The client wants you to start on Monday. Your team is available, the scope seems clear, and both project managers agree on what needs to be done. There is just one problem. The contract is still with the lawyers.
Two weeks later, everyone is still waiting for agreement on liability and insurance clauses. The client is becoming impatient, and your carefully planned resource allocation is starting to fall apart.
Or perhaps the work went ahead anyway. Months later, something fails and someone asks a simple question: “Who agreed that your company would be responsible for that?”
That is when a small gap in the paperwork can become a very large project problem.
Problem: Professional Indemnity Issues Consume Time and Money
The cost starts before there is a claim
Professional indemnity issues can affect a project long before anyone alleges a mistake. Contract negotiations stall because the parties cannot agree on responsibility, liability limits or insurance requirements. Meanwhile, the project manager keeps revising the start date, explaining delays and trying to hold the team together.
That effort still costs money. Much of it may be non-billable, depending on your commercial arrangements. Even if the contract is eventually signed, the project can start with less time available and more pressure on the people doing the work.
If a dispute arises later, the distraction becomes much greater. Instead of managing delivery, experienced staff are searching old emails, explaining technical decisions and helping reconstruct events. Legal expenses, excesses, rework and possible compensation can add to the cost. Insurance should not be assumed to pay every expense or penalty.
Having insurance does not settle every question
Professional indemnity insurance generally addresses claims arising from professional services, such as allegations of negligent advice, design errors or omissions. Depending on the policy, it can help with defence costs and covered liabilities. Aon explains the purpose of professional indemnity insurance.
However, “we have insurance” does not answer whether your particular services, contractual promises or circumstances are covered. You need to understand what your company has agreed to do and whether its policy responds to that exposure.
For example, a contract might require periodic site inspections, while the client expects continuous supervision. A report intended to identify visible defects might be treated as confirmation that the whole installation complies. Those are very different responsibilities.
If that difference is discovered only after a failure, everyone has a problem.
Informal agreements leave room for disagreement
A helpful project manager may agree to “have a quick look” at something outside the original scope. Someone else sends an email saying the design will meet every requirement. The team proceeds because everyone seems comfortable with the arrangement.
Later, the client’s project manager changes. The replacement reads the report and expects your company to stand behind it. Your recollection of what the previous project manager meant is not much help.
Verbal agreements and emails can have legal effect. The problem is that they may leave essential terms unclear or fail to satisfy the contract’s formal requirements. The Australian Government’s guidance on types of contracts explains why a clear written agreement is safer.
Good relationships help projects run well, but they are a poor reason to leave important responsibilities undocumented.
Solution: Keep the Contract, Scope and Insurance Aligned
Review the difficult terms before the start date becomes urgent
Include legal and insurance review in your tender and mobilisation planning. Do not assume it can all be completed between winning the work on Friday and starting on Monday.
Send the reviewers the proposed contract, scope, relevant tender qualifications and a plain explanation of the services. Tell them about unusual risks, proposed subcontracting and anything the client expects that is not clearly documented.
Ask for the specific issues that need resolution, their practical consequences and acceptable alternatives. A project manager needs to know what decision will allow the work to proceed.
As I noted in Legal Review of Contracts, liability, indemnity, insurance and liquidated damages clauses deserve attention before signing. Your legal adviser considers the obligations you are accepting; your broker or insurer helps assess the insurance implications. Both perspectives matter.
Check the promises as well as the insurance amount
A contract can impose responsibilities beyond those your company would otherwise have. Broad indemnities, fitness-for-purpose warranties and guarantees of outcomes deserve particular scrutiny. Planned Cover’s contract review guidance identifies these as potential sources of uninsured exposure.
Do not assume that changing one troublesome word fixes the whole contract. The meaning of the obligation, its context and the policy wording all matter. Ask the reviewers whether your promised standard of service is appropriate and whether additional obligations are insured or require a commercial decision.
Also distinguish the fee, the contractual liability limit and the insurance limit. A $20,000 fee does not automatically limit your liability to $20,000. Having $5 million of insurance does not, by itself, cap your liability at $5 million either.
These are separate matters to resolve. Do not sign a clause you cannot accept simply because the client says it is never enforced. See my other post Agree With the Contract Before Signing It.
Make the agreed duties clear enough to use
Your contract and scope should describe what the team will actually do. They should also make the boundaries clear enough that someone can recognise when a request falls outside them.
For example, specify whether an inspection covers selected accessible items, particular stages or a broader verification service. Identify the expected report, the information needed from others and the assumptions on which the work depends.
Avoid a situation where the proposal says one thing, the contract schedule says another, and the project team works from a third version. Carry agreed tender qualifications into the executed documents and resolve conflicts through the agreed document hierarchy.
This is the practical value of Clear Duties in Contract. Clear duties help the client understand what they are buying and help your team deliver it.
They also help you price the necessary checks, reviews and inspections. If the work needs a proper inspection, allow time and money to do one properly.
Use an interim agreement only where it provides a sound basis to start
Sometimes the project managers agree on the immediate work, but the full contract will take several more weeks (or sometimes much more). A carefully prepared interim agreement may allow a defined part of the work to begin.
For example, the parties might authorise a review of existing information and a preliminary options workshop while continuing negotiations for the detailed design. That could preserve useful progress and help retain the team allocated to the project.
