Novating Contracts – The Insurance Time-bomb?

Do you ever have the employers professional team novated to you? Do you understand what all of the risks are?

Increasingly Professional Indemnity insurers are including a clause on their policies requiring that their insured (you) do not waive or in any way limit full rights of recovery or subrogation against another party.

It is common practice for an employer on a building project to engage their own professional advisers before appointing a main contractor. When the main contractor is appointed, the employers own advisers are often then novated across to the main contractor. A straight novation means that the contractor assumes the employers role in their contract with the adviser – complete with all the pre-existing terms and conditions of that contract.

Many professional advisers are engaged on their standard terms & conditions, which usually contain contractual caps on the advisers liability. For example, a very large international consultancy uses standard terms & conditions which cap all liability for the projects it consults on at £1M.

By accepting a novation from an employer, on the advisers standard terms, you risk invalidating your own Professional Indemnity policy.

Bear in mind that the contracts you work on now are the same ones that may generate claims in 3, 5 or even 12 years time and the policy which will respond is the one which is live when the claim is made against you. With a disconnect between your insurance arrangements and your contractual arrangements there is a real risk of creating a Professional Indemnity time-bomb with the potential to damage your business for years to come.

Irrespective of insurance you, as Main Contractor could be signing up to contracts and warranties, with requirements to maintain £10M Professional Indemnity, while the negligent party on the employers original professionals team have been able to cap their liability at a significantly lower level, leaving you exposed.

There are simple and cost effective (in many cases they are free) solutions to the problem. For further details or to discuss any other Construction Insurance issues please contact Mike Mitchell by email, or call 07496 888411.