FIDIC 2005 Beijing
Workshop 14
Risk and Liability for Consulting
Engineers: An Australian Perspective
Tony Barry, President and Therese Charles CEO
Association of Consulting Engineers Australia
Risk or Liability Management?
• Risk management is one aspect of
project management and like
quality management,
environmental management and
safety management it is about the
project or the service we deliver to
our clients
• Liability management on the other
hand is about managing the
impact of claims for loss on our
business
2
Will Managing Risk Limit our Liability?
• If risk is managed effectively, it may
reduce the likelihood and severity
of loss
• However, the consulting engineer
is rarely in a position to manage,
control or bear project risk
• Liability management may prevent
or reduce the loss incurred by the
consulting engineer.
3
The Business Environment
•
•
•
•
•
•
•
The last 10 years
PI Insurance
Where are we heading?
ACEA Initiatives
The Problem
Onerous Terms
What can you do?
4
Last 10 years
• Increasing obligations on
consultants - well beyond common
law
• Common law has moved in its
application exposing consultants to
new sources of claim
• Clients laying off responsibility for
own actions
• Trade Practices exposure
• Occupational Health & Safety
• Insurance crisis
5
PI Insurance 2001 -2004
• Increased premiums
• Absorb the first level of loss increasing deductibles
• Increasing use of captive
insurance
• Restricted cover - narrower policy
wording
• Insurers concentrate on risk
selection
• Restrictions on availability
6
PI Insurance - Unreasonable Outcomes?
• Could infer consultants are taking
on risks they cannot manage or
bear
• Could infer the problem is inherent
in the forms of project delivery we
use
• When the loss ratios improve,
capital will flow back into the PI
Insurance market
7
ACEA Initiatives
•
•
•
•
Law reform
Policy debate
Information
Negotiation
8
ACEA Initiatives
• Promoting Legislative Reform
• Professional Standards Legislation
• Proportionate Liability
• Trade Practices Act Amendments
• Educating Insurers and Firms
• Insurer Site Visits
• Guidelines and Tips for Firms
• Continuing Professional Development
• Individual Contacts for Firms
• Talking to Clients
• Public Sector - APCC Guidelines
• Private Sector - Discussions to Follow
9
PI Insurance - A Scarce Resource
• Engineers fees - 1% - 5% project
• Insurance premiums 2% - 4%
income
• Claim pool resource say 0.07 - 0.1%
industry value
• Building & Construction industry
value say $ 35 Billion
• Claims pool resource say $ 35
Million
• Reported claims history (IBNR’s)
300% of premium
10
APCC /ACEA PI Guidelines
• Professional indemnity insurance of
consultants relate to project risk and the
services required
• A consistent approach (formula
developed for determining project risk
and insurance requirements
• Principal-organised insurance recognised
as an alternative to consultant PI
insurance, or for some extreme risk
projects
11
The Problem
• Client risk dumping through contracts
• Risks inherent in Design & Construct, no avenue
to claim against client, the losses crystallise in the
D&C team
• Clients pass on risk to consultants for fitness for
purpose, delayed project delivery, inadequate or
incorrect information, cost overruns, safety and
consequential loss
• Most of the risks are commercial risks in contract
not in the consultant’s control
• Onerous contracts create grounds for claim
against consultant
• Neither the Consultants or their PI cannot support
project risks
12
Onerous Terms Create Liability
• High standard of care
• Responsibility for client supplied
information
• Absolute Fitness for Purpose
warranties
• Strict compliance
• Open ended Indemnities
• Duty of Care to multiple parties
• Liability for delays outside control
• Disclosing terms of PI Policy
13
The Solution
• Don’t accept unreasonable terms
– walk away
• Negotiate terms which focus on
maintaining a good relationship
and a good business
• Use Limits of Liability above which
Clients carry the risk
• Adopt commercially sustainable PI
Insurance levels and guidelines
14
Limits of Liability - the Firms’ Perspective
• reduces the impact of unreasonable
indemnities
• dissuades clients from taking legal action
where the prospect of recovery is small
• assists in maintaining the firm as an
attractive risk to insurers
• protects the livelihood of thousands
employees
• protects the owners interests in the firm
• assists to maintain the professions as an
attractive career
15
Limits of Liability - the Clients’ Perspective
• reflects an agreed realistic
allocation of risk between the
Consultant and the Client
• forces the Client to properly
consider managing (and insuring)
the risk which it in reality retains
• protects the Client from the impact
of adverse outcome of a claim
against the Consultant taken out
by another client
16
Limits of Liability - the Clients’ Perspective
• maintains PI insurance as being
available to Consultants generally
• keeps the cost of providing
consulting services reasonable
• assists to maintain professional
services for the community
• equitable basis for tendering – all
required to offer same capacity
• avoid unsustainable risk-taking
culture
17
Therese Charles
Chief Executive
on behalf of
Level 12, 75 Miller Street | North Sydney NSW 2059
(02) 99224711 | www.acea.com.au |
acea@acea.com.au
18