and accountants.

LEGAL OBLIGATIONS OF INSUREDS TO INSURERS
The first hurdle for an insured is the proposal form. This will form a part of the contract. 'Every single word of the insured's answers to the queries on the form must be weighed very carefully'. It will form part of the contract and if incorrect the insurers may reject liability.

One of the most common reasons for withdrawal of cover by insurers is that they are not notified of claims early enough. By way of reminder, an insured is under a duty to notify any circumstances which are likely to lead to a claim; it is not enough to wait and see whether court proceedings are issued against you. But what amounts to a notifiable circumstance ? The only safe approach to take is to notify any criticisms of your work that are made in writing; verbal complaints can be made in the heat of the moment but if someone feels strongly enough to record their concerns, it is conceivable that they may eventually resort to litigation.

The above considerations are also relevant when seeking to enter into a new or to renew an existing policy of insurance. You will be asked whether, at the time of completion of the Proposal form, you are aware after enquiry of any circumstances or material facts which might lead to a claim. Following the land mark case of Pan Atlantic v Pine Top [1994] 3 All ER 581, the court held that for an insurer to be entitled to avoid a policy for misrepresentation or non disclosure, the circumstance not disclosed would have to have had an effect on the mind of a prudent insurer in weighing up the risk (materiality) and in addition, the insurer must have been induced into the making of the policy on the relevant terms (inducement). Accordingly, an underwriter who is not induced by the misrepresentation of a material fact to make the contract can not rely on the misrepresentation or non disclosure to avoid the contract.

In the later case of St Paul Fire & Marine v McConnell Dowell [1995] Ll Rep 116, the Defendant sought construction works insurance on a government building and the insurance submission and its accompanying documents described the buildings as being constructed on piled foundations. The nature of the foundations of that building were subsequently changed involving the use of spread foundations, a fact which was not disclosed in the Proposal Form and the court held that non disclosure of this point was non disclosure of a material fact.
The extent of the duty upon a proposer was then further clarified in the case of Ontario Metal Products when it found that a material fact may include a fact or circumstance about which an insurer does not necessarily request details in the insured's proposal form but which, if known to the insurer, would result in that insurer refusing cover to the proposer or the seeking of a higher premium from the insured.

It is worth remembering that you are under a duty of utmost good faith when answering this question and a failure to disclose a material fact (which will usually come to light when a claim is made on your policy) will entitle your insurers to either repudiate your policy of insurance in full or alternatively, to allow cover to continue under the policy but to withdraw indemnity for that particular claim. Accordingly, although a proposer may be quoted a higher premium by bringing to the attention of his prospective insurers details of an anticipated claim, this is surely a small price to pay for peace of mind when any such potential claim becomes a reality.

HOW CAN YOU ENSURE THAT ALL MATERIAL FACTS ARE DISCLOSED TO YOUR INSURERS ?
Many professional firms or companies within the construction industry retain large numbers of staff with delegation taking place of appropriate tasks to members of that organisation. This inevitably leads to communication problems and often a problem will remain undiscovered because the relevant member of staff feels uneasy about accepting and/or reporting criticisms levelled against them. They may also persuade themselves that the problem will go away or that it can be resolved by further discussions. It is therefore extremely important that all staff who have dealings with clients are:-
A. educated in claims management,
B. encouraged to report to brokers or insurers on any criticisms that are levelled against themselves, their fellow staff or the organisation as a whole, and
C. trained staff to deal properly with complaints 6om clients.

A. EDUCATION
i. If staff are made aware of the effects of a non disclosure upon the organisation as a whole, they are more likely to take such matters seriously and consult with the appropriate person about the problem.
ii. Those staff who are responsible for appointing other professionals on a sub contract basis should also be aware of the need to ensure that, prior to any appointment, the professional indemnity insurance held by the sub contractor is adequate.

B. NOTIFICATION
i. Professionals never like to be criticised; we all pride ourselves in providing the best quality advice at all times (although to keep things in perspective, one must also remember that the person who never made a mistake never made anything !). All staff must be encouraged to report complaints at an early stage without fear of reprisals and often if discovered and dealt with at that stage, a complaint can usually be resolved. It may be helpful to arrange a regular meeting with your broker shortly after partners meetings or board meetings have taken place so that all potential claims can be monitored on a regular basis.

C. DEALING WITH COMPLAINTS
i. It is an obvious, but often forgotten point that liability should never be admitted in respect of a criticism, complaint or claim without first consulting your insurance brokers. An admission will prejudice your insurers' position and will amount to a breach of your policy.
ii. In addition, one should never confirm that insurers are dealing with a particular claim; any Claimant's solicitor worth their salt will seek to establish at an early stage whether a Defendant is worth suing. If they know that indemnity in respect of that claim is being provided by the professional's insurers, they will be aware that a potential 'pot of gold' awaits them should a judgment be obtained. This may well induce them to issue proceedings which would not otherwise have been commenced against an uninsured Defendant. By giving this information to a potential Claimant, therefore you could once again be in breach of your policy terms. Many insureds are surprised when advised not to reveal this information due to the fact that when they are appointed by the client, they usually have to provide details of their insurance in any event and argue that a client will know that they are insured. My response is always to the effect that, for the reasons set out above, although a professional will almost always carry insurance, if a professional breaches their policy terms, an insurer will not always carry that professional.

Richard Palmer LLB Partner, Professional Indemnity Unit, Watson Burton