Risk, liability and insurance

Overview

• Architects face a range of risks in the context of construction projects and the scope of the duty of care owed to clients in providing architectural services is broad.
• The unfair allocation of risk under D&C contracts could increase architects’ exposure to liability and, in turn, reduce protection for clients.
• Efforts by industry bodies to tackle the imposition of unfair contract terms on architects, which heighten their exposure to risk, need to be ongoing.
• Further initiatives to entrench the use of standard form contracts, such as AS4122, are also needed, particularly in the context of D&C procurement.
• The availability of insurance to help architects manage risk may be affected by increased insurance costs and limitations on coverage.
• Education and support to assist architects to manage risk would be useful, especially for smaller practices.
• Compliance with professional standards and insurance obligations and investment in sound risk management practices will help architects manage risk.

A. Background

155. Construction projects are inherently risky.[1] Materialisation of risk can result in a project deviating from expected outcomes and, in turn, can compromise the project itself.[2]

156. Risks that could arise in a construction project have been categorised into five main categories – namely, time, cost, quality, safety and the environment.[3] Factors giving rise to time and cost risks are likely to be similar and include inadequate project planning, co-ordination and communication, inflation of material costs, labour shortages, approval delays, variations, and emergence of disagreements and conflicts. Quality and safety risks may occur due to lack of co-ordination, lack of skilled and experienced workers, and tight budgets. Environmental risks include unexpected site conditions and bad weather. Given the spectrum, nature and potential consequences of these risks for a construction project, the management of risk management is a crucial aspect of the building delivery process, including for architects.[4]

157. The Victorian and NSW Codes impose a range of obligations on architects regarding the provision of architectural services. Among other things, architects are required to have suitable skills and experience, to maintain thorough knowledge of architectural services, to act with reasonable care in the provision of architectural services, and to discharge obligations diligently and promptly. Compliance with these obligations may assist architects in managing risks that could arise in the context of a construction project. Professional indemnity insurance can also provide some protection for architects against claims for alleged negligence and breach of duty of care arising from acts, errors and omissions in the performance of professional services. In Victoria, architects are prohibited from carrying out work as an architect unless covered by the required insurance[5] and the ARBV may take steps to immediately suspend the registration of an architect in cases where this obligation has not been complied with.[6] In NSW an architect may be removed from the register if the architect has not met professional indemnity requirements.[7]

158. This chapter considers various issues concerning architects’ exposure to legal risk, particularly in light of current market dynamics within the Australian construction sector.

B. Key issues

The unfair allocation of risk under certain types of contracts could increase architects’ exposure to liability

159. In the Australian Construction Industry Research Report (2020), risk allocation is noted as one of the most commonly nominated issues affecting the industry.[8] The report states that ‘there is a general tendency and expectation to shift risks down the contracting chain to parties who are not necessarily best suited to manage such risks’.[9]

160. In a similar vein, in its submission on unfair contract terms, the ACA (2014) refers to increasing anecdotal evidence that many architectural practices are asked to engage in contracts that unfairly disadvantage them. The ACA notes that this is a particular concern for small architectural businesses, which have few resources to negotiate or contest the contract, and often suffer an imbalance in bargaining power.[10] The submission references the following examples where risk may be unfairly allocated to architects, including in relation to matters that are outside an architect’s area of professional expertise or ability to control:[11]

• Architects are regularly expected to assemble full project delivery teams and to accept primary responsibility for submission preparation.
• Some emerging government contracts require the architect as primary consultant to offer unlimited liability.
• It is increasingly common for projects to require insurance that is far in excess of the scale of the project.
• Architects may be exposed to the same liquidated damages as building contractors for delays to completion of a construction project despite the significant differences in fees charged by these parties respectively.

161. Perversely, these types of unfair contract terms may result in the allocation of risks away from those who are best placed to manage them, such as developers and contractors. The problem is compounded by the fact that contracts for large-scale projects are typically bespoke. Notwithstanding differences in the specific requirements of these projects, the ad hoc and typically opaque contractual arrangements may be unnecessary given the predictable construction approaches, processes and technologies used for most Australian projects.

162. Unfair contract terms can provoke defensive and risk-averse behaviour, including more investment by architects in mechanisms to manage legal risk.[12] The ACA suggests that managing the risks of unfair contract terms could increase the cost of delivery of services, which cannot be easily absorbed in a market that is already intensely competitive.[13] Many architects may lack the skills or resources to understand their obligations and exposure to risk and may be unable to negotiate better contractual arrangements to reduce their exposure to risk.[14]

163. The Australian Consumer Law may provide some architectural practices with recourse in cases when they have been saddled with unfair contract terms. However, architects may be inclined to accept, rather than challenge, unfair contract terms out of fear of losing work. As noted by the ACA, some architects may not have sufficient work to allow them to negotiate with those offering work.[15] Ultimately, unfair allocation of risk can have the greatest impact on owners and end-users. This can increase project costs, compromise built outcomes and limit recourse for owners and end-users against the appropriate parties because of complex and counter-intuitive risk-sharing arrangements.