However, the agreement needs to resolve the terms applicable to those early services. It could even be a separate contract with a limited scope and limited liability. Calling a document a “letter of intent” does not establish its legal effect. Informed’s explanation of preliminary agreements discusses why their wording and intended effect need careful review.
Ask your legal and insurance advisers to address the early scope, payment, applicable liability terms, insurance, permitted use of deliverables and what happens if the full contract is never signed. Define when authority ends and how any extension must be approved.
A spending limit is useful, but it is not automatically a liability limit. Even preliminary advice can influence expensive decisions.
If the unresolved issue affects the early work itself, an interim agreement may not solve the problem. Do not let urgency disguise a risk that still needs a decision.
Manage the interim agreement as an active restriction
Once an interim agreement is signed, make its boundaries visible to the team. Record its authorised activities, expenditure limit and expiry date in the project controls. Assign someone to monitor them.
Set a review point early enough to obtain further authority before the team reaches a limit. “The contract should be signed next week” is not a reliable control if people continue working beyond the agreed authority.
For a hypothetical example, suppose the agreement permits a $15,000 desktop assessment. The client then asks the team to inspect the site and issue construction advice. That request needs assessment and approval before the additional work proceeds, even if the team has not spent the original allowance.
When the full contract is ready, have the transition reviewed so it is clear how the early services and their deliverables are treated. Do not leave two overlapping agreements for the delivery team to interpret.
Recheck the position when the work changes
The contract should remain relevant throughout delivery. Revisit it when the scope, deliverables, responsibilities or intended use of your work changes.
A request to add one drawing may have a straightforward impact. A request to certify someone else’s design or take responsibility for another consultant’s work may change the exposure considerably. The additional fee alone does not tell you how significant the risk is.
Before accepting a material change, establish what is being requested, who can authorise it, what resources and checks it needs, and whether legal or insurance review is required. Follow the contractual variation process and communicate the approved change to the team.
Work outside the original scope does not automatically invalidate all insurance. However, the policy’s description of professional services, exclusions and conditions can affect whether a claim is covered. The Australian Department of Finance’s guidance on insurance requirements explains the relevance of the insured professional services.
The practical lesson is to check changed work before agreeing to it, rather than discovering a possible coverage gap afterwards.
Keep records that explain what actually happened
If a dispute arises, you need more than a folder containing thousands of documents. You need a record that explains what was agreed, what information was available, what decisions were made and what your team delivered.
Keep the executed contract and variations accessible. Retain relevant instructions, assumptions, reviews, issued deliverables, warnings and approvals. For inspections, record the date, extent, limitations and observations, with photographs where appropriate.
After an important verbal discussion, confirm your understanding in writing. Where formal approval or notice is required, follow that process as well. This is consistent with Document All Client Communication.
Make it easy to trace a decision to the evidence behind it. A project communication, decision and action register can provide an index to the original records.
Record concerns and mistakes accurately as well as successes. Preserve original documents and version history. Good records support an honest account of the project; they are not an excuse to rewrite its history when something goes wrong.
Give the delivery team the commercial handover
The people doing the work may not have participated in contract negotiations. They need to know which assumptions were accepted, which qualifications changed and where their authority ends.
Include those points in the handover from the bid team. Explain who approves variations, which deliverables require review and who must receive a potential claim or complaint. Apply the same care when a new project manager takes over.
If you engage subconsultants, check that their agreed scope fits the responsibilities your company has accepted. Do not assume a missing duty has been passed to someone else. A gap between the client agreement and the subconsultant agreement still needs an owner and an appropriate commercial arrangement.
Act promptly when a problem may become a claim
Make sure the team knows how to escalate a potential professional indemnity matter. A complaint, allegation of an error or demand to pay for remedial work should not sit in one person’s inbox while they try to resolve everything themselves. If you, the project manager, have been notified of a potential indemnity issue or claim you should inform your legal team as soon as possible. Don’t wait to gather lots of records first, inform then and they can guide you on what you need to provide them.
Professional indemnity policies commonly operate on a claims-made basis. The timing of the claim and notification, the retroactive date and the policy terms matter. Aon’s explanation of how professional indemnity insurance works highlights the importance of prompt notification.
Contact the appropriate internal manager and broker or insurer promptly (via your legal team). Preserve the records and prepare a factual chronology. Avoid admitting legal liability, promising compensation or agreeing a settlement without the necessary advice and consent. Webber Insurance’s notification guidance sets out practical steps and precautions.
That does not mean hiding facts or delaying urgent safety action. Deal with immediate hazards, communicate accurately and coordinate the response.
Also plan beyond project completion. Claims may arise later, so ask the insurance owner about ongoing cover, contractual maintenance periods and run-off arrangements where services cease. Aon’s insurance terminology guide explains why run-off cover matters for past work.
Lesson: Resolve Professional Indemnity Issues Before They Become Project Problems
Professional indemnity issues can consume a lot of time and money, both when negotiating a contract and when responding to a claim. The project manager cannot settle every legal or insurance question, but can make sure the right questions reach the right people early.
Get the contract reviewed. Make the duties clear. Keep the actual work aligned with the agreed scope, and check the insurance implications when that work changes.
If an interim agreement is appropriate, define its terms and manage its limits. Keep records that allow someone else to understand what happened without relying on your memory.
I would much rather spend time clarifying a responsibility before work starts than spend weeks arguing about it after something has failed.
