FIDIC 2005 Beijing Workshop 14

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FIDIC 2005 BeijingWorkshop 14

• Risk and Liability for Consulting Engineers An
  Australian Perspective

Tony Barry, President and Therese Charles
CEO Association of Consulting Engineers Australia
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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?

• 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 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 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 -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 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 Initiatives

• Law reform
• Policy debate
• Information
• Negotiation

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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

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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 (IBNRs) 300 of premium

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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

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The Problem

• Client risk dumping through contracts
• Risks inherent in Design Construct, no avenue
  to claim against client, the losses crystallise
  in the DC 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 consultants 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 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 Solution

• Dont 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 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

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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

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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

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Therese Charles Chief Executive on behalf
of Level 12, 75 Miller Street North
Sydney NSW 2059 (02) 99224711 www.acea.com.au
acea_at_acea.com.au