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Professional indemnity insurance: Who is responsible to ensure that your scheme is protected?

Professional indemnity insurance cover is issued to provide insurance cover for a service provider in case their clients suffer a financial loss, resulting from the negligent act, error or omission of the service provider while working for their client.

Trustees’ responsibility

While a community scheme does not necessarily need this kind of insurance, it does remain an important consideration for the trustees or directors when contracting certain professional service providers to perform tasks for, or on behalf of, the scheme.

By ensuring that the relevant service provider has an active professional indemnity insurance policy in place, the scheme has some measure of comfort that if the service provider causes financial loss to the scheme, the scheme is more likely to be compensated for their loss.

With the demands being made on community schemes to comply with specific requirements of the CSOS and STSM Act legislation, the trustees are obliged to enter into contractual agreements with a number of professional service providers. These include managing agents, auditors, property valuers, and possibly engineers and various construction industry contractors.

The responsibility of valuers, building contractors and engineers

In terms of current legislation, the trustees are obligated to obtain insurance for the full replacement value of the scheme property. Furthermore, the legislation compels them to do so under the advice of a professional valuer.

What then happens if the valuer makes an error or provides poor advice in his determination of the replacement value? When the insurer applies average to a claim and the property owner is found to be under insured despite following the advice of the valuer, who then bears the responsibility for the property owners’ financial loss?

Similarly, if a construction industry contractor is appointed to provide detailed advice or complete a particular development or improvement of the property, and this process leads to a financial loss for the property owner due to the poor advice or error of the contractor, who then carries the responsibility for the financial loss? Engineers are often called on to confirm the stability of retaining walls in order to secure insurance thereof. The trustees should be asking whether the engineer is protected by professional indemnity in the event that his advice and approval proves to be incorrect and the insurer repudiates a possible claim.

Depending on the circumstances of the contract, the professional party may require insurance other than professional indemnity. A building industry contractor for example should carry a contract works policy to protect against damage caused to scheme property by him while on site.

It is our view that trustees should carefully consider which contractors and professionals they engage, and where appropriate, ask whether they carry professional indemnity cover. For example, it is very important that a valuer, insurance advisor or structural engineer carry such. This where a managing agent’s guidance can be important.

In conclusion: It is vital that the trustees, as the appointed representatives of the scheme, ensure that every reasonable precaution is taken to protect not only themselves but the entire scheme from any potential financial loss due to the negligence of any other party contracted by them.


Author:  Bruce Gibson

Addsure is a leading sectional title insurance broker. Get fit and proper advice from advisors who understand sectional title.

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