Back in 2004-2005, the fallout from the collapse of large insurer HIH/FAI was still reverberating through the economy and rendering liability insurances unaffordable for many businesses. In response, governments across Australia developed legislation to provide professionals with some level of protection against very large claims.

The most significant reform was a topic we’ve covered in our news articles before: proportionate liability legislation.

The second major reform was professional standards legislation, which created a pathway for professionals to gain the powerful protection of a statutory limit of liability. Lawyers and accountants, whose insurers were reeling from payouts in the tens of millions of dollars, quickly embarked on this pathway but, in the construction industry, its impact was minor.

Then, in 2021, during the rapid escalation of high-value claims generated by combustible cladding and other defects in multi residential projects, the Australian Institute of Building Surveyors (“AIBS”) successfully applied for a Scheme. Since builder certifiers and surveyors play a critical role in medium and large procurement, this development makes it important to understand who is protected by a Scheme, and what it means for you.

What are Professional Standards Schemes (“Schemes”) and who has one?

In a piece of good news, although professional standards legislation is state-based, the states administer it jointly through a single website.

The Professional Standards Council website hosts a list of currently applicable Schemes which makes it easy to find out who has a Scheme and conditions each Scheme provides for. The website lists lapsed Schemes on a separate page.

An occupational association can make an application to put a Scheme in place for the protection of members in a specific occupation. If approved by the Professional Standards Association, the Scheme is listed on the above website and goes into operation. Each Scheme lasts for a specified period (usually about 4 – 6 years) following which it must be replaced, otherwise it lapses.

The main attraction of a Scheme is providing members of the occupational association with a monetary limit of liability. For example, the AIBS Scheme limits its members’ liability to:

• $1 million for Level 2 buildings (less than 2000m2 and 3 storeys or less)
• $2 million for Level 1 (all other buildings)

This means that, if an AIBS member protected by the Scheme makes a mistake that causes $4 million in loss and damage, the member’s liability is capped at a maximum of $2 million or, if the building is in the Level 2 category, only $1 million.

To gain protection under a Scheme, association members must fulfil any conditions set out in the Scheme document or in underlying legislation. Some common conditions are that members must:

• Disclose that they are protected by a Scheme limit – e.g. by putting a statement on the business’s letterhead along the lines of “Liability limited by a scheme approved under Professional Standards Legislation”
• Having professional indemnity insurance to cover amounts up to the Scheme limit
• Undertaking minimum hours of Continuing Professional Development

Some Schemes also require members to make a formal application for Scheme membership and pay an annual fee. A small price to pay, you might think, for a protection that could be highly beneficial.

The apple: gaining protection under a Scheme

Check the link above to find out if you can gain the protection of a Scheme. At the time of writing, Schemes are currently in place for AIBS, Association of Consulting Surveyors National Ltd, Australian Property Institute Valuers Ltd and many lawyers and accountants. Past Schemes held by Engineers Australia and other engineering bodies have now lapsed. We are not aware of any Schemes for other construction professionals such as architects, landscape architects, building designers, project managers, quantity surveyors, town planners or interior designers.

If you would like the protection of a Scheme that is available to you, find out what conditions apply to it and put systems in place to satisfy them. Also investigate how Scheme membership is granted. Depending on the terms of the Scheme and the underlying legislation, the Scheme could:

• simply apply to all members of the occupational association; or
• apply to all members except those who specifically opt out; or
• apply only to members who opt in; or
• allow members the option to apply for a higher limit of liability than the standard Scheme limit.

Why would anyone opt out of this powerful protection? Because sometimes their clients demand it, as the clients want the right to sue the member for a higher amount, or even an unlimited amount.

So the last factor to weigh up is your clients’ likely response. Generally, Schemes are not designed to allow members to contract out of them for one client or one project. So, in practice, the attitude of your most demanding and difficult clients might determine whether you can take part in a Scheme or not.

The worm: Engaging subconsultants who are protected by a Scheme

When you engage a subconsultant then, unless your consultancy agreement provides otherwise, you will become liable to the client who engaged you for all of the subconsultant’s work. If the subconsultant has the protection of a Scheme with a $1 million cap, that cap will not flow through to you unless you are a member of the same Scheme. If your subconsultant makes a $2.5 million error, there is a $1.5 million gap between your liability to the client, and the subconsultant’s capped liability to you. If your professional indemnity insurance covers the gap, you will still have a large claim on your record, and to add insult to injury you will have to pay the excess on your policy.

Many of you will know that we advise against allowing subconsultants to include clauses in contracts that limit their liability, because this can trigger the “waiver of rights” exclusion commonly found in professional indemnity policies. However, a Scheme is a legislative limit, not a contractual limit. We are optimistic that engaging a subconsultant who has a Scheme limit should not infringe a typical “waiver of rights” exclusion. But insurers may take a different view, and it could depend on the wording of the exclusion in any one specific policy.

Regardless of whether the “gap” is insured, you’re probably already thinking of how you could avoid the gap in the first place. These are some of the options you could look into or discuss with your solicitors:

• Have the client or the head contractor engage the subconsultant, so that you are not contractually liable for their work.
• Insert into your consultancy agreement a clause that limits your liability to the same amount as the subconsultant’s Scheme. As a minimum, the limit applies to your liability for the subconsultant, but ideally it applies to all your liability.
• Find out whether the Scheme allows the subconsultant to opt out, or contract out, or apply for a higher limit, and make it a condition of engaging the subconsultant that they take one of those steps, especially if they are working for you on many projects or high-risk projects.

If the above is unachievable, you can always select and manage the subconsultant carefully so as to reduce the risk of any claims arising out of their work in the first place. It’s also reasonable to charge your client a fee as compensation for the risk of engaging them. In other words, the same sensible risk management measures you would have undertaken if no Scheme existed.

Wendy Poulton
Manager Risk Services

This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.