Architects’ ability to discharge the broad scope of the duty of care owed to clients may be compromised in the context of certain procurement models

164. Design professionals, including architects, owe a common law duty of care to their clients that is independent of any duty that may be owed under contract and obligations that are imposed under the regulatory framework. Failure to discharge the duty of care may give rise to claims in negligence. While there is limited available data on this matter, an article published in 2018 on the ACA’s website suggests that actions in negligence against architects are on the rise.[16]

165. The scope of an architect’s duty of care when providing architectural services is broad. Whether or not that duty has been breached will depend upon the particular circumstances of each case, although the following general points can be made:[17]

• Formulation of design: Generally, where a project has an inherent element of risk, the architect has an obligation to warn the client of that risk. Where a project calls for judgments to be made outside an architect’s area of expertise, they may be negligent in failing to engage the services of a more qualified individual, such as a quantity surveyor or structural engineer.
• Documentation: The standard of care expected in preparing design plans and specifications is to avoid negligent errors or omissions that may cause a client to incur additional costs.
• Representations: The duty of care may extend to oral representations made by an architect to a client. Negligent misstatements that are relied upon by a client and cause loss or damage may expose an architect to liability.
• Contract administration: If an architect is responsible for contract administration, care must be exercised to ensure that the project meets specifications, is on time and on budget. The architect may be required to monitor progress, supervise work and issue instructions to others involved in project delivery with the contract to discharge the duty of care.
• Cost: Reasonable skill and care must be exercised when preparing cost estimates. The duty of care may extend to advising the client about risk, the effect of inflation on construction costs, and the advisability of engaging a quantity surveyor in order to provide a more accurate estimate of those costs.
• Third parties: An architect may have a duty of care to a third party who relies on designs and documentation prepared by the architect if that party suffers loss or damage, even if the architect has not entered into a contract with that third party or engaged directly with the party, such as subsequent property owners. A duty of care may also be owed to contractors and their employees.

166. As illustrated by the Lacrosse case (discussed earlier in this report), an architect’s capacity to ensure that the duty of care is discharged may be compromised in the context of certain construction projects, particularly where:

• the architect’s ability to influence and control design processes and decisions and choice of materials is limited
• the architect has limited involvement in project planning and administration
• communication and co-ordination between contractors is limited
• the architect has been engaged for ‘partial services’ and is not able to oversee final project delivery.

167. However, it should be noted that the increased exposure to risk may be self-inflicted in some cases. For example, complaints received by the ARBV include cases where architects do not have the skills or experience to know whether and when to engage other specialists if the scope of work extends beyond their sphere of expertise.

168. The ARBV is also increasingly encountering cases where employees, particularly in large practices, are purporting to act under the supervision of architects for periods far in excess of the timeframe required to obtain practical architectural work experience to be eligible for registration. Anecdotally, the ARBV and NSW ARB understand that some of these employees may choose not to be registered, even though they are eligible, because they may perceive that they lack the requisite expertise, whereas others may believe that they are less accountable to the regulator. Either way, appropriate insurance cover may not be in place for the architectural services these practitioners provide as a consequence. In addition, this scenario can contribute to professional complacency and may mean that compliance with professional standards is compromised because these practitioners are not registered.

The availability of insurance to manage risk may be affected by increased cost of and limitations on coverage

169. The capacity of architects to adequately manage risk may be adversely affected by rising insurance costs and limitations on availability of insurance coverage. In an article in the RIBA Journal (2021) noting anecdotal evidence from UK architects, the following conclusions were reached regarding professional indemnity insurance for architects:

Overall, the findings are clear: PII costs are rising for the majority, and exclusions and restrictions are regularly being applied to renewed policies. Because of these exclusions and restrictions, it is becoming difficult for architects to work in certain sectors – often the ones where they are most needed. For many, the issue of PII is not an inconvenience or a regrettable expense. It is a threat to their business.[18]

In avoiding risk because of the impact of insurance restrictions, architects may diminish their ability to win work and to influence design outcomes when they are engaged.[19]

170. In Australia, a higher proportion of buildings with defects has reportedly resulted in either significant increases in insurance premiums for practitioners, exclusions such as for flammable cladding or, in some cases, some practitioners are unable to obtain insurance at all.[20] It has been suggested by the ACA that it is increasingly common for insurance requirements to far exceed the scale of a construction project.[21]

171. Anecdotally, some private and public sector clients require architects to agree to unlimited liability, even though it is legally impossible for many entities to offer this (e.g. if they are companies with limited liability). The challenges in obtaining insurance could conceivably lead to the perverse situation that architects are disinclined to comply with their insurance obligations because insurance is too expensive or architects are prevented from doing so because certain projects are uninsurable. This leaves architects exposed to risk but also compromises clients’ access to recourse in the event that a legitimate claim against an architect exists because contract clauses that impose unlimited liability could void the architect’s insurance policy. Clients may not be aware of this risk when they demand that architects offer unlimited liability.

