Fees & Professional Indemnity Insurance

Peter Sarlos , 11 November 2013

Does your professional indemnity insurance preclude claims for fees? Peter Sarlos – architect, lawyer and chartered surveyor – outlines the issues. 

In a number of instances over the past few years, architects have received insurance claims for the return of fees or have served a claim for the payment of fees. As a result, these architects – perhaps unwittingly – may have exposed themselves to the loss of cover supposedly offered by their professional indemnity insurance (PI insurance).

This loss of cover is a result of the exception clauses included in most PI insurance contracts. In some cases these clauses are worded ambiguously and are capable of being interpreted in different ways.

The provisions of one such exemption exclude any claim “…for fees by way of damages or otherwise…” (Policy 1).

Compare this with the wording of another policy that includes a provision for the recovery of fees that is subject to specific conditions:

“…WE agree to provide cover in respect of any payment of the INSURED’s fee (or balance of the outstanding fee at the time the circumstances outlined within this clause 3.21 arise and are submitted to US for consideration) where a client has expressed dissatisfaction with the work undertaken by the INSURED and demonstrates reasonable grounds for such dissatisfaction and subsequent refusal to pay such fees (including amounts the INSURED is legally obligated to pay subcontractors at the time of the refusal to pay such fees) and threatens to bring a CLAIM against the INSURED for a sum greater than the outstanding fee but agrees not to pursue such CLAIM if the INSURED agrees not to press for their outstanding fee….” (Policy 2)

In recent years, the wording in Policy 1 has been interpreted to mean that the architect has lost the protection of its policy in what can be considered questionable circumstances. This was the situation in the two following examples. In each case the insurer sought to administratively deny cover to the architect based on the interpretation of its exclusion clause.

Case 1

The clients decided that they did not like the architect’s design of their house and made a claim under the Consumer Claims Act (NSW). That claim was formulated to comply with the terms of that Act as a claim for the return of fees. The facts of the claim were, in fact, a breach of contract and professional negligence.

The insurer administratively interpreted the clause to be excluded and refused to support the architect.

The architect defended the claim and was successful. As the jurisdiction did not make decisions on costs the architect lost in any event. 

Case 2

The clients sought to fit out premises for use as an optical laboratory. During the course of the work the architect sought additional fees to cover a series of changes in the brief and scope. Prior to the development application (DA), the architect invoiced the client for additional fees. The client responded by terminating the architect’s services, copying the PDF drawings submitted for approval prior to submission of DA and submitting them and using them for CC and then issuing them for construction. The builder contacted the architect with a series of RFIs.

The architect lodged a claim for fees. In response, the client crossed for breach of contract and negligence and sought to invoke the PI insurance policy.

The insurer administratively interpreted the clause to be excluded and refused to support the architect.

Such outcomes discourage architects from becoming involved in claims for fees and have a consequential and direct impact on the ability of practices, particularly smaller ones, to maintain the level of service that we expect of ourselves.

Contrast these decisions, and the interpretations they are based on, with the provisions in Policy 2.

The clause in Policy 2 is a clearly defined, unambiguous inclusion clause. As such, it is likely to have resulted in a different decision. Discussions with other insurers indicate that their decision-making processes are handled differently and that the harshness meted out in the above decisions is not a universal practice.

This raises a number of questions:

  • Why do some insurers offer a policy that could be seen as working against the interests of architects?
  • Why do some insurers rely on (ambiguous) exclusion clauses while others provide carefully worded inclusion clauses?

For the moment, the answers are left to you to ponder. 

The ACA recommends you check the wording of your policy and ensure that it does provide you with effective cover for situations as described above.


Peter Sarlos is an architect, lawyer and chartered surveyor (building). This article was first published in ACA Communique, November 2013.