Will PI Insurers pay out following an adjudicator's decision against the insured?
Is an adjudication award the establishment of one construction professional's liability to another? Is this equivalent to a judgment of the Court, agreement or an arbitration award? Does this award force a Professional Indemnity Insurer to pay out?
At first glance, Judge Behrens' answers to the above questions in Galliford (UK) Limited trading as Galliford Northern v Markel Capital Limited ((2003) WL 21162147 (QBD (Merc Ct)), [2003] EWHC) might cause construction professionals to worry about the effectiveness of the most favoured means of dispute resolution within the construction industry: adjudication.
Judge Behrens decided that, whilst the adjudicator's decision created a contractual obligation for Michael Heal Associates ("MHA") to pay Galliford, liability under MHA's professional insurance policy was not established until the adjudication award was enforced by a judgment of the court or by agreement between the parties. As MHA had gone into voluntary liquidation shortly before adjudication proceedings commenced, proceedings were issued against MHA's insurers, Markel, who were found to have no contractual liability to meet the adjudication award.
Whilst leave was given to appeal the decision due to the uncertainty of the law on this point, this decision shows that once an adjudication award has been made in favour of a referring party, there is a further step to be taken in order to enforce the award.
The facts
Galliford, in its position as main contractor in the refurbishment of a large hotel in Leeds, appointed MHA as structural engineer. Galliford and MHA became embroiled in a dispute over MHA's performance of its duties and, following several unsuccessful attempts to resolve the dispute by mediation and negotiation, Galliford referred the dispute to adjudication.
Section 1 of the Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act") provides that when a company insured against its liability to a third party is wound up (i.e. MHA), all of the insurance rights that it had in respect of such liability incurred before or after liquidation are transferred to the party to whom the liability was incurred (i.e. Galliford). Galliford argued that these rights had passed to them.
Crucially from Galliford's point of view, there was a doubt as to the jurisdiction of the adjudicator to make the decision, as it was not clear whether any construction contract had ever been concluded between Galliford and MHA. If it was found that Insurers were not on the hook to pay out on the adjudication award, then Galliford would have to take action to enforce the award. Ordinarily this would not prove to be a problem as adjudicators' decisions cannot be overturned if they are made in good faith, even if they are wrong. However, they CAN be overturned if the adjudicator is found not to have had the jurisdiction to make the award. In this case the adjudicator found that MHA was liable to Galliford in respect of some of the matters and assessed quantum at £722,586. Galliford were therefore extremely keen for Insurers to be on the hook to pay this and did not want to have to try to enforce it. Enforcement would normally take the form of a Summary Judgment application, but if there was a doubt as to the adjudicator's jurisdiction, then this application could be unsuccessful.
In addition, Galliford relied on an endorsement to the policy which provided that the Insurer would indemnify MHA against "Loss" consequent on an adjudication award. Markel however pointed out that "Loss" was defined in the Policy as "MHA's legal liability for damages against MHA" and that legal liability would not be established until the adjudication award was enforced.
The key question was therefore whether an adjudicator's award was sufficient to establish the Insured's liability. The leading case in this field, Post Office v Norwich Union ([1967] 2 QB 363) provides that in an insurance against liability, the assured suffers loss when his liability to a third party is established, and the amount of that liability is ascertained. Whilst Post Office v Norwich Union says it must be ascertained "either by judgment of the court or by an award in arbitration or by agreement" this was prior to the advent of the adjudication procedure.
Markel emphasised that an adjudication decision was a provisional decision:
"The contract shall provide that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement".
(s108(3) Housing Grants and Regeneration Act 1996 ("the 1996 Act"))
It is arguable that the case of Cox v Bankside ([1995] 2 LR 437) assists the view that liability is established by the Adjudication Award. Cox v Bankside found that an interim payment order ascertains a quantifiable sum which is due and payable by way of damages, albeit on a provisional basis: "Interim payment orders did not exist when Post Office v Norwich Union was decided, but in my judgment an interim payment order satisfies the requirements there laid down."
Further, there is no requirement imposed in Post Office v Norwich Union that the determination be "final" and arbitrators, whose decisions are clearly sufficient to impose a legal liability on an insolvent professional's insurer, are free to make provisional awards under section 39 of the Arbitration Act.
However, in the event Judge Behrens sided with Markel. An adjudication award creates a contractual liability on the negligent insured to pay the sum decided by the adjudication award, but does not establish the Insured's liability. Therefore there is no loss under a professional indemnity policy and no right of indemnity as between the Insurer and the insolvent Insured.
In order for liability to exist under an insurance policy, the adjudication award must be enforced by a judgment of the court or agreement.
In light of this, is the adjudication process one that construction professionals should continue with? It is still the quickest and most cost-efficient route to settling a dispute. As the adjudication award is not in itself enforceable against Insurers, then all that needs to be done, remembering that a Court cannot overturn a wrong adjudicator's decision made in good faith, is to go to Court to get the decision enforced on a Summary Judgment application. However, following Galliford v Markel, there may be a problem if there is a doubt as to the adjudicator's jurisdiction to make the award.
Will this decision affect premiums?
It is unlikely that this decision will itself have an effect on premium costs. Insurers will still have to pay after the claimant gets an enforceable order from the Court.
However, it is worth pointing out that whilst Construction professionals have seen huge increases in their professional indemnity premiums over the last two years due to both the loss ratios reported by professional indemnity insurers over a 5 year period and the fact that fewer insurers were providing professional indemnity cover, there could be some good news on the horizon for construction professionals. Recent evidence suggests that, as new players enter the professional indemnity market, premiums are now rising by only 10-15% per year – a figure that represents a levelling out from the increases in premiums over the past 2 years.
Practical advice for construction professionals
- Pay attention to the Policy Wording and any Endorsements purporting to cover Adjudication Costs.
Does the policy require legal liability to be established? Following Galliford, if "legal liability" has to be proved before an insolvent Insured's Insurer will pay out, then an adjudication award will not be enough to enforce this. However, on careful reading of some insurance policies, it may come to light that the policy paying out is not dependent upon any liability being established between the Insured and a third party.
- The referring party should take immediate steps to enforce an adjudicator's decision.
It is imperative that this decision is enforced as soon as possible in order for the insolvent insured's policy to bite.
- Attach great importance to Risk Management
The uncertainty of the law means that the best advice is simply to place a greater importance on risk management – give yourself as little chance as is possible of being sued!
As a general rule, construction professionals should:
- not sign up to something that they are unable to achieve or that they know they have not done;
- not accept any contractual duty in excess of "reasonable skill and care" – insurance will rarely cover it;
- not accept "fitness for purpose obligations";
- not commit to providing single project professional indemnity cover in respect of obligations relating to maintenance of professional indemnity insurance;
- only agree to maintain cover for as long as such cover is available at commercial rates;
- avoid liability for consequential losses;
- keep detailed records in writing of everything that happens on the project. Whilst laborious and time consuming, it is important to remember that regardless of what you actually did, if a claim is made against you, it only matters what a professional can prove they have done.
- Take time to arm your broker with all your risk management activities at the time of renewal of cover.
Conclusion
Construction professionals should be aware of the effects that the decision in Galliford v Markel will have, but should not be scared to use the adjudication process. It still, in most cases, represents the quickest and most cost efficient way of settling the many disputes that crop up during construction contracts. However, referring parties should be aware that if there is a doubt as to the adjudicator's jurisdiction to make the adjudication award, then his decision could be challenged and overturned, and this doubt could cause Summary Judgment proceedings issued in order to enforce adjudicator's awards to be unsuccessful.
For further information contact Ben Goodier at ben.goodier@cms-cmck.com
