Insurance is a risky business
Architects offering advice or guidance to clients on insurance matters need to be aware that they could be inadvertently carrying out ‘regulated activities’, which they are not permitted to do under the Financial Services and Markets Act 2000 (FSMA).
The latest Risk Management Briefing from the Construction Industry Council (CIC) addresses insurance advice, and particularly consultants engaging in what could be classed as ‘insurance mediation services’, that is engaging in any aspect of the insurance marketing and sales process.
Under FSMA rules, anyone carrying out such activities who is not authorised or exempted by the Act is committing a criminal offence.
Insurance contracts are regarded as ‘specified investments’ for legal purposes. A contract administrator who is advising on the appropriate type and amount of insurance as part of their overall services – and therefore as part of their business, for which they receive remuneration – would be subject to the FSMA regime.
The Regulated Activities Order (RAO) sets out regulated activities that are considered to be insurance mediation activities. These are very general in what they include, such as ‘making arrangements with a view to a transaction’ and ‘assisting in the administration’ of an investment.
The CIC Management Briefing sets out some examples of what would fall within the Order. Advising a potential policy holder by providing an opinion on the merits of that person taking out a specific contract of insurance would count, as would introducing a potential policy holder to a specific insurer or intermediary. Helping complete applications for insurance or assisting with an insurance claim form note also fall within the Order.
Contract Administrators advising an employer on the suitability of designers’ and contractors’ own insurances would also be covered.
There is an exclusion under the RAO that architects and other design consultants can fall back on: the arranging of activities and assisting in the administration of a contract of insurance when such activity is ‘incidental’ to a business that does not otherwise undertake regulated activities.
‘An architect introducing buildings insurance to its clients may be considered to be 'incidental' to their business,’ says the briefing, but even so it is still necessary that such advice is correct and appropriate in the circumstances.
At present, the Royal Institution of Chartered Surveyors (RICS) enjoys a professional services exemption for its members to carry out certain regulated activities where they are incidental to the business, but the exemption does not apply to the RIBA or the Institution of Civil Engineers.
‘Where a professional adviser – say, an architect or consulting engineer – performs services that include advising on insurance contracts, it is important that this is disclosed to that adviser’s insurers, as it may be that the adviser needs additional wording to cover activities that are outside the usual scope of such an adviser’s business,’ warns the CIC Briefing.
Peter Godfrey, director at RIBA Insurance Agency, says the risks associated with insurance advice are not to be dismissed, adding the architects are most likely to be approached for advice on residential projects.
Mark Klimt, Partner at law firm DWF and RIBA Specialist Practice Consultant, adds:
"An architect may be asked by a client (given that he tends to be the first port of call for queries) what level of insurance it should request from the various consultants. Aside from potential liability under FSMA, such requests must be approached with caution. As an example, care needs to be taken that the architect is not deemed to have represented maximum potential losses including loss of rent following delayed completion.'
The best advice may be to point out to a client the different bands of insurance amounts that are typically available and then leave the client to discuss with its insurance broker and other interested parties, such as funders, what the appropriate level of insurance for its needs are.
As with so many areas of advice from an architect, it is often as important to stress what isn't being advised upon and therefore needs addressing elsewhere."
While an architect’s own PI insurance may cover costs of defence or civil awards in the event of a finding of negligence arising from such advice, it will not be available to cover any regulatory fines that a body such as the Financial Conduct Authority might impose.
Thanks to Mark Klimt, Partner, DWF LLP and Peter Godfrey, Director, RIBA Insurance Agency
Text by Neal Morris. This is a ‘Practice News’ post edited by the RIBA Practice team. The team would like to hear your feedback and ideas for Practice News: firstname.lastname@example.org