It’s a strange thing, but often a consultant who is liable and has been negligent may be better protected than one who is liable but hasn’t been negligent

David Johnson in his article on the recent case of Lumbermans Mutual Casualty Company vs Bovis Lend Lease drew attention to the problems there might be in obtaining an indemnity from insurers for a payment made under a global settlement (5 November, page 52).

The judge in that case also ruled on other issues concerning the wording and scope of the professional indemnity insurance policy involved. This opened the possibility that even where the loss allegedly covered by a policy is ascertained, as the judge said it must be, insurers may still argue that liability for that loss is not covered.

The judge’s remarks highlighted a problem that could lie in wait for consultants and contractors with policies written in similar terms, or for those with relatively cheap, and increasingly popular, negligence-only policies.

The danger is that a consultant may be in breach of their contract with their clients, but without being negligent, in which case there may be no cover under their PI insurance. The terms they would be in breach of are known as “strict” or “absolute” obligations, and are often included in bespoke appointments. Clients also seem to assume that the liability imposed by these sorts of obligations will be covered by PI insurance.

This PI policy in Lumbermans covered “any neglect, error or omission” by the insured, which is not unusual. The judge considered whether the words “error or omission” referred to negligent error or omission only. He said that as “neglect” clearly involved negligent conduct and specifically negligent omission, the words “error or omission” must be intended to refer to non-negligent conduct that gave rise to liability, but not the breaking of a strict contractual term.

The judge cited the case of Rylands vs Fletcher as an example of non-negligent liability that would be covered. This established the principle that a person could be liable, regardless of any negligence on their part, for all the damage caused if they kept on their land something likely to do mischief if it escaped. This case concerned water escaping from a reservoir.

Clients seem to assume the liability imposed will be covered by professional indemnity insurance

So, to recap: the judge decided that negligent breaches of the contract would be covered by PI insurance because they gave rise to liability for negligence independently of the contract, but the words “error or omission” would not cover other breaches of contract, unless they also founded an action in tort where negligence was not required (such as liability under Rylands vs Fletcher). Therefore, such policies would not cover strict obligations unless there had been negligence or a liability outside the contract.

What terms could give rise to such strict obligations? If the consultant is required to “ensure” or “procure” that something happens, this is a strict obligation. They might be asked, for example, to ensure the most cost-effective solution is used or to procure that the construction is in accordance with their plans. If they fail to achieve these things, they will be in breach of their contract, and if they have not been negligent, a policy with this sort of wording may not provide an indemnity for the damages.

The same would apply to an obligation to comply with statutes or the employer’s requirements or the brief. Again, the consultant would be liable for breach of contract if they failed to comply, and if they had not been negligent there might well be no cover. The non-negligent breach of an obligation to comply with other agreements, such as the building contract, would probably not be covered either.

Almost all bespoke appointments include an obligation to comply with the programme. Sometimes the appointment provides that the consultant is relieved of liability if they can show they have been prevented by reasons beyond their control. However, if they fail to comply with the programme and this was not for reasons beyond their control, it does not necessarily mean they have been negligent, and so, again, liability for failure to comply with the programme may well not be covered.

Rachel Barnes is a partner in solicitor Beale & Company