Happy 1st birthday to the building surveyor limitation of liability scheme!

The Australian Institute of Building Surveyors (AIBS) Professional Standards Scheme (PSS) commenced on 1 July 2021 in all Australian jurisdictions (except Victoria which commenced on 1 September 2021). In its first year of operation, the PSS has assisted in improving practice standards in the building surveying profession. The PSS is intended to assist in stabilising the cost and availability of professional indemnity insurance for building surveyors, which was approaching a crisis around the time the PSS commenced. In this article, we summarise the key features of the PSS and share our experience on how it has impacted professional indemnity insurance claims in its first year of operation.

The PSS is a legislative instrument that obliges the AIBS to monitor, enforce and improve the professional standards of its member building surveyors, thereby reducing risk for the consumers who engage them. Members must hold professional indemnity (PI) and public liability insurance that meets the minimum requirements of the PSS. In recognition of these consumer protections, the PSS limits the civil liability of AIBS members for breaches of professional duty. The liability cap is $1M for buildings that are less than 2,000M² and 3 storeys or less (designated in the PSS as “Level 2” buildings), or $2M for all other buildings (“Level 1” buildings).

The PSS minimum PI insurance requirements

The PSS liability cap only applies where, among other things, the member holds professional indemnity and public liability insurance that meets the minimum requirements set out in the PSS. 

Some of the key PSS requirements for PI insurance that are not typically included in standard market wordings are:  

1. For ”Level 1” buildings the policy limit must be at least $2.5M where defence costs are included in the limit.
    
2. For ”Level 2” buildings the policy limit must be at least $1.5M where defence costs are included in the limit.
    
3. The policy must provide indemnity to PSS members and their relevant trading entity(ies) including any directors, partners, principals and all employees past, present and including those who join the firm during the period of insurance.
    
4. The policy must provide cover for claims arising from work performed by consultants or sub-consultants.
    
5. The policy must have a continuous cover extension.
    
6. The Policy must either:
   1. Provide at least one automatic reinstatement of the limit of liability; or
   2. Have an aggregate limit of liability at least twice the any one claim limit of liability.
       
7. The policy deductible must be set at an amount which the member has the financial capacity to pay at least twice in any 12-month period.
    
8. The policy must contain an aggregation clause which provides that one deductible is payable for claims that are causally connected or arise from the same act, error or omission.
    
9. Cover must be provided for misleading and deceptive conduct claims.
    
10. The policy must not contain any exclusion or combination of exclusions that:
    1. negate any mandatory PSS insurance requirement;
    2. remove cover for a “material proportion” of the professional liability claims that are likely to be made against the member; and
    3. are inconsistent with the professional activities of the member.

Insurers, brokers and building surveyors should ensure that their PI policies meet the abovementioned requirements. This includes considering whether a “material proportion” of claims against the building surveyor could be excluded under the policy (point 10(b) above). Determining what a “material proportion” means for a building surveying business that may be subject to infrequent claims may prove challenging. Building surveyors who work on Class 2 and 3 buildings but have cladding exclusions in their PI policies have had to carefully consider whether there is compliance with the PSS requirements in points 10(b) and (c) above.

The PSS liability cap

The AIBS PSS is established under the Professional Standards Act 1994 (NSW) and equivalent legislation in other states (collectively the PS Acts). Subject to a member’s compliance with the requirements of the PS Acts and the PSS, the PSS limits the “occupational liability” of members based on an act or omission occurring during the period when the PSS is in force. Further, the PSS provides for the AIBS to assess each member’s compliance with the PSS requirements and issue an accreditation before the member is admitted into the scheme. Accordingly, the liability cap is only available where the wrongful conduct occurs after the member’s admission into the PSS.  The cap applies to the member’s liability for damages, interest and claimant’s legal costs. 

The provisions of the PS Acts governing how the cap applies to multiple allegations of wrongdoing are not straightforward. In summary, the cap applies to the damages awarded for a “single claim”, and to all causes of action founded on an act or omission to which the cap applies. Claims by persons who are associated or have a joint interest are treated as a single claim. The term “single claim” is not defined in the PS Acts and has not yet been defined in case law. It remains to be seen how the cap will apply in construction litigation involving multiple defects alleged against a member.

The PS Acts prohibit contracting out of the PSS which includes the operation of the liability cap. Building surveyors should be aware of the contracting out prohibition when drafting/negotiating consultancy agreements. Building surveyors who work for public entities can apply for an exemption from the PSS.

Where to from here?

There have not yet been any litigated claims against building surveyors involving a wrongful act that occurred after the member’s admission to the PSS, and for an amount exceeding the liability cap, that have run to judgment. Whilst there have been some modest improvements in the affordability and availability of PI insurance for building surveyors during renewals this financial year, the sector remains challenging and there is no evidence yet that the PSS has had any short-term effect. We anticipate the effects of the PSS will flow through over the next few years.

In claims involving wrongful conduct that occurred after 1 July 2021, building surveyors who are accredited PSS members now plead the PSS limitation of liability defence to both the plaintiff’s claim and the contribution claims of the other defendants. The plaintiff will usually put the building surveyor to proof of compliance with the requirements of the PSS and the PS Acts, in which case the building surveyor will have to produce its PI insurance policy to verify compliance with the minimum PSS insurance requirements.

Consequently, we expect there will be strong demand by building surveyors for PI policies that are marketed by insurers as being compliant with the PSS minimum insurance requirements. We also anticipate instances may arise in the medium term where the building surveyor is unable to rely on a limitation of liability defence because the PI insurance policy does not meet the minimum PSS requirements, which might give rise to a claim against the company’s directors (in the case of building surveyor companies) for failing to obtain compliant insurance and/or a professional liability claim against the insurance broker.

Until a Court gives a judgment on the operation of the AIBS PSS scheme, the strength and effect of the building surveyor’s limitation of liability defence will continue to be assessed by applying the principles from Court decisions applicable to professional standards schemes in other professions, primarily the long-running accountants’ and solicitors’ schemes.