The importance of quality professional liability insurance: Meet the skeleton designer who was negligent and will pay compensation totaling approximately 3 million shekels
Sep 14, 2020
The Haifa District Court recently (June 2020) issued a judgment that serves as a clear warning regarding the importance of professional liability insurance for engineers, technical engineers, and architects (Case No. 3071-07-16). We will briefly review the case and highlight relevant implications regarding the dramatic significance professional liability insurance can have for design professionals.
The case began with a married couple who purchased a plot in a community settlement and engaged various professionals for a “build-your-own-home” project. When serious construction defects were discovered in the building, the couple filed a tort claim against the engineering company responsible for the structural design and the company’s structural engineer (who held a senior position).
The defendants attempted to raise defenses and deny negligence. Additionally, they sought to shift responsibility by issuing third-party claims against a range of parties: from the construction supervisor and the architect, to the electrician who carried out chases in the property, and even against the couple themselves (as they were effectively “acting as the contractor” in the absence of a turnkey contractor).
The court rejected (almost) all claims of the structural engineering company and the structural engineer, finding them liable for substantial compensation to the couple. The damages amounted to approximately 2.7 million NIS, covering the costs of demolishing the existing structure and building a new house in its place, as well as additional heads of damage, including compensation for alternative housing, furniture storage during construction, fees, levies, distress, and expert fees for those who submitted reports for the proceedings.
The Court reached its conclusion based on the opinion of an expert it had appointed, together with the evidence presented, the cross examinations and the complex legal proceedings conducted before it over approximately four years, beginning in July 2016.
Without delving into the technical details of the engineering negligence, the structural engineer’s failings involved several aspects, primarily:
• Failure to conduct a soil investigation.• Designing foundation piles shorter than required.• Insufficient steel reinforcement in the living room floor.• Defective design of the roof support beams.
The damage was so extensive that the Court determined that repairs alone would not adequately compensate the couple. Demolition and reconstruction of the building were unavoidable.
Broader lessons: the importance of quality professional indemnity insurance
The judgment highlights several important points about the value of professional indemnity insurance selected carefully and supported by robust coverage.
For the defendants, the structural engineer and the structural engineering company, effectively operating as a single entity, the compensation awarded against them was undoubtedly substantial. This was in addition to the legal expenses incurred in defending complex and extensive proceedings lasting more than four years. The case was heard at two court levels: initially in the Magistrates’ Court and subsequently, as the amount of compensation sought increased, in the District Court.
Furthermore, no insurance company was involved in the judgment. This suggests that the defendants were probably not adequately insured, since an insurer providing coverage would likely have been named as an additional defendant. In other words, the defendants will have to bear the full, substantial compensation award themselves, without insurance coverage.
Moreover, the claim was brought against both the limited company and the structural engineer personally. This did not even require piercing the corporate veil; rather, the claim against the engineer arose from his position as a senior figure in the company and its sole director.
How did the court reach its conclusion?
The court reached its conclusion based on the opinion of an expert appointed on its behalf, as well as on the evidence presented, the cross-examinations, and the complex legal process that took place before it for approximately 4 years (since July 2016).
Without going into the intricacies of engineering negligence, we will explain that the skeleton designer's negligence was on several levels and mainly stemmed from:
Failure to conduct a soil test.
Designing piles that are shorter than necessary.
Lack of iron on the living room floor.
Poor design of the roof support beams.
The damage was so great that it was decided that the compensation due to the couple would not only be useful in "repair", but that there was no escape from demolishing the structure and rebuilding it.
From the specific to the general – the importance of quality professional liability insurance
The ruling teaches us several things about the great importance of having professional liability insurance that is purchased wisely, prudently, and with quality coverage.
From the perspective of the defendants – the skeleton designer and the construction company, who are in fact one entity – there is no doubt that the amount of compensation awarded against them is high and significant. This is in addition to the legal expenses they were required to bear in order to conduct a complex and extensive legal process for over four years (which was conducted in two instances – first in the Magistrates' Court, and then, in light of the growth in the amount of compensation, in the District Court).
Neither is this true, there is no involvement of an insurance company in the verdict. From this, it can be assumed with high probability that the defendants were not properly insured (since if an insurance company had been behind them, it would likely have been sued in addition to them as the insurer). In other words, the defendants will be forced to bear the full amount of the high compensation themselves, without insurance coverage behind them.
Moreover, the lawsuit was filed not only against the construction company, which is a limited liability company, but also directly against the skeleton designer personally. Even without the need to lift the company's legal incorporation veil, but by virtue of the skeleton designer being a very senior figure in the company, and its sole director.
