Professional indemnity insurance is designed to protect you should a client make a claim against you for professional negligence.
Often a loss arising from negligence isn’t immediately apparent and so the claim may be made long after the work was carried out. In some cases, the problem will lie undiscovered for years, creating a liability time bomb!
This guide provides basic guidance on the limitation periods applicable in law to professional negligence claims. You can also talk to us about your own situation, or obtain formal legal advice.
- How long does a liability last?
- Claims under contract law
- Claims under tort law
- What is a Secondary limitation period?
- Can a negligence claim be made after fifteen years?
- Why is 'claims made' insurance so significant?
This is the question everyone asks. Unfortunately, the issues can be complicated and so the answer is not simple. This guide explores the issues surrounding the question.
If your client feels you have been negligent, and that they have suffered a loss as a consequence, they only have a certain amount of time in which to bring proceedings against you. Once that period has elapsed you are no longer liable and so if a claim is brought against you, you can argue that it is “time barred” or “statute barred”.
The length of time in question varies. Your professional body can give you guidance on this, but you also need to be mindful of the relevant limitation period fixed by law. Different types of claim may have different limitation periods, but most are covered by the Limitation Act 1980.
Because professional indemnity insurance is ‘Claims Made’, these periods are extremely relevant. Please refer to the ‘Claims Made’ section below.
Contract, tort or both?
As a professional you are liable under contract law and tort law and your PI policy will potentially cover liability against both types of claim. In most cases the client will be alleging a breach of contract as well as negligence - they are often much the same thing because most contracts by which a professional agrees to provide a service contain an implied term that the professional will act with reasonable care and skill. This is the same standard as the duty of care which gives rise to a claim in negligence.
However, you need to be aware that the limitation period is different under contract law and tort law.
If a client sues you for alleged breach of contract the position is governed by section 5 of the Limitation Act 1980. The client has six years to bring the claim from when “the cause of action accrued” (meaning when the breach of contract was committed). That date is usually quite simple to identify: for example, if an accountant gives negligent tax advice, the breach occurs on the day the advice is provided.
Sometimes, however, matters may not be so clear. If the breach of contract is caused by an omitted act, then the court will have to consider and then rule on when the omitted act should have been performed.
With claims for negligence under tort, matters are often more complicated. There is still a six year limitation period, under section 2 of the Limitation Act 1980. However, this is only the primary limitation period. A secondary limitation period is introduced because in this situation the cause of action only accrues when the claimant sustains damage, which may or may not be the same date as the breach of duty.
For example, a firm of architects is commissioned to design a building. There’s a flaw in their design but the error it is only realised when fractures begin appearing in the building seven years later.
This is a situation where a claimant is completely unaware that something has gone wrong until after the primary limitation period has expired. To avoid this a secondary limitation period has been introduced.
Section 14A of the Limitation Act 1980 covers this additional limitation period. Extending it for three years, the additional period only commences from the date when the claimant became aware of the relevant facts. These relevant facts include knowledge that they had suffered damage, knowledge of the identity of the defendant, and knowledge that the damage was attributable to the acts or omissions of the defendant.
In professional negligence cases, claimants often have to rely on section 14A in order to win a case for negligence – and this section can be problematic. The three year time limit starts running from the date of actual knowledge. However, that knowledge must be deemed to be constructive knowledge.
Constructive knowledge is knowledge which the client could reasonably have been expected to acquire. For example, a claim is brought against a surveyor who failed to warn the client of defects in the house they were buying. However, the client cannot say they did not notice some cracks in the wall for six years if in fact those cracks were visible to the naked eye and the client could reasonably have been expected to have noticed them.
In such a situation “knowledge” is not defined as something that the client knows for certain – it is sufficient that they have cause to suspect it may be true. If they suspect something may be the case, and take legal advice, then the knowledge dates from the day they were put on notice that there was potentially a problem.
Having said all that, Section 14A cannot postpone limitation indefinitely: Section 14B of the act specifies a “longstop” of fifteen years from the act or omission in question.
You need to be aware that there is an exception to the fifteen year cut-off provided by the longstop. Under section 32(1)(b) of the Limitation Act 1980 claims are still admissible if you, as the defendant, deliberately concealed a fact relevant to the claimant’s cause of action. That includes the situation where you committed a deliberate breach of duty in circumstances where it was unlikely to be discovered. In such a situation the time limit is then six years from when the claimants discovered, or could with reasonable diligence have discovered, the relevant facts.
Thankfully this situation is rare and the court will need firm evidence if it is to make a serious finding that a professional has acted dishonestly or committed a deliberate breach of duty.
Professional indemnity is designed as ‘claims made’ insurance. Therefore, the policy provides cover for claims made against you and notified to the insurer during the live policy period of insurance only. You can’t claim against a professional indemnity policy which has already expired. Therefore, it’s critical to maintain a live policy at all times, even after retirement or the sale of a business.
This guidance note is intended for information purposes only. Whilst all care has been taken to ensure the accuracy of the guidance note it is not to be regarded as a substitute for specific advice. As you can see the issues are complex so we strongly recommend you talk to us regarding your specific situation, or take formal legal advice.
This guidance note shall not be reproduced in any form without our prior permission. © Professional Indemnity Insurance Brokers Ltd.