Professional indemnity insurance clause in conditions of engagement

The case of 'Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd' [2012] EWHC 2137 (TCC) relates to conflict between a liability clause and insurance clause in conditions of engagement.

The claimants alleged that the defendants had been negligent in their management of a construction project, and that their limitation of liability clause was unenforceable.

The liability clause said:

'Liability for any negligent failure by Us to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms... and in no event shall Our liability exceed the fees paid to Us or £1 million whichever is the less'

The insurance clause said:

'We shall take out a policy of Professional Indemnity Insurance with a limit of indemnity of £10 million for any one occurrence or series of occurrences arising out of any one event'

The amount of the claim as determined by the court was £226,667. The liability cap if effective would have capped liability to £111,321, the amount of the Defendants’ fees.

The Defendants agreed their terms were 'standard terms'. This meant that S 3(2) of the Unfair Contract Terms Act 1977 applied which required an exclusion or limitation of liability to be reasonable. If not reasonable it was unenforceable.

The Defendants claimed the liability cap was reasonable and therefore enforceable because:

• The terms were clear, unambiguous and would have been understood by their client if the client had taken the trouble to read them.
• There was no inequality of bargaining position.
• The Claimants had not received an inducement to accept the terms.
• The Claimants had the time, opportunity and freedom to turn to an alternative project manager.
• Generally commercial parties should be left to apportion risks as they see fit.

The Judge decided the limit was unreasonable and therefore unenforceable. This was because the defendants had contracted to hold £10 million professional indemnity (PI) insurance which exceeded the liability cap. The Judge felt that the claimants had in effect paid for access to £10 million of PI cover, and so it was unreasonable to deny access to that insurance:

'The effect of upholding the limitation clause would be that, although the parties had contracted for the insurance of the risks and (implicitly) for the Trust to pay for that insurance, far the greater part of that insurance would be rendered illusory.'

NB: An additional ruling was made in this case in relation to a project managers duty to ensure a contract is entered into rather than relying on a letter of intent. See: Ampleforth Abbey Trust v Turner & Townsend Project Management.

[edit] Related articles on Designing Buildings Wiki

• Ampleforth Abbey Trust v Turner & Townsend Project Management.
• 3D animation for insurance risk analysis.
• Clause.
• Contractors' all-risk insurance.
• Directors and officers insurance.
• Letters of intent.
• Professional indemnity insurance.
• Professional indemnity insurance in construction.
• Residual value insurance.
• Run-off cover.

[edit] External references

• Unfair Contract Terms Act.
• The full decision: Ampleforth Abbey Trust v Turner & Townsend Project Management.