172. Despite these concerns about the availability of insurance, the ARBV and NSW ARB have observed that there are relatively high levels of compliance with architect’s insurance obligations in both Victoria and NSW. However, architects will need to ensure that they are aware of the scope of coverage for each project and that the insurance is adequate.

C. Findings

173. Architects are exposed to a broad variety of risks in providing architectural services. The undue reliance on unfair contract terms by developers and builders, particularly in the context of D&C procurement models, is well-known and can increase the exposure of architects to risk and liability. Moreover, the evidence indicates that unfair contract terms provoke defensive, risk-averse behaviour, which could lead to increased costs to mitigate risk that ultimately results in disadvantage for clients. In the worst-case scenario, unfair contract terms can render projects uninsurable, which removes protection for architects as well as their clients.

174. There is some concern about eligible practitioners in large practices failing to seek registration. These practitioners may fall short of the professional standards expected of architects and, consequently, undermine the credibility and reputation of the practices of which they are a part. Furthermore, eligible practitioners that provide architectural services without being registered may be in breach of the title offences under the regulatory framework.

175. Rising insurance premiums and exclusions from insurance coverage for certain aspects of architectural services are also a cause for concern. These limitations on the availability of insurance may deter some architects from obtaining insurance. Apart from this constituting a serious breach by architects of the regulatory framework, clients may also be left without adequate recourse if the provision of architectural services results in loss or damage.

176. Compliance by architects with their professional standards and insurance obligations can help to mitigate some of these risks.

D. Regulatory role

177. The ARBV and NSW ARB will continue to support architects to comply with their professional standards and insurance obligations as this will assist architects to manage risk. Where necessary, action will be taken in cases when these obligations have been breached to address risk exposure for clients and for the sector more generally.

E. Role of other stakeholders

178. Industry bodies have already attempted to tackle the problem of unfair contract terms, particularly by educating members about the risks they create for architects. These efforts need to be ongoing until the prevalence of such terms subsides. Additional initiatives to entrench the use of standard form contracts, such as AS4122, are also needed to reduce the incidence of unfair contract terms.

179. Architects in small practices could also benefit from additional education and training about effective risk management, particularly in the D&C context.

F. Implications and recommendations

[1] A. Burke, ‘Risk, innovation and the business of architecture’ (2015) 104(2) Architecture Australia, pp. 50–2, at 50.

[2] M. Ali Rezvani Befrouei, ‘Identification and Management of Risks in Construction Projects’ (2015) 3(5) American Journal of Civil Engineering, p. 170.

[3] Ibid.

[4] A. Burke, n. 214 above, p. 50.

[5] Section 8B(1) of the Victorian Act.

[6] Section 36A(1)(f) of the Victorian Act.

[7] Section 24(2)(h) of the NSW Act.

[8] J. Sharkey et al, n. 4 above, p. 6.

[9] Ibid. p. 26.

[10] Association of Consulting Architects, n. 38 above, p. 1.

[11] Ibid. p. 3.

[12] R. Imrie & E. Street, ‘Risk, Regulation and the Practices of Architects’ (2009) 46(12) Urban Studies, pp. 2555–76, at 2561.

[13] Association of Consulting Architects, n. 38 above, p. 1.

[14] Ibid. p. 4.

[15] Ibid.

[16] K. McLeish, ‘Common Claims and How to Avoid Them’, The Business of Architecture (13 March 2018) accessible at: https://aca.org.au/common-claims-and-how-to-avoid-them/.

[17] Various cases regarding an architect’s duty and standard of care are referenced in D. Kearney, ‘Professional Liability - Design Professionals’, Issue No. 66, Australian Construction Law News, pp. 32–43.

[18] A. Malleson, ‘PII is failing architects, say RIBA members’, The RIBA Journal (27 August 2021) accessible at: https://www.ribaj.com/intelligence/pii-is-failing-architects-riba-membe….

[19] C. Jamieson, n. 23 above, p. 13.

[20] The Centre for International Economics, n. 176 above, p. 50.

[21] Association of Consulting Architects, n. 38 above, p. 3.