Engagement of sub-consultants

The effective management of risks associated with the engagement of sub-consultants requires a clear understanding of the liability and insurance implications of this type of arrangement. How exactly liability attaches to lead and sub-consultants, as well as the extent to which professional indemnity policies cover each party, is often misunderstood.

A lead consultant is liable for the deliverables provided by sub-consultants; the principal consultant is contracted to provide the services to the client and is therefore vicariously liable for services provided under that contract, even if those services were contracted out to others.

There are some exceptions to the above general rule, one of which is the good faith defence pursuant to s128 of The Building Act 1993 (VIC); this provides immunity to a building surveyor relying upon a certificate issued by another building practitioner.

Sub-consultants retain liability for services they provide to their client, the lead consultant. Therefore, both lead and sub-consultants retain liability for the deliverables of the sub-consultant.

From a professional indemnity insurance perspective, two key issues to consider are the extent to which a consultant is insured:

• under a professional indemnity policy held by another party
• for claims arising out of services provided by others

The insured parties are usually specified in a policy definition of ‘Insured’, with the definition typically including the entity named in the policy schedule together with directors and employees. Some policies extend cover to sub-consultants. However, these extensions can be subject to onerous conditions such as requiring the sub-consultant to work under the ‘direct control and supervision’ of the named insured. Failure to comply with such onerous conditions may leave the subconsultant uninsured.

If a sub-consultant is to be insured, the appropriate way to achieve this is to have the insurer explicitly name them as an insured entity on the policy rather than rely upon an automatic extension.

It is common for professional indemnity policies to include a clause that explicitly states that the insured is covered for claims arising out of the conduct of sub-consultants. These clauses reinforce that the named insured is covered for claims arising out of services provided by sub-consultants. However, these clauses also often reinforce that the cover does not extend to include the sub-consultants themselves.

Some sub-consultants do not maintain their own professional indemnity insurance because they assume that they are covered by their principal’s (the lead consultant) policy. Unfortunately, this is often not the case; the lead consultant may be covered for claims arising out of services provided by sub-consultants, but this does not mean the benefit of the policy extends to insure the sub-consultant.

Professional indemnity policies cover claims arising out the profession/professional business described in the policy; if the services of a sub-consultant do not fall within this description, they may be outside the scope of the policy. Lead consultants should ensure that the profession/professional business description in their policy encompasses all deliverables, whether provided in-house or by sub-consultants.

This issue presents significant risk for some professions. For example, say that a project management firm with a policy specifying the profession/business as ‘project management’ takes on a lead design consultant role. Unless their policy includes cover for design services, their insurer may seek to deny indemnity for a claim arising from design because this is outside the scope of ‘project management’.

Other risk management strategies for lead consultants to consider include:

• Engaging sub-consultants on a back-to-back basis where the subcontract closely reflects your obligations under the lead consultant contract
• Requiring your sub-consultants to maintain their own professional indemnity insurance
• Seeking advice from a specialist broker who should be able to clearly explain your policy operation and negotiate any required amendments

Risk management strategies for sub-consultants include:

• Maintaining your own insurance program rather than relying upon insurance arranged by others
• If relying upon insurance arranged by others, obtaining insurer documents to verify that you are covered

Sometimes the best way to manage risk is avoidance; an alternative to the lead/sub-consultant relationship is for the client to engage all consultants directly.

Whether you are a lead or sub-consultant, if you are unsure how your policy operates or whether it appropriately protects you, seek the advice of a specialist broker.

The information provided here is general advice only and has been prepared without considering your objectives, financial situation, or needs. If you would like specific advice, please call 03 9059 4000 to speak to one of our specialist consultants.