Planners such as the skeleton planner in the above ruling, who is an engineer by training and education, are exposed to claims that can amount to huge sums. In the absence of adequate insurance coverage in terms of professional liability, these claims may cause personal damage, financial ruin, emotional distress, and harm.
(Human) in the name of good, legal expenses, etc.
It should also be noted that professional liability insurance is insurance that must be held at any given time, as it is a policy based on the "date of filing the claim" (Claims Made). That is, in order for the insurance to be valid, two cumulative conditions must be met:
- The insured had a valid policy at the time of planning.
- The insured had a valid policy at the time the claim was filed.
The quality of professional liability insurance is derived from the task of emphasizing all the conditions of coverage, and minimizing the "holes in the net". This is done while taking into account the totality of the risks that lie ahead for the insured. Similarly, an optimal balance must be created between broad coverage and an attractive premium (according to commercial considerations, of course). Therefore, it is unfortunate to know that many planners do not emphasize the full attention required for this, and resort to taking out professional liability insurance only in order to meet the conditions of tenders (while trying to strive for the minimum cost from their point of view).
The claim can be filed even after years.
Please note that when it comes to planners, claims for professional negligence can be filed even many years after the project was designed and completed. The statute of limitations begins to run from the date the defect was discovered, not the date of execution or planning. Sometimes the claim is even filed after the planning office has closed, and sometimes even against the heirs of a deceased planner.
The nature of professional liability insurance is measured, among other things, by maximum liability limits, run-off coverage for protection after cessation of activity and for a significant period, extension of the disclosure period in cases of non-renewal of a policy by the insurance company, maintaining insurance continuity in the transition between policies and projects, and more.
Highlights regarding professional liability insurance for planners
Design professionals, such as the structural designer in the judgment discussed above, who is a practical engineer by training and education, are exposed to claims that can reach enormous sums. Without adequate professional indemnity insurance, these claims can result in personal hardship, financial ruin, emotional distress, severe reputational damage, legal expenses and more.
It should also be noted that professional indemnity insurance must be maintained continuously, as it operates on a “claims made” basis. This means that, for coverage to apply, two cumulative conditions must be met:
The insured had a valid policy when the design work was carried out.
The insured had a valid policy when the claim was made.
The quality of professional indemnity insurance depends on careful attention to all coverage terms and on minimizing gaps in protection, taking into account the full range of risks facing the insured. An appropriate balance must also be struck between broad coverage and a competitive premium, subject, of course, to commercial considerations. It is therefore regrettable that many design professionals do not give this matter the attention it deserves, purchasing professional indemnity insurance merely to satisfy tender requirements while seeking the lowest possible cost.
Claims may be brought many years later
For design professionals, claims alleging professional negligence may be brought many years after a project was designed and construction was completed. The limitation period begins when the defect is discovered, rather than when the construction or design work was performed. A claim may even be brought after the design practice has closed, and sometimes against the heirs of a deceased designer.
The quality of professional indemnity insurance is measured, among other things, by sufficiently high liability limits, run off coverage providing protection for a substantial period after operations cease, an extended reporting period if the insurer declines to renew the policy, and continuity of coverage when moving between policies and projects.
"Professional Liability Policy" and the date of filing the claim
A professional liability insurance policy for supervisors—whether they are engineers, technical engineers, or architects—is the only protection a supervisor has against claims alleging negligence.
It is important to note that professional liability insurance for supervisors (and in general) is a “Claims Made” policy. For coverage to be valid, two cumulative conditions must be met:
The supervisor held a valid professional liability policy at the time of the event.
The supervisor held a valid professional liability policy at the time the claim was filed.
It should be emphasized that the purpose of a professional liability policy for supervisors is not only to cover compensation the supervisor may be required to pay. The policy also provides coverage for legal expenses (within the policy limits*) incurred in managing the lawsuit.
When a “claimable” event occurs on a construction site, it is likely that the claim will be filed against all parties involved—from the project owner and the main contractor, to subcontractors, and of course, the planners, supervisors, third parties, and more. Even if claims against some defendants are later dismissed, the cost of managing the litigation itself can be substantial.
Even a construction supervisor who acted with utmost professionalism and performed excellently may be required to defend themselves in court. Law firms representing construction supervisors are specialized and charge accordingly. Without a valid professional liability policy, all legal expenses would have to be paid out-of-pocket by the defendant.
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