PROFESSIONAL INDEMNITY INSURANCE… a better understanding
Kevin McParland ACII sheds some light on the need for PI Cover, its origins and why practising designers should be covered. Compared with fire and marine insurance the need for what is generally known as Professional Indemnity Insurance is a recent development. A landmark legal case in 1964 – Hedley Byrne v Heller and Partners – gave birth to this new class of cover.
Hedley Byrne & Co Ltd v Heller & Partners Ltd  AC 465 is an English tort law case concerning pure economic loss, resulting from a negligent misstatement. Before this decision, the idea that a party may owe another a duty of care for statements that had been relied upon had been rejected. The only remedy for such losses was in contract law, provided of course that a contract was in place.
In Hedley Byrne the House of Lords overruled the previous position, and recognised liability for pure economic loss not arising from a contractual relationship, introducing the concept of “assumption of responsibility”.
So what happened?
Hedley Byrne was a firm of advertising agents. Their client, Easipower Ltd, put in a large order. Hedley Byrne wanted to check their financial position and credit-worthiness, and asked their bank, National Provincial Bank, to get a report from Easipower’s bank, Heller & Partners Ltd., who replied in a letter that was headed, “without responsibility on the part of this bank”. Subsequently, Easipower went into liquidation and Hedley Byrne lost £17,000 on the contracts. Hedley Byrne sued Heller & Partners Ltd. for negligence, claiming that the information it had provided was given negligently and was misleading. Heller & Partners Ltd. argued there was no duty of care owed regarding the statements, and in any case liability was excluded.
The court found that the relationship between the parties was “sufficiently proximate” as to create a duty of care. It was reasonable for them to have known that the information that they had given would be likely to have been relied upon for entering into a contract of some sort. This would give rise, the court said, to a “special relationship” between the parties, in which the defendant would have to take appropriate care in providing advice in order to avoid becoming liable for negligence. However, on the facts, the disclaimer was found to be sufficient to discharge any duty created by Heller’s actions.
Because there was an express disclaimer of responsibility, there was therefore no liability. This case established the doctrine of negligent misrepresentation, but in this particular case, the disclaimer effectively barred the claim. The matter was appealed but was dismissed.
This legal decision, which has never been overturned, means that any person, including a third-party, can sue another person or organisation for a breach of their duty of care following negligent advice and for the recovery of any economic loss which flows from that breach, even though here may have been no injury to a third-party or damage to third-party property. This very important law case transformed the insurance landscape in 1964 and made it important for many businesses, including those far removed from the world of what we ordinarily think of as professional consultants or professional advisors, to complete their suite of liability insurances with the purchase of professional indemnity insurance.
In the subsequent 50 or so years, the evolution of case-law applicable to professionals and other advisers, coupled with responsiveness of the insurance market, has provided a wide choice of insurance products at affordable prices.
When professionals purchase this cover they are, in effect, under the terms and conditions of the policy, transferring their negligence risk to the insurer providing the cover. Without the cover, professionals would be vulnerable to claims from a variety of sources. It is important to bear in mind also that even claims that have no merit require to be defended, often at significant cost – which is covered by the policy.
All professionals, irrespective of how they view the risks presented by their practice, should seek to protect themselves. Indeed, in many professions it is compulsory for practitioners to carry professional indemnity cover. The cost of this risk-transfer protection is relatively inexpensive when considering the reputational and financial damage that may emanate from a single error.
In subsequent articles Kevin will explain more specifically what considerations arise for design professionals when buying professional indemnity insurance. Care has to be taken not to miss the pitfalls that might be hidden within the small print of an unsuitable policy.
If you wish to compare your current PI cover or if you need a new quote please send your details to email@example.com