Practical Law

Time and time again, clients are confused about the differences between an obligation to maintain insurance and a limitation on liability clause. Confusing the two is a daily occurrence amongst builders, engineers, project managers and even company directors. Consequently, it is common for a client to return from a meeting and say “I agreed with James it’s £10 million PI” only for you to later find out that there has been a mix-up between the £10 million liability cap being offered and the amount of professional indemnity insurance (PII) to be maintained under the contract.

Liability to insure and caps are not the same thing

The key point to emphasise to the client is that an obligation to maintain insurance to a specified amount is not the same as a clause limiting a party’s liability under, or in connection, with the contract. Most building contracts (with design responsibility) and professional appointments include a clause requiring the design and build contractor or consultant to maintain PII to an agreed amount for a defined term.

Capping liability

A liability cap is entirely different. Parties to a contract can, subject to the Unfair Contract Terms Act 1977, look to limit or exclude liability they may incur to each other (except in respect of personal injury or death). In comparison to the obligation to maintain PII, the liability cap is potentially the more damaging, or rewarding, clause in the contract. A liability cap that is upheld by the courts can act as a powerful shield to a claim from the other party, particularly if the cap is an all embracing “aggregate” cap on liability.

However, an employer is unlikely to suffer substantial damages arising from a breach of the PII clause alone. At most, the PII obligations in a contract may require a party to notify the employer in the event it has failed to maintain the agreed level of insurance. It can also act as a useful early indicator to the employer of the consultant’s financial strength, especially if the consultant is not capable of providing evidence of sufficient (or any) PII before the contract is entered into.

“In aggregate” and “each and every claim”

The confusion is understandable when both the limitation on liability and professional indemnity clauses refer to terms such as “in aggregate” and “each and every claim”. To clarify, PII cover may be:

• On an “each and every” basis, which means the level of insurance cover for each claim up to an agreed limit.
• “In aggregate”, which sets a limit for all claims made during the policy term.

Similarly, a limitation on liability clause may be:

• An “aggregate” cap. For example, a cap of £1 million in aggregate means the parties have agreed that the value of all claims under (potentially also “in connection with”) the particular contract taken together must be no greater than £1 million.
• A “per claim” cap. For example, a per claim cap of £1 million means the value of each claim under the particular contract must be no greater than £1 million. Note, a per claim cap does not necessarily cap the total number of claims made under the contract.

In practice, it is difficult to see how an employer benefits from the inclusion of an obligation to maintain PII of £10 million when the same contract provides for, elsewhere, a properly drafted £1 million aggregate cap on liability, but it happens.

Best advice

In dealings with your client, please remember that confusing the insurance obligations with a cap on liability means potentially more time is spent on internal risk management discussions than is absolutely necessary. Clarify the distinction at the outset. If confusion still exists, it’s best to pick up the phone. It does not take long to explain that the PII clause “is not a cap.”

Only when your client truly understands can you then move on to risk allocation discussions with the other side, confident that you will get insurance requirements that reflect the actual cover maintained by that party.