FIDIC 2005 BeijingFIDIC 2005 BeijingWorkshop 14 Workshop 14 Risk and Liability for Consulting Engineers: An Australian Perspective

Tony Barry, President and Therese Charles CEOAssociation of Consulting Engineers Australia

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Risk or Liability Management?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

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Will Managing Risk Limit our Liability?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.

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The Business EnvironmentThe Business Environment

• The last 10 years• PI Insurance• Where are we heading?• ACEA Initiatives• The Problem• Onerous Terms• What can you do?

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Last 10 yearsLast 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

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PI Insurance 2001 -2004PI 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

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PI Insurance - Unreasonable PI Insurance - Unreasonable Outcomes?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

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ACEA InitiativesACEA Initiatives

• Law reform• Policy debate• Information• Negotiation

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ACEA InitiativesACEA 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

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PI Insurance - A Scarce ResourcePI 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

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APCC /ACEA PI GuidelinesAPCC /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

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The ProblemThe 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

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Onerous Terms Create LiabilityOnerous 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

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The SolutionThe 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

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Limits of Liability - the Firms’ Limits of Liability - the Firms’ PerspectivePerspective• 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

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Limits of Liability - the Clients’ Limits of Liability - the Clients’ PerspectivePerspective

• 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

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Limits of Liability - the Clients’ Limits of Liability - the Clients’ PerspectivePerspective

• 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

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Therese CharlesChief Executive

on behalf of

Level 12, 75 Miller Street | North Sydney NSW 2059 (02) 99224711 | www.acea.com.au | acea@acea.com.au