Anyone who has worked in construction (or watched an episode of Grand Designs) knows how quickly a passion project can turn into a nightmare. When that happens, building owners can either pay for the problem, chalking it up to bad luck, or sue everyone involved. When money is tight, the second option is often more appealing.

The cost of defending a claim and, if necessary, paying any judgment or settlement can be significant. While insurance may cover most of that cost, it cannot compensate for all the time and anxiety that claims can cause.

Our Christchurch insurance litigation team have years of construction disputes and insurance experience. Although claims cannot always be avoided, there are some common themes to them. Here is our general explanation of claims against professionals and our top tips to avoid them.

The construction claims landscape

As the volume of construction increases, the number of claims increases in proportion. Although the reasons for claims differ, the majority relate to the design and construction sectors, or those supporting them through reporting and project management. For a variety of reasons, the construction claims landscape is very active. The majority of claims start with a building owner but invariably involve a number of parties. Claims can result from any level of involvement in a project, no matter how minor, and often years after the event.

What can people claim for?

Claims are often brought in contract, tort or under consumer legislation. Often the same problem can give rise to a claim in each, and generally speaking, professionals will have liability if they fail to do what a reasonable professional would have done in the circumstances. Naturally, there is quite often debate about what the professional was doing and the standard of performance they have reached. Any specific contractual terms (whether written or verbal) can also affect roles and responsibilities.

A word about professional complaints and discipline

Construction work is regulated under the Building Act 2004 and a variety of other professional and membership organisations. The role of regulatory bodies is to uphold professional standards, not to provide compensation to a complainant. However, some complainants still use disciplinary processes hoping it may provide leverage or information for any later claim.

A building surveyor that is qualified as a LBP can be disciplined by the Building Practitioners Board if they breach the Code of Practice, are convicted of a criminal offence, perform their services negligently, make a false representation, fail to comply with building consent, or bring the discipline into disrepute. Disciplinary proceedings can result in, among other things, formal reprimand, retraining, deregistration, and a fine of up to $10,000. Breaches of the NZIBS Ethics and Code of Practice can also affect membership with NZIBS.

When do I have to tell my insurer about a claim?

You are normally required to notify your insurer when you receive a claim (ie when you are served with court papers) or if there are “circumstances giving rise to a claim.” This is a much broader concept and can include becoming aware that you have made a mistake which may cause loss or a disgruntled client making threats of a claim. Cover can be affected or lost if a claim is not properly notified. If in doubt about whether to notify, you should speak with a broker or your lawyer.

The claims process

If the claim is accepted, the insurer might appoint a lawyer, or (if court proceedings still seem a way off) your insurer might just guide you through the process initially.

If your insurer instructs lawyers, they act for the insurer and your insurer has control over the claim. You will also have a policy obligation to co-operate with the appointed lawyers. In practice, that usually happens naturally because the insurer and insured often have the common goal of wanting to resolve the claim. The appropriate strategy for resolution, and how claims resolve, varies. Sometimes that will be going to court, or it might be convincing another party to withdraw their claim or to settle it.

Top five tips to avoid claims

Where possible, it is better to prevent claims. The best advice is specific to your business and risk exposure, but our top five tips are:

1. Always get a contract signed that sets out your role (and fees) and stick to it

Some construction professionals forget to get a contract signed, only do so after some (or all) of the work has been done or depart from what they have agreed to do part way through the project. The contract is the first thing a judge will look at when deciding who was responsible for what and in some case it can be determinative. Ensure you have a contract. Being clear about roles, responsibilities and any limits of liability is key.

2. Memories fade, so make a file note of every important conversation

Risk is introduced when key events are not recorded. Honest people can have different recollections. If a claim results, and there is no written record, a decision maker has to decide who s/he believes. A result is more likely to go in your favour if there is a written record and this can also sometimes be the difference between a claim being filed or not. We know there are time pressures. However, a file note does not need to be formal, but it should have a time, date and explanation - sending an email to yourself or a team member is an easy way to do this.

3. List your assumptions and limitations in every piece of advice

You might think you and your client understand the purpose and assumptions in a report, but claims can result when these are not clear or when a third party gets a copy of a report. Listing assumptions is a good practice, as is a clear disclaimer about who can rely on the report. Both should be up front, and not buried in the fine print.

4. Reflect and take advice before trying to fix your own or other’s mistakes

A particularly unfair theme is people being sued after they tried to help when something went wrong, even if it had nothing to do with them. This can confuse roles and responsibilities or cause you to step outside of your contracted role and therefore lose the benefit of any contractual limitations. Before jumping in, take time to pause, seek advice and/or re-scope the work.

5. Take negative feedback seriously - big claims often start with small fee disputes

Complaints and fee disputes can balloon into larger disputes if not dealt with appropriately. All complaints should be taken seriously and, if required, insurers notified. A strategy can then be developed which may help prevent a larger dispute developing.

Conclusion

Claiming on your professional indemnity insurance can feel like an inevitability given how litigious New Zealand’s construction industry can be, but with a few business practice improvements you can reduce the likelihood of a claim or make it much easier to resolve. We are happy to provide training specific to your business and risk exposure.

Special thanks to Sam Hider for his assistance in writing this article, which was first published by New Zealand Institute of Building Surveyors (NZIBS).